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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________
TO__________________.
Commission File No. 0-14902
MERIDIAN BIOSCIENCE, INC.
Incorporated under 3471 River Hills Drive IRS Employer ID
the Laws of Ohio Cincinnati, Ohio 45244 No. 31-0888197
Phone: (513) 271-3700
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES NO
|X| |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
The aggregate market value of Common Stock held by non-affiliates is $69,367,315
based on a closing sale price of $6.90 per share on December 2, 2002. As of
December 2, 2002, 14,633,733 shares of no par value Common Stock were issued and
outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended September 30, 2002 furnished to the Commission pursuant to Rule 14a-3(b)
as specified and portions of the Registrant's Proxy Statement filed with the
Commission for its 2003 Annual Meeting are incorporated by reference in Parts II
and III as specified.
MERIDIAN BIOSCIENCE, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 Business ................................................................................ 1
Item 2 Properties .............................................................................. 8
Item 3 Legal Proceedings ....................................................................... 9
Item 4 Submission of Matters to a Vote of Security Holders ..................................... 10
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ................... 10
Item 6 Selected Financial Data ................................................................. 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ... 11
Item 7A Quantitative and Qualitative Disclosures about Market Risk .............................. 20
Item 8 Financial Statements and Supplementary Data ............................................. 21
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 45
Part III
Item 10 Directors and Executive Officers of the Registrant ...................................... 45
Item 11 Executive Compensation .................................................................. 45
Item 12 Security Ownership of Certain Beneficial Owners and Management .......................... 45
Item 13 Certain Relationships and Related Transactions .......................................... 45
Item 14 Controls and Procedures ................................................................. 46
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 46
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from
civil litigation for forward looking statements accompanied by meaningful
cautionary statements. These statements identify important factors that could
cause actual results to differ materially from those that might be projected.
Meridian's continued growth depends, in part, on its ability to introduce into
the marketplace enhancements of existing products or new products that
incorporate technological advances, meet customer requirements and respond to
products developed by Meridian's competition. While Meridian has introduced a
number of internally-developed products, there can be no assurance that it will
be successful in the future in introducing such products on a timely basis.
Ongoing consolidations of reference laboratories and formation of multi-hospital
alliances may cause adverse changes to pricing and distribution. Costs and
difficulties in complying with laws and regulations administered by the United
States Food and Drug Administration can result in unanticipated expenses and
delays and interruptions to the sale of new and existing products. One of
Meridian's main growth strategies is the acquisition of companies and product
lines. There can be no assurance that additional acquisitions will be
consummated or that, if consummated, will be successful and the acquired
businesses successfully integrated into Meridian's operations.
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PART I.
ITEM 1.
BUSINESS
General
Meridian is a fully integrated life sciences company that develops,
manufactures, markets and distributes a broad range of innovative, disposable
diagnostic test kits and related diagnostic products used for the rapid
diagnosis of infectious diseases. Meridian also offers biopharmaceutical
capabilities through its cGMP protein production laboratory at its Viral
Antigens subsidiary.
Meridian's diagnostics products provide accuracy, simplicity and speed, and
enable early diagnosis and treatment of common medical conditions such as
gastrointestinal, viral, and respiratory infections. All of Meridian's
diagnostics products are used in procedures performed in vitro (outside the
body) and enhance patient well-being while reducing total outcome costs of
healthcare.
In addition to the diagnostic business, Meridian is expanding further into the
area of life sciences. Through recent acquisitions, Meridian has the technical
expertise to enable research efforts of genomics scientists in drug and vaccine
development. The expansion into life sciences prompted Meridian's decision to
change its official name to Meridian Bioscience, Inc. in fiscal 2001.
Meridian's diagnostic product development strategy is to combine existing
technologies with new product designs, both through internal or joint product
development, and through product acquisitions, licensing or supply arrangements.
Internal and joint product development activities focus on the development or
enhancement of immunodiagnostic technologies and applications to simplify,
accelerate or increase the accuracy of diagnoses of certain infectious diseases.
Since 1990, Meridian has acquired or obtained rights to distribute numerous
products and technologies.
Meridian utilizes its resources to serve each of the strategic domestic and
international medical markets it has targeted: hospital networks and clinical
and hospital laboratories; outpatient clinics, and health maintenance
organizations (HMOs); and new markets, including veterinary laboratories and
water treatment facilities. Meridian markets over 200 products representing four
major disease states through a direct sales force in the United States, Italy,
France, Belgium and the Netherlands, supplemented by a network of national and
international distributors. International sales in more than 60 countries were
30% of total fiscal 2002 sales (see Note 11 to the Consolidated Financial
Statements for information regarding sales by business segment.)
During the fourth quarter of fiscal 2000, a plan was implemented to restructure
European distribution operations and improve operating results. Effective
October 1, 2000, the European export business was transferred from Germany to
Belgium. During the second quarter of fiscal 2001 Meridian completed the
transfer of the German business to an independent distributor. Meridian believes
that the results of the restructuring plan to date have been successful.
Excluding restructuring costs, the European business segment generated operating
income of $1,565,000 and $852,000 during fiscal 2002 and 2001, respectively,
compared to an operating loss of $566,000 in fiscal 2000. Substantial savings
have been realized from the closure of the German distribution facility and
further cost-cutting measures implemented in fiscal 2002.
Acquisitions
Important elements of Meridian's long-term business strategy are the expansion
into life sciences and the acquisition, licensing or entrance into supply
arrangements to obtain innovative diagnostic testing technologies, product
formats and products that complement its existing operations. Meridian has
executed a number of supply arrangements, both domestically and internationally,
that include more than 80 products. In late fiscal 2000, Meridian completed its
acquisition of Viral Antigens, Inc. VAI further expanded Meridian's life
sciences capabilities through VAI's cGMP protein production laboratory,
providing Meridian the opportunity to serve as an enabler to biopharmaceutical
companies in the development of new drugs and vaccines. VAI also manufactures
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infectious disease antigens that are used in immunodiagnostics testing, and a
Pseudorabies Virus antibody test kit and equine infectious anemia antibody test
kit for the veterinary market.
In early fiscal 1999, Meridian completed its acquisition of Gull Laboratories,
Inc. Gull further expanded Meridian's diagnostic test product offerings and
European distribution channels. Included in the Gull acquisition was its
subsidiary, BIODESIGN International, which manufactures, markets and distributes
antigens and antibodies to diagnostic and pharmaceutical manufacturers as well
as academic researchers.
Meridian pursues the acquisition and licensing of products and technologies that
fit Meridian's niche diagnostic test markets, which are characterized by a large
number of users. Examples of this included the acquisition of Gull Laboratories,
Inc. in fiscal 1999, the acquisition of the enteric product line of Cambridge
Biotech Corporation in fiscal 1996, the acquisitions of the infectious disease
and mononucleosis product lines of Johnson & Johnson in fiscal 1994 and 1993,
respectively, and numerous smaller product acquisitions and licensing
arrangements.
A key component in the success of Meridian's acquisition and licensing of new
products and technologies has been the ability of Meridian to respond quickly to
acquisition and licensing opportunities as they arise in the marketplace. The
success of this strategy has also been due in part to management's selective
acquisition and licensing philosophy as well as the availability of cash on hand
and available lines of credit.
Immunodiagnostics Overview
In vitro diagnostic testing is the process of analyzing constituents of blood,
urine, stool, other body fluids or tissue for the presence of specific
infectious diseases. Immunodiagnostic testing, which is the leading method of in
vitro testing for infectious diseases, tests for antigens and antibodies. When a
pathogen, such as bacteria, viruses and fungi, and its related antigens is
present, the body responds by producing an antibody. The antibody binds
specifically with the antigen in a lock-and-key fashion and initiates a
biochemical reaction to attempt to neutralize and, ultimately, to eliminate the
antigen. The ability of an antibody to bind with a specific antigen provides the
basis for immunodiagnostic testing.
Immunodiagnostic testing detects the presence of specific infectious diseases
through "visualization", such as color changes or the formation of visible
aggregates, of the biochemical reactions caused by the antigen/antibody. Most
immunodiagnostic tests utilize one of two alternative methods to determine the
presence of a specific disease in a patient specimen. In one method, the test
employs the antibody to detect directly the presence of an antigen.
Alternatively, certain tests employ the antigen to detect the presence of an
antibody. In addition to the diagnosis of infectious diseases, immunodiagnostic
testing is also used to monitor the status of various patient therapy programs.
Market Trends
The global market for infectious disease tests continues to expand as new
disease states are identified, new therapies become available and worldwide
standards of living and access to health care improve. More importantly, within
this market there is a continuing shift from conventional testing, which
requires highly trained personnel and lengthy turnaround times for test results,
to more technologically advanced testing which can be performed by less highly
trained personnel and completed in minutes or hours. These technological
advances permit accurate testing to occur outside the traditional hospital or
laboratory.
The increasing pressures to contain total health care costs have accelerated the
increased use of diagnostic testing and the market shift to alternate sites.
With rapid and accurate diagnoses of infectious diseases, physicians can
pinpoint appropriate therapies quickly, leading to faster recovery, shorter
hospital stays and less treatment expense. In addition, these pressures have led
to a major consolidation among reference laboratories and the formation of
multi-hospital alliances that have reduced the number of institutional customers
for diagnostic products and resulted in changes in buying practices.
Specifically, multi-year exclusive or primary source marketing or distribution
contracts with institutional customers have become more common, replacing less
formal distribution arrangements of shorter duration and involving lower product
volumes. In Europe, the reexamination of health care costs, access and funding
is causing similar pressures.
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Business Strategy
Meridian continues to execute its long-term strategy consisting of the following
elements:
Developing New Product Applications from Core Technologies - Meridian employs a
market-driven product development strategy to adapt or enhance diagnostic
testing technologies and product formats in response to newly identified disease
states and customer demands for improvements in product accuracy, simplicity,
speed and cost-efficiency. Meridian accomplishes this by monitoring existing
markets, interacting closely with its customers and recognizing emerging
diseases and therapies.
Acquiring and Licensing Products and Technology - Meridian intends to acquire,
license or enter into supply arrangements to obtain innovative diagnostic
testing technologies, product formats and products that complement its existing
operations and address the needs of Meridian's existing and targeted customer
base. Management regularly identifies and reviews opportunities through its
broad industry contacts and recognized position in the industry. Meridian has
acquired, licensed or entered into supply arrangements relating to more than 100
products.
Enabling Biomedical Research and Early Stage Biopharmaceutical Development -
Meridian intends to leverage its skills and capabilities in the life sciences
market. Meridian has an established position in this market through its
BIODESIGN subsidiary. BIODESIGN manufactures and distributes essential antigen
and antibody reagents to diagnostic and pharmaceutical manufacturers as well as
academic researchers. These reagents are essential to the development of assay
systems, control standards and new drug development research.
During fiscal 2000, Meridian further improved its skills and capabilities in the
life sciences market through the acquisition of VAI. VAI's pharmaceutical
quality proteomics laboratory will be used to produce drug and vaccine proteins
through gene expression techniques. These proteins will be used by
biopharmaceutical companies in the development of drugs and vaccines for Phase I
and II clinical trials. Meridian expects to have its first customer for the cGMP
protein production laboratory in the second quarter of fiscal 2003.
Increasing International Sales - Meridian has targeted international sales as an
attractive source of growth. Meridian has developed a strong presence in Italy
through its Italian subsidiary, Meridian Bioscience Europe s.r.l., and with the
acquisition of Gull has an established sales force in Belgium, France and the
Netherlands. Meridian has expanded its ability to serve Latin American and Asian
markets and has expanded its international distributor base. Over the last
several years, Meridian's international sales have grown from $2.1 million in
fiscal 1993 to $18.0 million in fiscal 2002 and represented 30% of total
consolidated sales in fiscal 2002.
Strengthening Partnerships With Consolidated Health Care Organizations -
Meridian seeks to develop strategic partnerships with the major reference
laboratories and other consolidated health care providers. Meridian believes it
is in a position to develop partnerships because it is an integrated
manufacturer, has a broad product line, offers tests in multiple formats and is
willing to invest resources in building relationships and facilitating open
communications with those large customers. Since 1998, several exclusive
multiple-year contracts have been signed with consolidated health care providers
and Meridian also extended or renewed supply agreements with major reference
laboratories and other consolidated health care providers.
Global Sales Excellence - Meridian continues to focus on an initiative to
improve its worldwide excellence in customer service, sales support and
technical assistance. Meridian believes that its customers have rewarded it for
the high level of customer service and support it has provided in the past.
However, Meridian desires to provide a level of service that exceeds the current
standards of the health care industry and, most importantly, the customer's
expectations. Meridian is implementing several customer satisfaction training
programs and information system improvements in order to achieve global sales
excellence.
Products and Markets
Meridian has expertise in the development and manufacture of products based on
multiple core diagnostic technologies, each of which enables the visualization
and identification of antigen/antibody reactions for specific pathogens. As a
result, Meridian is able to develop and manufacture diagnostic tests in a
variety of formats that
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satisfy customer needs and preferences, whether in a hospital, commercial or
reference laboratory or alternate site location. These technologies include
enzyme immunoassay, immunofluorescence, particle agglutination/aggregation,
immunodiffusion, complement fixation and chemical stains.
Enzyme Immunoassay (EIA) - Products incorporating the EIA technology achieve
extremely high levels of accuracy in detecting disease-related antigens or
antibodies through the use of special color-based enzyme-substrate reactions.
Meridian utilizes this technology in its multiple test format, the Premier(TM)
product for large volume users, and in its single test formats, the
ImmunoCard(R), ImmunoCard STAT!(R) and Monolert(R) products, for lower volume
users.
Immunofluorescence - When the microscopic visualization of an antigen/antibody
reaction is necessary or desired, immunofluorescence technology is frequently
utilized. Fluorescing immunochemicals, in the presence of the target antigen or
antibody, can be viewed via a fluorescent microscope. Meridian utilizes this
technology in its Merifluor(R) products.
Particle Agglutination/Aggregation - This technology utilizes microparticles
(e.g., latex, red blood cells) coated with specific antigens or antibodies that
form visible aggregates in the presence of a specimen containing the
complementary antigen or antibody. This technology is rapid and economical and
is used in Meridian's Meritec(TM), MeriStar(R) and MonoSpot(R) products.
Other Technologies - Meridian utilizes other technologies that include
immunodiffusion, complement fixation and chemical stains. Meridian also
manufactures and markets specimen collection, transportation, preservation and
concentration products, such as Para-Pak(R), Macro-CON(R) and Spin-CON.
Meridian's product line consists of over 200 medical diagnostic products
representing four major disease types discussed below. Currently, the most
important product lines from the perspective of sales are products to diagnose
gastrointestinal, viral and parasitic diseases. Meridian's products generally
range in list price from $1 per test to $33 per test. A discussion of Meridian's
key products and their competitive advantage follows.
Parasitic Diseases - Meridian manufactures products for the diagnosis and
collection, preservation, transportation and concentration of parasites.
Parasitic diseases include Giardiasis, Cryptosporidiosis, and Lyme disease. The
markets for these products are hospital, reference and veterinary laboratories.
Gastrointestinal Diseases - Meridian manufactures products for the rapid
diagnosis of stomach ulcers, toxigenic E.coli, antibiotic associated diarrhea
(C. difficile) and pediatric diarrhea (Rotavirus and Adenovirus). The markets
for these products are hospital, reference, veterinary and state health
laboratories.
Respiratory Diseases - Meridian manufactures a broad range of diagnostic
reagents for detecting respiratory diseases including pneumonia (Mycoplasma
pneumoniae) and valley fever (Coccidioides immittis). The markets for these
products are hospital, reference, veterinary and state health laboratories.
Viral Diseases - Meridian manufactures a broad range of products for the
detection of various viruses including Epstein-Barr (mononucleosis), Herpes
simplex, Cytomegalovirus (organ transplant infections) and Varicella -Zoster
(chicken pox and shingles). The markets for these products are hospital,
reference, physicians' office and public health laboratories.
Marketing and Sales
Meridian's marketing efforts are focused on a continual process of seeking ways
to assist health care providers in improving outcomes for patients exposed to
serious infectious diseases. Rapid, accurate diagnosis can mean faster recovery,
shorter hospital stays and less expense, both for the patient and the health
care system.
Meridian believes that its marketing goals are best served by forming
partnerships with key customers to develop concepts for future products and
technology applications. These partnerships facilitate close customer
interaction, including product strategy sessions and co-marketing programs.
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Marketing utilizes its strong industry contacts, plus key customer focus
sessions, to identify new products and other opportunities. Through the use of
cross-functional teams that include marketing, research and development and
manufacturing personnel, marketing guides the development process to meet
customers' needs with products that are easier to use, require less technical
expertise, and yield faster results--often in minutes or hours rather than days.
Changes in the health care delivery system have resulted in major consolidation
among reference laboratories and the formation of multi-hospital alliances.
Meridian has structured its marketing, selling and customer service to
anticipate and respond to these changes. This involved dedicating sales and
marketing personnel to these accounts; the expansion of technical services staff
to support Meridian's customers and distribution network; and the implementation
of major marketing programs to target key customers.
Meridian markets products through direct sales forces, both domestically and in
Italy, France, Belgium and the Netherlands, and through national and
international independent distributors. In the United States, Meridian's direct
sales force consists of three regional sales managers, one corporate health
system manager, two inside sales representatives and 21 technical sales
representatives. In Europe, Meridian's sales force consists of five sales and
marketing managers, three product specialists and 11 technical sales
representatives. Where Meridian utilizes distributors, Meridian participates in
selling efforts involving key customers. Meridian has nearly 80 independent
distributors in more than 60 foreign countries including key distributor
relationships in Canada, Central and South America, Mexico, Australia, New
Zealand and the Pacific Rim, which are managed directly from the United States
by an international manager. Meridian's sales in Europe, North Africa and the
Middle East are shipped from Meridian Bioscience Europe (MBE) distribution
centers in Milan, Italy and Nivelle, Belgium.
Research and Development
Meridian's research and development activities focus on developing new and
improved diagnostic solutions, both internally and with collaborative partners.
Working in conjunction with the marketing department, Meridian's research and
development department focuses its activities on enhancements to, and new
applications for, Meridian's technologies. Meridian's internally developed
products include Premier Platinum HpSA and Premier(TM) Toxins A&B. Meridian has
patent protection on certain of its products including Premier Platinum
HpSA(TM). The research and development department is proficient in a number of
diagnostic technologies, each of which can be applied to meet new product
specifications that marketing has established. Meridian's product development
staffs are experts in binding various biological materials to numerous solid
phases, including plastics, membranes, latex beads, immunofluorescent dyes and
immunogold, to develop testing formats. Meridian believes that its proprietary
know-how and technologies in these areas enable it to develop products that have
longer shelf-lives and provide improved performance and quicker test results.
The research and development department initiates Meridian's quality process
through its design control mechanism which establishes manufacturing standards
and specifications. By working closely with the manufacturing department, the
same standards and specifications ensure consistent high-quality products.
Meridian estimates that it takes approximately 18 to 24 months from the
conceptualization of a product to its marketing.
The research and development department includes the Vice President of Research
and Development and 14 research scientists, up from nine one year ago. The
disciplines represented in the group include biochemistry, immunology, mycology,
bacteriology, virology and parasitology. In fiscal 2000, fiscal 2001 and fiscal
2002, Meridian spent $2.3 million, $3.4 million, and $2.9 million respectively,
on its research and development activities.
Customers
The principal customers for Meridian's products are hospitals, commercial and
reference laboratories and HMOs, and new markets, such as veterinary
laboratories and water treatment facilities. Two distributors together accounted
for 25% of Meridian's fiscal 2002 sales. However, Meridian does not believe that
the loss of either of these distributors would have a material adverse effect on
Meridian because of its ability to sell to the end-use customers served by these
distributors through alternative means.
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Manufacturing
During fiscal 2002, substantially all of Meridian's manufacturing was performed
at its Cincinnati, Ohio facility and VAI's Memphis, Tennessee facility. To
maintain the highest quality standards, Meridian utilizes both external and
internal quality auditors who routinely evaluate Meridian's manufacturing
processes. Meridian strives to quickly evaluate, remedy and review the
implementation of corrective actions to further assure compliance with medical
device regulation.
Meridian's immunodiagnostic products require the production of highly specific
and sensitive antigens and antibodies. Meridian produces substantially all of
its own requirements including monoclonal antibodies and polyclonal antibodies,
plus a variety of fungal, bacterial and viral antigens. Meridian believes it has
sufficient manufacturing capacity for anticipated growth.
During January 2001, the FDA completed a follow-up inspection of Meridian's
compliance with the Quality Systems Regulations that govern the manufacturing of
in vitro diagnostics. This inspection included a review of, among other things,
procedures for validation, document control, corrective actions and design
control. In June 2001, Meridian received a Warning Letter from the FDA which
summarized and reiterated certain of the observations made by the FDA during
their follow-up inspection completed in January 2001. Meridian responded to the
Warning Letter on July 20, 2001.
In January 2001, Meridian submitted a comprehensive plan to the FDA outlining
specific steps it committed to undertake to improve its quality systems. To
concentrate and focus resources on QSR compliance, Meridian discontinued the
manufacturing and distribution of approximately 30 products. During fiscal 2001,
Meridian incurred costs in the amount of $2,322,000, primarily for outside
consultants with experience in the quality system regulations, validation and
computer software and equipment. Meridian has considered the effects of
incremental costs of compliance with QSR in its cost structure. Meridian
continues to engage in activities designed to reduce costs, improve operations
and replace products that were discontinued.
As a result of the decision to discontinue the manufacturing and distribution of
approximately 30 products, Meridian could not recover the cost of certain
assets, and consequently, recorded a pre-tax charge in the amount of $12.8
million during fiscal 2001 (see Note 4 to the Consolidated Financial Statements
for further discussion).
In accordance with the FDA's directive in the Warning Letter, in September 2001,
Meridian engaged an independent auditor to evaluate Meridian's progress in
implementing its corrective plan. Based on an extensive review of documents and
an on-site visit, the auditors substantiated Meridian's progress in addressing
the issues raised in the FDA inspection and Warning Letter. As anticipated by
Meridian, the FDA commenced an on-site follow-up inspection during late fiscal
2002. This follow-up inspection was completed in August 2002. The FDA issued
several observations primarily aimed at fine-tuning established quality control
systems and procedures. Meridian submitted written corrective action plans to
address these refinements and continues its periodic communications with the FDA
on the progress of its plan submitted to the FDA in January 2001 and the
observations from the recently completed inspection.
Meridian expects cash flows from operations to be sufficient to fund working
capital needs, debt service and dividends during fiscal 2003. Meridian is
communicating with the FDA on a periodic basis to advise it on the progress of
its plan. At present, it is uncertain whether Meridian's actions will be
sufficient so that no further remedial action or enforcement action by the FDA
will occur.
Competition
The market for diagnostic tests is a multi-billion dollar international industry
which is highly competitive. Many of Meridian's competitors are larger with
greater financial, research, manufacturing and marketing resources. Important
competitive factors of Meridian's products include product quality, price, ease
of use, customer service, and reputation. In a broader sense, industry
competition is based upon scientific and technological capability, proprietary
know-how, access to adequate capital, the ability to develop and market products
and processes, the ability to attract and retain qualified personnel and the
availability of patent protection. To the extent that
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Meridian's product lines do not reflect technological advances, Meridian's
ability to compete in those product lines could be adversely affected.
Companies competing in the diagnostic test industry generally focus on a limited
number of tests or limited segments of the market. As a result, the diagnostic
test industry is highly fragmented and segmented. Hundreds of companies in the
United States alone supply immunodiagnostic tests. These companies range from
multi-national health care companies, for which immunodiagnostics is one line of
business, to small start-up companies. Of central importance in the industry are
mid-sized medical diagnostic specialty companies, like Meridian, that offer
multiple, broad product lines and have the ability to deliver high value new
products quickly to the marketplace. Among the companies with which Meridian
competes in the marketing of one or more of its products are Abbott Laboratories
Inc., Becton, Dickinson and Company, Diagnostic Products Corporation, Quidel
Corporation and Inverness Medical.
Intellectual Property, Patents and Licenses
Meridian owns or licenses U.S. and foreign patents for approximately 25 of its
products, including a patent for Premier Platinum HpSA(TM) issued in February
1998. Meridian's VAI subsidiary has U.S. patents for four of its manufacturing
processes. The patents or licenses for most of Meridian's products were acquired
in connection with the purchase of the products or the licensing of the
technology on which the products are based. In the absence of patent protection,
Meridian may be vulnerable to competitors who successfully replicate Meridian's
production and manufacturing techniques and processes. Meridian's employees are
required to execute confidentiality and non-disclosure agreements designed to
protect Meridian's proprietary products.
Meridian does not believe that its products and proprietary rights infringe the
proprietary rights of any third parties. There can be no assurance, however,
that third parties will not assert infringement claims in the future.
Government Regulation
FDA Regulation of Medical Devices - Meridian's products are regulated by the
Food & Drug Administration as "devices" pursuant to the Federal Food, Drug and
Cosmetic Act (FDCA). Under the FDCA, medical devices are classified into one of
three classes (i.e., Class I, II or III). Class I and II devices are not
expressly approved by the FDA, but, instead, are "cleared" for marketing. Class
III devices generally must receive "pre-market approval" from the FDA as to
safety and effectiveness.
A 510(k) clearance will be granted if the submitted data establishes that the
proposed device is "substantially equivalent" to an existing Class I or Class II
medical device or to a Class III medical device for which the FDA has not
required pre-market approval. The 510(k) clearance process for "substantially
equivalent" devices allows product sales to be made after the filing of an
application and upon acknowledgment by the FDA, typically within 90 to 120 days
after submission. If the FDA requests additional information, the product cannot
be sold until the application has been supplemented and upon acknowledgment by
the FDA within 90 to 120 days of the supplemental application. In practice, the
FDA has been granting clearance in about 90 days following submission of the
supplemental information. If there are no existing FDA-approved products or
processes comparable to a diagnostic product or process, approval by the FDA
involves the more lengthy pre-market approval procedures.
Each of the products currently marketed by Meridian in the United States has
been cleared by the FDA pursuant to the 510(k) clearance process or is exempt
from such requirements. Meridian believes that most, but not all, products under
development will be classified as Class I or II medical devices and, in the case
of Class II devices, will be eligible for 510(k) clearance.
Other Medical Device Regulation - Sales of Meridian's products in foreign
countries are subject to foreign government regulation, the requirements of
which vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA approval and the requirements may differ. Currently, Meridian is supporting
foreign product registrations in Mexico, Korea, Japan, China and Argentina via
the distributors in the respective countries.
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VAI's veterinary products are approved and licensed by the United States
Department of Agriculture (USDA). This typically requires six months to one year
for the approval process. In addition, assays for monitoring "controlled
diseases" require testing and release of each production serial before it is
available to the market.
The proteins that will be produced in VAI's cGMP protein production laboratory
are intended to be used as "injectibles". As such they will be produced under
cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA.
Approval and licensing, following clinical trials, of these products will be the
responsibility of the applicant, who owns the rights to each protein. VAI may or
may not be the applicant depending on specific circumstances with particular
customers.
The Clinical Laboratory Improvement Act of 1988 prohibits laboratories from
performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the U.S. Department of Health and Human
Services applicable to the category of examination or procedure performed.
Although these certificates are required only for Meridian's laboratory
customers (but not for Meridian itself), Meridian considers the requirements of
The Clinical Laboratory Improvement Act of 1988 in the design and development of
its products.
Meridian is a conditionally exempt small quantity generator of hazardous waste
and has a U.S. Environmental Protection Agency identification number. All
hazardous waste is manifested and disposed of properly. Meridian is in
compliance with the applicable portions of the federal and state hazardous waste
regulations and has never been a party to any environmental proceeding.
Employees
As of September 30, 2002, Meridian had 339 full-time employees and 11 part time
employees. None of Meridian's employees is represented by a labor organization
and Meridian is not a party to any collective bargaining agreement. Meridian has
never experienced any strike or work stoppage and considers its relationship
with its employees to be good.
Meridian maintains a Savings and Investment Plan for its U.S. employees and has
established stock option plans for its officers, directors and employees. In
addition, a stock purchase plan was established on October 1, 1997 for all
employees.
ITEM 2.
PROPERTIES
Meridian's corporate offices, manufacturing facility and research and
development facility are located in three buildings totaling approximately
94,000 square feet on 6.2 acres of land in a suburb of Cincinnati. These
properties are owned by Meridian. Meridian has approximately 51,000 square feet
of manufacturing space and 9,000 square feet of warehouse space in the
Cincinnati facility.
VAI's executive offices and manufacturing facility are located in Memphis,
Tennessee. This facility is comprised of two buildings totaling approximately
34,000 square feet, including approximately 27,000 square feet of manufacturing
space.
The distribution center in Italy conducts its operations in a two-story building
in the Milan, Italy area consisting of approximately 18,000 square feet. This
facility is owned by Meridian Bioscience Europe s.r.l.
BIODESIGN rents a 10,000 square foot facility that houses administration,
distribution and manufacturing facilities in Saco, Maine under a lease that
expires in 2006.
8
Meridian rents approximately 6,000 square feet of space in Nivelle, Belgium for
sales, warehousing and distribution. The lease expires in 2009. Meridian also
rents office space in France and the Netherlands for small sales offices.
ITEM 3.
LEGAL PROCEEDINGS
In June 2000, Meridian filed suit against a former employee and certain other
defendants for breach of an employment agreement and misappropriation of trade
secrets in Ohio. The lawsuit sought injunctive relief as well as compensatory
and punitive damages against the defendants. Meridian successfully obtained a
temporary restraining order and a preliminary injunction against its former
employee and an affiliated corporation. This matter is currently pending appeal.
The former employee and affiliated corporation filed for bankruptcy protection
in May 2001 but the bankruptcy court has modified the applicable bankruptcy stay
to allow Meridian to continue to pursue this litigation.
In July 2000, the former employee commenced a separate action against Meridian
in California which was transferred to Ohio, and has been consolidated with
Meridian's Ohio case. Subsequent to the initiation of the litigation in Ohio and
California, the former employee filed two actions in the Republic of China. The
first action, which is characterized as a "criminal" action, claimed Meridian,
an unrelated third party defendant and two officers of Meridian should be
jointly and severally liable for damages in the amount of approximately $28
million in lost profits due to Meridian's alleged anticompetitive actions.
Although in August 2002 the Taipei District Court dismissed the criminal
complaints filed in this action, the former employee has filed appeals from
these decisions. In the second action, the former employee filed an
administrative complaint with the Fair Trade Commission in the Republic of China
also asserting unfair competition. In November 2002, the Fair Trade Commission
dismissed the complaint in the administrative action. Meridian plans to continue
to vigorously defend these matters which it believes are motivated in large part
by the former employee's disappointment over the outcome to date of the U.S.
litigation. Legal fees related to all of these actions amounted to $150,000,
$440,000 and $450,000 in fiscal 2002, 2001 and 2000, respectively. Based on the
status of the case to date, the ultimate resolution of this matter is not
expected to have a material adverse effect on Meridian's financial position,
results of operations or cash flows.
In July 2001, Meridian was sued, along with an unrelated third party defendant
in Italy, for unfair competition. The basis of the claim is the publication of
results of a clinical trial study involving the plaintiff's diagnostic test kit
which plaintiff believes were not accurate. The plaintiffs seek approximately $5
million in damages. Meridian intends to vigorously defend this case. Meridian
also may challenge the sale and distribution of the diagnostic test kit; and
accordingly, the plaintiff's right to sell the diagnostic kit may be the subject
of further litigation. To date litigation costs related to this matter have been
immaterial. Based on the status of the case to date, the ultimate resolution of
this matter is not expected to have a material adverse effect on Meridian's
financial position, results of operations or cash flows.
Meridian is a party to other litigation that it believes is in the normal course
of business. The ultimate resolution of these matters is not expected to have a
material adverse effect on Meridian's financial position, results of operations
or cash flows.
9
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
"Common Stock Information" on the inside back cover of the Annual Report to
Shareholders for 2002 and "Quarterly Financial Data" in Note 13 to the
Consolidated Financial Statements are incorporated herein by reference. There
are no external restrictions on cash dividend payments.
In November 2002, Meridian's Board of Directors adopted a new cash dividend
policy whereby the indicated annual dividend rate will be set between 75% and
85% of each fiscal years expected net earnings. The declaration and amount of
dividends will be determined by the Board of Directors in its discretion based
upon its evaluation of earnings, cash flow requirements and future business
developments and opportunities, including acquisitions.
Meridian paid dividends of $0.23 per share, $0.26 per share, and $0.275 per
share in fiscal 2000, fiscal 2001, and fiscal 2002, respectively.
Equity Compensation Plan Information as of September 30, 2002 was as follows:
- -----------------------------------------------------------------------------------------------------------
(c)
Number of securities
(b) remaining available for
(a) Weighted average future issuance under
Number of securities to be exercise price Equity Compensation Plans
issued upon exercise of of outstanding (excluding securities
Plan Category outstanding options (2) options (2) reflection in column (a)).
- -----------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders (1) 1,226,974 $7.00 267,376
Equity compensation
plans not approved
by security holders 25,000 8.28 --
- -----------------------------------------------------------------------------------------------------------
Total 1,251,974 $7.00 267,376
- -----------------------------------------------------------------------------------------------------------
(1) 1986 Stock Option Plan
1990 Director's Stock Option Plan
1994 Director's Stock Option Plan
1996 Stock Option Plan, as amended in 2001
1999 Director's Stock Option Plan
(2) No warrants or rights are authorized for issuance.
10
ITEM 6.
SELECTED FINANCIAL DATA
"Ten Year Summary" on page four of the Annual Report to Shareholders for 2002 is
incorporated by reference.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Future Trends:
Life Sciences
During fiscal 2003, Meridian will open its cGMP protein production laboratory
for business, creating the opportunity to serve as an "enabler" in the
development of new drugs and vaccines. Although the cGMP protein production
laboratory is a new line of business for Meridian, it is an extension of
Meridian's existing antigen manufacturing technologies and capabilities. The new
line of business will create a new class of customers, pharmaceutical companies,
as well as the opportunity to leverage sales and marketing resources. Sales and
marketing resources at Meridian's Viral Antigens and BIODESIGN subsidiaries are
being aligned to focus on common customers and complimentary products. Meridian
also expects to develop or license unique biological tools and technology.
Meridian expects to have its first customer for the cGMP protein production
laboratory in the second quarter of fiscal 2003. Meridian expects to begin
reporting Life Sciences as a new operating segment beginning in fiscal 2003.
European Markets
Meridian has experienced sales declines of 4% in fiscal 2002 and 13% in fiscal
2001 in its MBE operating segment. Competitive factors and government
reimbursement policies have slowed growth in European markets and sales have
also been negatively affected by currency translation. In response to market
conditions, Meridian restructured its European distribution operations in fiscal
2001 and 2000 by moving the export business from Germany to Belgium, and moving
the German in-country business to an independent distributor (this latter move
also affected sales because Meridian is no longer selling to end-user customers
on a direct basis in Germany). Although this restructuring has improved overall
operating results for the MBE operating segment by lowering its cost structure,
for fiscal 2002 and 2001, there were decreases in sales as described above.
Meridian believes that sales levels have at least stabilized, and in fact,
believes a modest increase is attainable for fiscal 2003.
US Markets
Consolidation of the US healthcare industry is expected to continue and
potentially affect Meridian's customers. Industry consolidation puts pressure on
pricing and aggregates buying power. In response, in the last four years,
Meridian has entered into, extended or renewed several exclusive multiple-year
contracts with consolidated healthcare providers and supply agreements with
major reference laboratories.
Research and Development
Meridian believes that internally-developed products will continue to be a
critical source of sales and sales growth. Research and development efforts are
expected to focus on the development of new products and product improvements
where Meridian has a dominant market position, or its intellectual property is
protected by patents or licenses.
11
Results of Operations:
Overview
Fourth quarter
Net earnings for the fourth quarter of fiscal 2002 were $863,000, or $0.06 per
diluted share, including an after-tax charge of $751,000 for costs related to
the abandoned Biotrin acquisition. Excluding this non-recurring charge, net
earnings for the fourth quarter of fiscal 2002 were $1,614,000, or $0.11 per
diluted share. Net earnings for the fourth quarter of fiscal 2001 were $171,000,
or $0.01 per diluted share. Net sales for the fourth quarter of fiscal 2002 were
$15,559,000, an increase of $2,058,000 or 15% compared to the fourth quarter of
fiscal 2001.
In May 2002, Meridian executed a letter of intent to acquire all of the
outstanding capital stock of Biotrin Holdings plc, headquartered in Dublin,
Ireland. In November 2002, Meridian terminated negotiations and ceased further
discussions regarding its interest in acquiring Biotrin. Costs of $751,000,
after-tax, were for professional fees for attorneys and financial and tax
advisors.
Fiscal Year
Net earnings for fiscal 2002 were $5,031,000, or $0.34 per diluted share,
including the after-tax charge of $751,000 for the abandoned Biotrin
acquisition. Excluding this non-recurring charge, net earnings for fiscal 2002
were $5,782,000, or $0.39 per diluted share. Fiscal 2001 was a net loss of
$10,275,000, or $0.70 per diluted share, including after-tax charges of $0.80
per share for acquired in-process research and development, asset impairment and
other costs related to FDA matters and European restructuring. Results of
operations for fiscal 2002 compared to fiscal 2001 are discussed below.
Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30,
2001
Net Sales
Overall, net sales increased $2,577,000, or 5%, to $59,104,000 for fiscal 2002
compared to fiscal 2001. Net sales for the MBI operating segment increased
$3,078,000, or 7%, to $47,184,000, and net sales for the MBE operating segment
decreased $501,000, or 4%, to $11,920,000.
For the MBI operating segment, volume increases occurred in all component
businesses. The negative effects of discontinuing the manufacturing and
distribution of approximately 30 products in the second quarter of fiscal 2001
(see FDA discussion contained herein) was more than offset by strong growth in C
difficile and H pylori diagnostic products. Meridian's Premier Toxins A&B and
Premier Platinum HpSA led the volume growth for these two disease states. Both
of these products were developed by Meridian and launched in 1999 and 1998,
respectively. In addition, sales of antigen products experienced strong volume
growth, led by Rubella antigen.
For the MBE operating segment, the decline in sales during fiscal 2002 is net of
currency translation gains of $371,000. It reflects volume declines attributable
to continued deterioration in market conditions in Germany, as well as price
erosion and volume declines related to competition for certain products in Italy
and other European markets. In addition, upon changeover to an independent
distributor in Germany in the second quarter of fiscal 2001, the new distributor
placed stocking orders that did not repeat in fiscal 2002.
For both operating segments combined, international sales were $17,993,000, or
30% of total sales, for fiscal 2002, compared to $18,123,000, or 32% of total
sales, in fiscal 2001. Domestic MBI exports were $6,073,000 for fiscal 2002,
compared to $5,702,000 in fiscal 2001. The remaining international sales were
generated by Meridian's European distribution businesses (MBE).
Gross Profit
Gross profit increased $7,892,000 or 30%, to $34,598,000 for fiscal 2002
compared to fiscal 2001. Gross profit
12
margins increased from 47% for fiscal 2001, to 59% for fiscal 2002. Gross profit
for fiscal 2001 included the negative effects of an inventory impairment charge
in the amount of $4,000,000 related to FDA matters, as well as certain
inefficiencies related to products manufactured in Cincinnati, because during
the second quarter of fiscal 2001, resources were concentrated on execution of
the plan submitted to the FDA (see FDA discussion contained herein). Excluding
the effects of the inventory impairment charge, gross profit margin for fiscal
2001 was 54%.
Meridian's overall operations consist of the sale of diagnostic test kits for
various disease states and in alternative test formats, as well as bioresearch
reagents, antigens and proficiency tests. On a quarterly basis, product sales
mix shifts, in the normal course of business, can cause the consolidated gross
profit margin to fluctuate by several points.
Operating Expenses
Operating expenses declined $14,609,000, to $24,604,000 for fiscal 2002 compared
to fiscal 2001. Operating expenses for fiscal 2002 included $1,211,000 related
to the abandoned acquisition of Biotrin Holdings. Operating expenses for fiscal
2001 included costs of $11,074,000, $1,510,000, and $800,000 related to FDA
matters, European restructuring and acquired in-process research and
development, respectively. Excluding these non-recurring charges, operating
expenses for fiscal 2002 declined $2,436,000 or 9%. This decline is primarily
attributable to closure of the German distribution operation during the first
quarter of fiscal 2001, general cost-cutting measures implemented across all
Meridian business units, tightly controlled spending and the offsetting effects
of lower legal costs related to trade secrets litigation and increased reserves
for distributor rebates.
Research and development expenses declined $475,000 or 14%, to $2,888,000 for
fiscal 2002 compared to fiscal 2001, and as a percentage of sales, declined from
6% for fiscal 2001 to 5% for fiscal 2002. This decline is primarily attributable
to lower outside contract research and clinical trial costs based on timing of
projects, as well as the favorable effects of spending controls. Research and
development expenses relate entirely to the MBI operating segment.
Sales and marketing expenses declined $1,241,000 or 11%, to $9,730,000 for
fiscal 2002 compared to fiscal 2001, and as a percentage of sales, declined from
19% for fiscal 2001 to 16% for fiscal 2002. Of this decline, $704,000 related to
the MBI operating segment while $537,000 related to the MBE operating segment.
The decline for the MBI operating segment is primarily attributable to spending
controls and cost-cutting measures. Spending controls and cost-cutting measures
were in the areas of advertising, promotional materials, travel and conventions.
In addition, freight costs to ship product to customers from the Cincinnati
manufacturing facility have been reduced as a result of better management of
this element of operations. The decline for the MBE operating segment is
primarily attributable to the closure of the German distribution operation
during the first quarter of fiscal 2001.
General and administrative expenses declined $720,000 or 6%, to $10,775,000 for
fiscal 2002 compared to fiscal 2001, and as a percentage of sales, declined from
20% for fiscal 2001 to 18% for fiscal 2002. Of this decline, $545,000 related to
the MBI operating segment while $175,000 related to the MBE operating segment.
The decline for the MBI operating segment is primarily attributable to no longer
amortizing goodwill due to the adoption of SFAS No. 142, while lower legal costs
related to trade secrets litigation were offset by increased reserves for
distributor rebates. The decline for the MBE operating segment is primarily
attributable to the closure of the German distribution operation during the
first quarter of fiscal 2001.
Operating Income
Operating income increased $22,501,000 from a loss of $12,507,000 in fiscal
2001, to income of $9,994,000 in fiscal 2002. Excluding the effects of costs for
the abandoned Biotrin acquisition in fiscal 2002, and FDA matters, European
restructuring and acquired in-process research and development during fiscal
2001, operating income increased $6,328,000 to $11,205,000 for fiscal 2002
compared to fiscal 2001. The increase, excluding the effects of special charges,
is attributable to increased sales, improved gross profit margins and operating
expense reductions, all discussed above.
13
Other Income and Expense
Interest expense declined $572,000 or 22%, to $1,974,000 for fiscal 2002
compared to fiscal 2001. This decrease is attributable to the favorable effects
of a lower interest rate environment and lower overall debt levels outstanding.
Other income and expense, net for fiscal 2002 included a net gain of $254,000
related to the sale of shares of common stock received in the demutualization of
two insurance companies during the first quarter. Other income and expense, net
for fiscal 2002 and 2001 included net currency losses of $14,000 and $39,000,
respectively, related to transactions that are denominated in foreign
currencies. The decrease in currency losses is attributable to the level of
Euro/US dollar exchange rates during each period as well as strategies that were
implemented in the latter part of fiscal 2001 to reduce currency exposure on
these types of transactions.
Income Taxes
The effective rate for income taxes is a provision of 39% for fiscal 2002,
compared to a credit of 31% for fiscal 2001. The effective rate for fiscal 2002
includes the favorable effects of reversing valuation allowance provisions in
Belgium that were established prior to the restructuring of European operations,
as net operating loss carryforwards in this jurisdiction are being utilized, and
certain favorable book-to-tax return adjustments related to non-US sales
activities. The effective rate for fiscal 2001 includes the unfavorable effects
of the goodwill portion of the impairment charges related to FDA matters, a
substantial portion of the European restructuring charge and the acquired
in-process research and development charge, which could not be utilized for tax
purposes.
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30,
2000
Net Sales
Overall, net sales decreased $569,000, or 1%, to $56,527,000 for fiscal 2001
compared to fiscal 2000. Net sales for the MBI operating segment increased
$1,267,000, or 3%, to $44,106,000, and net sales for the MBE operating segment
decreased $1,836,000, or 13%, to $12,421,000.
For the MBI operating segment, volume declines occurring in the traditional
Meridian core business were caused by discontinuing the manufacturing and
distribution of approximately 30 products and Cincinnati manufacturing output
inefficiencies. Volume declines in the traditional Meridian core business were
offset by the VAI acquisition, which contributed sales of $7,591,000.
For the MBE operating segment, the decline in sales during fiscal 2001 reflects
the unfavorable impact of currency translation losses ($1,055,000) and volume
declines attributable to discontinuing the manufacturing and distribution of the
products discussed above. The Premier Platinum HpSA product had strong volume
growth in the Italian market, offsetting a portion of the volume declines.
For both operating segments combined, international sales were $18,123,000, or
32% of total sales, for fiscal 2001, compared to $19,276,000, or 34% of total
sales, in fiscal 2000. Domestic MBI exports were $5,702,000 for fiscal 2001,
compared to $5,019,000 in fiscal 2000. The remaining international sales were
generated by Meridian's European distribution businesses (MBE).
Gross Profit
Gross profit, including the effects of the inventory write-off of $4,000,000,
decreased $8,740,000 or 25%, to $26,706,000 in fiscal 2001 compared to fiscal
2000. Gross profit margins decreased from 62% in fiscal 2000 to 47% in fiscal
2001. The $4,000,000 inventory write-off accounts for seven points of this
decrease. The remaining decrease of eight points is primarily attributable to
the Cincinnati manufacturing output inefficiencies, including unusual scrap
levels and currency translation losses.
14
Meridian's manufacturing costs are predominantly incurred in US dollars whereas
a significant portion of international sales are denominated in foreign
currencies. Consequently, a significant portion of the currency translation
losses discussed under "Net Sales" above, adversely affected gross profit
margins.
Operating Expenses
Operating expenses, inclusive of acquired in-process research and development,
asset impairment charges related to FDA matters, plan implementation costs to
improve quality systems and European restructuring costs, in fiscal 2001
increased $13,121,000 or 50%, and as a percentage of sales, increased from 46%
in fiscal 2000 to 69% in fiscal 2001. Excluding these special charges, operating
expenses increased $537,000 or 2%, and as a percentage of sales, increased from
44% to 46%. The increase in operating expenses, excluding the special charges,
is primarily attributable to the VAI acquisition, including amortization of
goodwill and other intangibles, costs for outsourced research and development
activities, costs of certain clinical trials, costs for recruiting and
relocation of new personnel, and normal salary and wage increases. These
increases have been partially offset by the results of cost reduction measures
in Cincinnati and Europe, including the effects of closure of the German
distribution operation and lower headcount.
Research and development expenses increased $1,103,000 or 49%, to $3,363,000 in
fiscal 2001, and as a percentage of sales, increased from 4% of sales in fiscal
2000 to 6% in fiscal 2001. This increase primarily relates to the addition of
VAI's costs, costs for outsourced research and development activities and costs
for certain clinical trials. Research and development expenses relate entirely
to the MBI operating segment.
Selling and marketing expenses decreased $1,285,000, or 10%, to $10,971,000 in
fiscal 2001, and as a percentage of sales, decreased from 21% in fiscal 2000 to
19% in fiscal 2001. Of this decrease, $276,000 related to the MBI operating
segment while $1,009,000 related to the MBE operating segment. The decrease for
the MBI operating segment primarily relates to the effects of cost reduction
measures in Cincinnati, partially offset by the addition of VAI's costs. The
decrease for the MBE operating segment primarily relates to the closure of the
German distribution operation.
General and administrative expenses increased $719,000 or 7%, to $11,495,000 in
fiscal 2001, and as a percentage of sales, increased from 19% in fiscal 2000 to
20% in fiscal 2001. Of this increase, $903,000 related to the MBI operating
segment while a decrease of $184,000 related to the MBE operating segment. The
increase for the MBI operating segment primarily relates to the addition of
VAI's costs, including amortization of goodwill and other intangibles, partially
offset by the results of cost reduction efforts in Cincinnati and lower
amortization related to impaired intangible assets from the first quarter. The
decrease for the MBE operating segment primarily relates to cost reduction
efforts, including the closure of the German distribution operation.
Operating Income
Meridian experienced an operating loss of $12,507,000 in fiscal 2001, reflecting
the negative effects of acquired in-process research and development, the asset
impairment charges and other costs related to FDA matters, European
restructuring costs and lower sales and gross profit for Cincinnati operations
during the latter three quarters. Operating income in fiscal 2000 was
$9,354,000.
Other Income and Expense
Interest income decreased $216,000 or 57%, to $166,000 in fiscal 2001. This
decrease is attributable to lower average interest-bearing cash balances and
lower interest rates.
Interest expense increased $422,000 or 20%, to $2,546,000 in fiscal 2001. This
increase is primarily due to interest on the debt that funded the VAI
acquisition, interest on the debt assumed in the VAI acquisition and higher
average working capital borrowings outstanding, offset somewhat by lower
interest rates.
15
Other expense, net in fiscal 2000 includes a gain of $292,000 from the sale of
the former Gull Laboratories headquarters facility and currency losses of
$845,000 related to intercompany debt transactions involving the German
distribution operation that was shut down.
Income Taxes
The effective rate for income tax credits is 31% in fiscal 2001, compared to an
effective rate of 2% in fiscal 2000. The effective rate in fiscal 2001 reflects
the unfavorable effect of certain permanent differences, primarily goodwill
amortization and the goodwill portion of the asset impairment charge, as well as
the charge for acquired in-process research and development. The provision for
income taxes in fiscal 2001 also includes benefits for operating losses in US
jurisdictions based on expectations of taxable income in future periods. The
effective rate in fiscal 2000 includes the tax benefits related to the write-off
of Meridian's net investment in its German distribution business ($4,641,000)
and valuation allowance provisions related to net operating losses in Europe
($1,718,000).
Liquidity and Capital Resources:
Comparative Cash Flow Analysis
Meridian's operating cash flow and financing requirements are determined by
analyses of operating and capital spending budgets and consideration of
acquisition plans. Meridian has historically maintained line of credit
availability to respond to acquisition opportunities quickly.
Net cash provided by operating activities increased $2,713,000 or 31%, to
$11,415,000 in fiscal 2002 compared to fiscal 2001. This increase is primarily
attributable to earning levels, net of changes in deferred taxes, and also
reflects cash used to return finished goods inventories to targeted levels.
Although fiscal 2001 reflected a significant loss caused by asset impairment
related to FDA matters, European restructuring and acquired in-process research
and development, a substantial portion of these charges were non-cash in nature.
Net cash used for investing activities was $4,201,000 for fiscal 2002, compared
to $1,914,000 for fiscal 2001, and primarily related to capital expenditures
during both periods. The increase during fiscal 2002 reflects the construction
of VAI's cGMP protein production laboratory. Net cash used in investing
activities for fiscal 2002 also included proceeds of $254,000 related to the
sale of common stock received in the demutualization of two insurance companies
during the first quarter.
Net cash used for financing activities was $8,999,000 for fiscal 2002, compared
to $7,046,000 for fiscal 2001. Activity on the revolving credit facility during
fiscal 2002 includes approximately $1,000,000 related to repayment of the
mortgage loan for the Viral Antigens facilities that matured in January 2002.
Net cash flows from operating activities are anticipated to fund working capital
requirements, debt service and dividends during fiscal 2003.
Capital Resources
The following table presents Meridian's financing obligations as of September
30, 2002 (amounts in thousands):
Payments Due for Fiscal Years Beginning October 1
---------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Total
---------------------------------------------------------------------------------
Bank term debt $736 $674 $674 $1,866 $58 $4,008
Capital lease obligations 207 167 83 89 15 561
Subordinated debentures -- -- -- 20,000 -- 20,000
16
Meridian has a $25,000,000 credit facility with a commercial bank that includes
$5,000,000 of term debt and capital lease capacity and a $20,000,000 line of
credit that expires in September 2004. As of December 2, 2002, borrowings of
$965,000 were outstanding on the line of credit portion of this facility, and
the availability was $19,035,000.
A substantial portion of the bank term debt, $3,888,000, is denominated in the
Euro currency and bears interest at a variable rate tied to Euro LIBOR. A
one-percentage point increase in the Euro LIBOR rate would increase fiscal 2003
interest expense by $33,000 for this debt. This debt serves as a natural
currency hedge against certain Euro denominated intercompany receivables. The
subordinated convertible debentures in the amount of $20,000,000 bear interest
at a fixed rate of 7% and have a conversion rate of $16.09. The Company expects
that these debentures will be converted or refinanced at maturity.
The Viral Antigens acquisition, completed in fiscal 2000, provides for
additional purchase consideration up to a maximum remaining amount of
$5,938,000, contingent upon Viral Antigen's future earnings through September
30, 2006. Earnout consideration is payable each year, following the period
earned. Earnout payments, if any, may require financing under the line of credit
or other bank credit facility. Earnout consideration in the amount of $1,407,000
related to fiscal 2002 is due to be paid in the second quarter of fiscal 2003
and will be financed on Meridian's line of credit.
Meridian's capital expenditures are estimated to be $2,000,000 for fiscal 2003,
and may be funded with operating cash flows or availability under the
$25,000,000 credit facility discussed above. Capital expenditures relate to
manufacturing and other equipment of a normal and recurring nature.
Commitments:
Royalties
Meridian has entered into various license agreements that require payment of
royalties based on a specified percentage of sales of related products (1% to
8%). Meridian expects that payments under these agreements will amount to as
much as $700,000 in fiscal 2003.
Market Risk Exposure:
Meridian has market risk exposure related to interest rate sensitive debt and
foreign currency transactions.
Meridian has debt obligations in the aggregate amount of $24,569,000 outstanding
at September 30, 2002, of which $4,511,000 bears interest at variable rates.
Information concerning the maturities of interest rate sensitive debt is
included in the discussion of Capital Resources above. To date, Meridian has not
employed a hedging strategy with respect to interest rate risk.
Meridian is exposed to foreign currency rate risk related to its European
distribution operations, including foreign currency denominated intercompany
receivables, as well as Euro denominated term debt. The Euro denominated term
debt serves as a natural hedge against a portion of the Euro denominated
intercompany receivables.
Euro Conversion:
On January 1, 1999, the European and Monetary Union took effect and introduced
the Euro as the official single currency for the 11 participating member
countries. On that date, the currency exchange rates of the participating
countries were fixed against the Euro. Effective January 1, 2002, the legacy
currencies were eliminated and the Euro is the single currency for the 11
participating countries.
Meridian's systems have been updated to process Euro transactions. Costs
required to prepare for the Euro have not been material to Meridian's financial
position, results of operations or cash flows. The future impact, if any, of the
Euro on Meridian's competitive position is unknown.
17
FDA Matters:
During January 2001, the FDA completed a follow-up inspection of Meridian's
compliance with the Quality Systems Regulations that govern the manufacturing of
in vitro diagnostics. This inspection included a review of, among other things,
procedures for validation, document control, corrective actions and design
control. In June 2001, Meridian received a Warning Letter from the FDA which
summarized and reiterated certain of the observations made by the FDA during
their follow-up inspection completed in January 2001. Meridian responded to the
Warning Letter on July 20, 2001.
In January 2001, Meridian submitted a comprehensive plan to the FDA outlining
specific steps it committed to undertake to improve its quality systems. To
concentrate and focus resources on QSR compliance, Meridian discontinued the
manufacturing and distribution of approximately 30 products. The costs of
implementing the plan included costs for outside consultants with experience in
the quality system regulations, validation and computer software and equipment.
During fiscal 2001, Meridian incurred plan implementation costs in the amount of
$2,322,000, primarily related to consulting fees. Meridian has considered the
effects of incremental costs of compliance with QSR in its cost structure.
Meridian continues to engage in activities designed to reduce costs, improve
operations and replace products that were discontinued.
As a result of the decision to discontinue the manufacturing and distribution of
approximately 30 products, Meridian could not recover the cost of certain
assets, and consequently, recorded the following pre-tax charges during fiscal
2001 (in thousands):
================================================================================
Product inventory write-off $ 4,000
Product recall costs 181
Write-off of sales-type lease receivables 336
Impaired instrumentation equipment 666
Impaired intangible assets 7,569
- --------------------------------------------------------------------------------
$12,752
================================================================================
Impaired intangible assets included portions of manufacturing technologies, core
products, customer lists and goodwill related to these products. Impairment
amounts for long-lived assets were measured by comparing discounted future cash
flow projections to the net book value of the assets.
In accordance with the FDA's directive in the Warning Letter, in September 2001,
Meridian engaged an independent auditor to evaluate Meridian's progress in
implementing its corrective plan. Based on an extensive review of documents and
an on-site visit, the auditors substantiated Meridian's progress in addressing
the issues raised in the FDA inspection and Warning Letter. As anticipated by
Meridian, the FDA commenced an on-site follow-up inspection during late fiscal
2002. This follow-up inspection was completed in August 2002. The FDA issued
several observations primarily aimed at fine-tuning established quality control
systems and procedures. Meridian submitted written corrective action plans to
address these refinements and continues its periodic communications with the FDA
on the progress of its plan submitted to the FDA in January 2001 and the
observations from the recently completed inspection.
Meridian expects cash flows from operations to be sufficient to fund working
capital needs, debt service and dividends during fiscal 2003. Meridian is
communicating with the FDA on a periodic basis to advise it on the progress of
its plan. At present, it is uncertain whether Meridian's actions will be
sufficient so that no further remedial action or enforcement action by the FDA
will occur.
18
Critical Accounting Policies:
The consolidated financial statements included in this Annual Report on Form
10-K have been prepared in accordance with accounting principles generally
accepted in the United States. Such accounting principles requires management to
make judgments about estimates and assumptions that affect the reported amount
of assets, liabilities, revenues, expenses and related disclosures. Management
believes that the following accounting policies are critical to understanding
the accompanying consolidated financial statements because the application of
such polices requires the use of significant estimates and assumptions and the
carrying values of related assets and liabilities are material.
Revenue Recognition
Meridian's revenues are derived primarily from product sales. Revenue is
recognized when product is shipped and title has passed to the buyer. Revenue is
reduced at the date of sale for estimated rebates and cash discounts that will
be claimed by customers. Rebate agreements are in place with certain independent
national distributors and are designed to reimburse such distributors for their
cost in handling Meridian's products. Management estimates reserves for rebate
agreements and cash discounts based on historical statistics, current trends and
other factors. Changes to these reserves are recorded in the period that they
become known.
During fiscal 2002, Meridian adopted EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including the Reseller of a Vendor's Products).
EITF No. 01-9 affected the manner in which Meridian estimates reserves for
distributor rebate agreements. Rebate agreements are in place with certain
independent national distributors and are designed to reimburse such
distributors for their cost in handling Meridian's products. Reserves for rebate
agreements include components for reported but unpaid rebates to date and
rebates not yet reported. Meridian's reserves for rebate agreements were
increased by approximately $350,000 upon adoption of EITF No. 01-9.
Inventories
Meridian's inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis, except for inventories in the Viral
Antigens business for which cost is determined on a last-in, first-out basis.
Meridian establishes reserves against cost for excess and obsolete materials,
finished goods whose shelf life may expire before sale to customers, and other
identified exposures. Management estimates reserves based on assumptions about
future demand and market conditions. If actual market conditions are less
favorable than such estimates, additional inventory writedowns would be required
and this would negatively affect gross profit margin and overall results of
operations. Changes to inventory reserves are recorded in the period that they
become known.
For the Viral Antigens purchase business combination, Meridian elected to use
last-in, first-out accounting for inventories for financial reporting purposes.
Under last-in, first-out accounting, the stepped-up inventory value will be
charged to earnings in periods in which inventory quantities decline below those
on hand at the purchase date. To date, inventory quantities have remained above
levels on hand at the acquisition date.
Intangible Assets
Meridian's intangible assets include identifiable intangibles and goodwill.
Identifiable intangibles include customer lists, supply agreements,
manufacturing technologies, patents, licenses, trade names and non-compete
agreements. All of Meridian's identifiable intangibles have finite lives.
During the first quarter of fiscal 2002, Meridian adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
provides that goodwill and intangible assets with indefinite lives are no longer
amortized over their useful lives, but rather, are now subject to an annual
impairment review (or more frequently if impairment indicators arise) by
applying a fair-value based test. Meridian completed the transition analyses
required by SFAS No. 142 during the first quarter, and there were no
impairments. Meridian completed its first annual impairment review as of
September 30, 2002. There were no impairments from this review.
19
Identifiable intangibles with finite lives are subject to impairment testing as
prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. Pursuant to the provisions of SFAS No. 144, identifiable
intangibles with finite lives are reviewed for impairment when events or
circumstances indicate that such assets may not be recoverable at their current
carrying value. Whether an event or circumstance triggers an impairment is
determined by comparing an estimate of the asset's undiscounted future cash
flows to its carrying value. If impairment has occurred, it is measured by a
fair-value based test. Meridian adopted SFAS No. 144 effective October 1, 2002.
There were no impairments from adoption.
Meridian's ability to recover its intangible assets, both identifiable
intangibles and goodwill, is dependent upon the future cash flows of the related
acquired businesses and assets. The application of SFAS Nos. 142 and 144
requires management to make judgments and assumptions regarding future cash
flows, including sales levels, gross profit margins, operating expense levels,
working capital levels and capital expenditures. With respect to identifiable
intangibles, management also makes judgments and assumptions regarding useful
lives.
Management considers the following factors in evaluating events and
circumstances for possible impairment: (i) significant under-performance
relative to historical or projected operating results, (ii) negative industry
trends, (iii) sales levels of specific groups of products (related to specific
identifiable intangibles), (iv) changes in overall business strategies and (v)
other factors.
If actual cash flows are less favorable than projections, this could trigger
impairment of intangible assets. If impairment were to occur, this would
negatively affect overall results of operations.
Income Taxes
Pursuant to SFAS No. 109, Accounting for Income Taxes, Meridian's provision for
income taxes includes federal, foreign, state and local income taxes currently
payable and those deferred because of temporary differences between income for
financial reporting and income for tax purposes.
Meridian's deferred tax assets include net operating loss carryforwards in
foreign jurisdictions. The realization of tax benefits related to net operating
loss carryforwards is dependent upon the generation of future taxable income in
the applicable jurisdictions. Management assesses the level of deferred tax
asset valuation allowance by taking into consideration historical and future
projected operating results, future reversals of taxable temporary differences,
as well as tax planning strategies. The amount of net deferred tax asset
considered realizable could be reduced in future years if estimates of future
taxable income during the carryforward period are reduced.
Undistributed earnings in Meridian's foreign subsidiaries are considered by
management to be permanently re-invested in such subsidiaries. Consequently, US
deferred tax liabilities on such earnings have not been recorded. Management
believes that such US taxes would be largely offset by foreign tax credits for
taxes paid in applicable foreign jurisdictions.
Accounting Pronouncements:
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities in situations that do not involve a business
combination. SFAS No. 146 requires liabilities associated with exit and disposal
activities to be expensed as incurred, rather than recognized at the date an
entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Market Risk Exposure under Item 7 above.
20
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Reports of Independent Accountants 22
Consolidated Statements of Operations for the years ended September 30, 2002, 2001 and 2000 24
Consolidated Statements of Cash Flows for the years ended September 30, 2002, 2001 and 2000 25
Consolidated Balance Sheets as of September 30, 2002 and 2001 26
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2002, 2001 and 2000 28
Notes to Consolidated Financial Statements 29
Schedule No. II - Valuation and Qualifying Accounts for the years ended September 30, 2002, 2001 and 2000 55
All other supplemental schedules are omitted due to the absence of conditions
under which they are required or because the information is shown in the
Consolidated Financial Statements or Notes thereto.
21
Report of Independent Public Accountants
To Meridian Bioscience, Inc.:
In our opinion, the consolidated balance sheet as of September 30, 2002 and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Meridian Bioscience, Inc. and its subsidiaries at September 30, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The financial statements and financial
statement schedule of the Company as of September 30, 2001, and for each of the
two years then ended September 30, 2001 were audited by independent accountants
who have ceased operations. Those independent accountants expressed an
unqualified opinion on those financial statements in their report dated November
9, 2001.
As discussed above, the financial statements of the Company as of September 30,
2001 and for each of the two years in the period then ended September 30, 2001
were audited by independent accountants who have ceased operations. As described
in Note 2, these financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
(Statement) No. 142, Goodwill and other Intangible Assets, which was adopted by
the Company as of October 1, 2001. We audited the transitional disclosures in
Note 2. In our opinion, the disclosures for 2001 and 2000 in Note 2 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the Company other than
with respect to such disclosures and, accordingly we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.
/s/ PricewaterhouseCoopers LLP
November 8, 2002
Cincinnati, Ohio
22
THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND
HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
Report of Independent Public Accountants
To Meridian Bioscience, Inc.:
We have audited the accompanying consolidated balance sheets of MERIDIAN
BIOSCIENCE, INC. and subsidiaries as of September 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 2001. These
financial statements and the schedule referred to below are the responsibility
of Meridian's management. Our responsibility is to express an opinion on the
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Meridian Bioscience, Inc. and
subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of the financial
statements is presented for the purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
November 9, 2001
23
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Meridian Bioscience, Inc. and Subsidiaries
=================================================================================================================
For the Year Ended September 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Net Sales $ 59,104 $ 56,527 $ 57,096
Cost of Sales
Sale of product 24,506 25,821 21,650
Inventory impairment -- 4,000 --
- -----------------------------------------------------------------------------------------------------------------
Total cost of sales 24,506 29,821 21,650
- -----------------------------------------------------------------------------------------------------------------
Gross Profit 34,598 26,706 35,446
- -----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Research and development 2,888 3,363 2,260
Selling and marketing 9,730 10,971 12,256
General and administrative 10,775 11,495 10,776
Costs of abandoned acquisition 1,211 -- --
Costs and asset impairment charges related to FDA matters -- 11,074 --
European restructuring costs -- 1,510 800
Acquired in-process research and development -- 800 --
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 24,604 39,213 26,092
- -----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 9,994 (12,507) 9,354
Other Income (Expense):
Interest income 38 166 382
Interest expense (1,974) (2,546) (2,124)
Other, net 185 (19) (674)
- -----------------------------------------------------------------------------------------------------------------
Total other income (expense) (1,751) (2,399) (2,416)
- -----------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 8,243 (14,906) 6,938
Income Tax Provision (Benefit) 3,212 (4,631) (173)
- -----------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ 5,031 $(10,275) $ 7,111
=================================================================================================================
Earnings Per Share Data:
Basic earnings (loss) per common share $ 0.34 $ (0.70) $ 0.49
Diluted earnings (loss) per common share $ 0.34 $ (0.70) $ 0.49
Common shares used for basic earnings (loss) per common share 14,621 14,589 14,565
Dilutive stock options 139 -- 87
- -----------------------------------------------------------------------------------------------------------------
Common shares used for diluted earnings (loss) per common share 14,760 14,589 14,652
=================================================================================================================
Anti-dilutive Securities:
Common stock options 737 1,088 407
Convertible debentures 1,243 1,243 1,243
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Meridian Bioscience, Inc. and Subsidiaries
==============================================================================================================
For the Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net earnings (loss) $ 5,031 $(10,275) $ 7,111
Non-cash items
Acquired in-process research and development -- 800 --
Depreciation of property, plant and equipment 2,312 2,261 2,039
Amortization of intangible assets 1,407 2,485 2,772
Asset impairment charges related to FDA matters -- 12,752 --
European restructuring -- 396 800
Deferred income taxes, net of impact of acquisitions 200 (4,394) (42)
Stock compensation expense 48 15 11
Gain on sale of stock received in demutualization (254) -- --
Gain on sale of Gull Laboratories headquarters facility -- -- (292)
Change in current assets, excluding cash and effects of acquisitions (123) 4,604 (6,970)
Change in current liabilities, excluding current portion of long-term
obligations and acquisitions 2,446 (1,302) (631)
Other, net 348 1,360 419
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,415 8,702 5,217
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Acquisition of Viral Antigens, net of cash acquired (905) -- (8,985)
Acquisitions of property, plant and equipment (3,550) (1,923) (4,047)
Proceeds from sale of Gull Laboratories headquarters facility -- -- 2,332
Proceeds from sales of investments 254 9 989
Purchase of product license and other intangibles -- -- (25)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,201) (1,914) (9,736)
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net activity on revolving credit facility (2,940) (345) 6,230
Proceeds from debt obligations -- 4,058 6,303
Repayment of debt obligations (2,175) (7,016) (5,810)
Dividends paid (4,022) (3,722) (3,353)
Acquisitions of treasury stock -- (32) --
Proceeds from exercises of stock options 138 11 181
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (8,999) (7,046) 3,551
- --------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 172 111 (441)
Net Decrease in Cash and Equivalents (1,613) (147) (1,409)
Cash and Equivalents at Beginning of Period 4,673 4,820 6,229
- --------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 3,060 $ 4,673 4,820
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
25
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
Meridian Bioscience, Inc. and Subsidiaries
=====================================================================================================
As of September 30, 2002 2001
- -----------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash $ 3,060 $ 4,673
Accounts receivable, less allowances of $987 in 2002 and $889 in 2001 12,616 12,526
Inventories 12,735 12,139
Prepaid expenses and other current assets 966 1,529
Deferred income taxes 998 1,635
- -----------------------------------------------------------------------------------------------------
Total current assets 30,375 32,502
- -----------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 666 658
Buildings and improvements 13,986 13,970
Machinery, equipment and furniture 15,317 13,756
Construction in progress 2,780 872
- -----------------------------------------------------------------------------------------------------
Subtotal 32,749 29,256
Less-accumulated depreciation and amortization 14,744 12,530
- -----------------------------------------------------------------------------------------------------
Net property, plant and equipment 18,005 16,726
- -----------------------------------------------------------------------------------------------------
Other Assets:
Deferred debenture offering costs, net 517 652
Goodwill 4,542 2,956
Other intangible assets, net 11,415 12,806
Other assets 241 340
- -----------------------------------------------------------------------------------------------------
Total other assets 16,715 16,754
- -----------------------------------------------------------------------------------------------------
Total assets $65,095 $65,982
=====================================================================================================
The accompanying notes are an integral part of these consolidated balance
sheets.
26
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
Meridian Bioscience, Inc. and Subsidiaries
===========================================================================================================
As of September 30, 2002 2001
- -----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 943 $ 2,132
Borrowings under revolving credit facility 2,945 5,885
Accounts payable 1,914 2,370
Accrued payroll costs 2,428 2,103
Purchase business combination liability 1,407 800
Abandoned acquisition costs 980 --
Other accrued expenses 2,817 3,078
Income taxes payable 1,815 --
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 15,249 16,368
- -----------------------------------------------------------------------------------------------------------
Long-term Obligations:
Bank debt and capital lease obligations 3,626 4,349
Convertible subordinated debentures 20,000 20,000
Deferred Income Taxes 1,839 2,321
Commitments and Contingencies -- --
Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized, none issued -- --
Common stock, no par value, 50,000,000 shares authorized, 14,633,215 and
14,598,970 shares issued and outstanding 2,535 2,535
Treasury stock, 8,300 shares (32) (32)
Additional paid-in capital 21,191 20,962
Retained earnings 1,901 892
Accumulated other comprehensive loss (1,214) (1,413)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 24,381 22,944
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 65,095 $ 65,982
===========================================================================================================
The accompanying notes are an integral part of these consolidated balance
sheets.
27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and shares in thousands except per share data)
Meridian Bioscience, Inc. and Subsidiaries
=========================================================================================================================
Common Shares Additional
Shares Held in Common Treasury Paid-in
Issued Treasury Stock Stock Capital
- -------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 14,429 -- $2,424 $ -- $20,855
Cash dividends paid - $0.23 per share -- -- -- -- --
Exercise of stock options 158 -- 106 -- 75
Issuance of stock options to non-employees -- -- -- -- 11
Comprehensive income:
Net earnings -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 14,587 -- 2,530 -- 20,941
Cash dividends paid - $0.26 per share -- -- -- -- --
Exercise of stock options 12 -- 5 -- 6
Issuance of stock options to non-employees -- -- -- -- 15
Purchase of treasury stock -- (8) -- (32) --
Comprehensive income:
Net earnings (loss) -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 14,599 (8) 2,535 (32) 20,962
Cash dividends paid - $0.275 share -- -- -- -- --
Exercise of stock options 34 -- -- -- 138
Issuance of stock options to non-employees -- -- -- -- 91
Comprehensive income:
Net earnings -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Comprehensive income (loss)
- -------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 14,633 (8) $2,535 $(32) $21,191
=========================================================================================================================
=================================================================================================================
Accumulated
Other Total
Retained Comprehensive Comprehensive Shareholders'
Earnings Income (Loss) Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $11,131 $(819) $33,591
Cash dividends paid - $0.23 per share (3,353) -- (3,353)
Exercise of stock options -- -- 181
Issuance of stock options to non-employees -- -- 11
Comprehensive income:
Net earnings 7,111 -- $7,111 7,111
Foreign currency translation adjustment -- (930) (930) (930)
---------
Comprehensive income $6,181
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 14,889 (1,749) 36,611
Cash dividends paid - $0.26 per share (3,722) -- (3,722)
Exercise of stock options -- -- 11
Issuance of stock options to non-employees -- -- 15
Purchase of treasury stock -- -- (32)
Comprehensive income:
Net earnings (loss) (10,275) -- $(10,275) (10,275)
Foreign currency translation adjustment -- 336 336 336
---------
Comprehensive income $(9,939)
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 892 (1,413) 22,944
Cash dividends paid - $0.275 share (4,022) -- (4,022)
Exercise of stock options -- -- 138
Issuance of stock options to non-employees -- -- 91
Comprehensive income:
Net earnings 5,031 -- $5,031 5,031
Foreign currency translation adjustment -- 199 199 199
---------
Comprehensive income (loss) $5,230
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $1,901 $(1,214) $24,381
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Meridian Bioscience, Inc. and Subsidiaries
(1) Corporate Name Change and Stock Buyback Program
On January 23, 2001, Meridian's shareholders approved a change in the corporate
name to Meridian Bioscience, Inc. Also during January 2001, Meridian changed its
Nasdaq symbol from KITS to VIVO. These changes were implemented to more
accurately reflect Meridian's expansion of its capabilities in bioscience,
research reagent development and other services that will enable drug discovery
and realization of new pharmaceuticals, vaccines and diagnostics.
During the second quarter of fiscal 2001, Meridian's Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock from time-to-time in open market and privately negotiated transactions.
The purchases will be made at the discretion of management and subject to
guidelines adopted by Meridian's Board of Directors, including consideration of
market, business, legal, accounting and other factors. Shares repurchased of
8,300 at September 30, 2002 have been held in treasury. On December 13, 2002,
Meridian's Board of Directors terminated this repurchase program.
(2) Summary of Significant Accounting Policies
(a) Nature of Business - Meridian's principal business is the development,
manufacture and distribution of a broad range of diagnostic test kits,
purified reagents and related products for the healthcare industry.
Meridian also offers biopharmaceutical-enabling capabilities.
(b) Principles of Consolidation - The consolidated financial statements
include the accounts of Meridian Bioscience, Inc. and its subsidiaries
(collectively, "Meridian" or the "Company"). All significant intercompany
accounts and transactions have been eliminated.
(c) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates are discussed in Notes 2(e), 2(g),
2(h), 2(k), 2(m) and 9.
(d) Foreign Currency Translation Adjustments - Assets and liabilities of
foreign operations are translated using year-end exchange rates with gains
or losses resulting from translation included in a separate component of
accumulated other comprehensive income (loss). Revenues and expenses are
translated using exchange rates prevailing during the year. Meridian also
recognizes foreign currency transaction gains and losses on certain assets
and liabilities that are denominated in the Euro currency. These gains and
losses are included in other income and expense in the accompanying
consolidated statements of operations.
(e) Inventories - Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis (FIFO), except for $3,859,000
of inventory for which cost is determined on a last-in, first-out basis
(LIFO). The FIFO cost of this inventory was $2,653,000 at September 30,
2002.
Meridian establishes reserves against cost for excess and obsolete
materials, finished goods whose shelf life may expire before sale to
customers, and other identified exposures. Management estimates reserves
based on assumptions about future demand and market conditions. If actual
market conditions are less favorable than such estimates, additional
inventory writedowns would be required and this would negatively affect
gross profit margin and overall results of operations. Changes to
inventory reserves are recorded in the period that they become known.
For the Viral Antigens purchase business combination, Meridian elected to
use LIFO accounting for inventories for financial reporting purposes.
Under LIFO accounting, the stepped-up inventory value will be charged to
earnings in periods in which inventory quantities decline below those on
hand at the purchase date. To date, inventory quantities have remained
above levels on hand at the acquisition date.
29
(f) Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Upon retirement or other disposition of property, plant and
equipment, the cost and related accumulated depreciation and amortization
are removed from the accounts and the resulting gain or loss is reflected
in earnings. Maintenance and repairs are expensed as incurred.
Depreciation and amortization are computed on the straight-line method in
amounts sufficient to write-off the cost over the estimated useful lives
as follows:
Buildings and improvements - 5 to 33 years
Machinery, equipment and furniture - 3 to 10 years
(g) Intangible Assets - Intangible assets, excluding goodwill, are stated at
cost less accumulated amortization and are being amortized on a
straight-line basis over their estimated useful lives, generally 3 to 15
years. Meridian continually evaluates whether subsequent events and
circumstances have occurred that indicate the remaining estimated useful
lives of intangible assets may warrant revision or that the remaining
balances of these assets may not be recoverable. When factors indicate
that an intangible asset should be evaluated for possible impairment,
Meridian uses an estimate of the related cash flows over the remaining
life of the asset in measuring whether the asset is recoverable. There
were no adjustments to the carrying values of intangible assets resulting
from these evaluations during fiscal 2002. During fiscal 2001, Meridian
recorded a charge for impairment of certain intangible assets and fixed
assets related to FDA matters. See Note 4 for further information
regarding these matters. During fiscal 2000, Meridian recorded a charge in
the amount of $800,000 to cover the amount of intangible assets and
equipment for its German distribution operation that it did not expect to
recover upon liquidation of the legal entity. See Note 5 for further
information regarding this matter. See Note 2 (m).
(h) Revenue Recognition - Revenue is recognized from sales when product is
shipped and title has passed to the buyer. Revenue is reduced at the date
of sale for estimated rebates and cash discounts that will be claimed by
customers. Management estimates reserves for rebate agreements and cash
discounts based on historical statistics, current trends and other
factors. Changes to the reserves are recorded in the period that they
become known.
During fiscal 2002, Meridian adopted EITF No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including the Reseller of a
Vendor's Products). EITF No. 01-9 affected the manner in which Meridian
estimates reserves for distributor rebate agreements. Rebate agreements
are in place with certain independent national distributors and are
designed to reimburse such distributors for their cost in handling
Meridian's products. Reserves for rebate agreements include components for
reported but unpaid rebates to date and rebates not yet reported.
Meridian's reserves for rebate agreements were increased by approximately
$350,000 upon adoption of EITF No. 01-9.
(i) Research and Development Costs - Internal research and development costs
are charged to earnings as incurred. Third-party research and development
costs are expensed when the contracted work has been performed and certain
milestone results have been achieved.
(j) Advertising - Advertising costs are charged to earnings as incurred.
Expenditures for advertising in fiscal 2002, 2001 and 2000 were
approximately $238,000, $193,000, and $366,000 respectively.
(k) Income Taxes - The provision for income taxes includes federal, foreign,
state and local income taxes currently payable and those deferred because
of temporary differences between income for financial reporting and income
for tax purposes.
30
(l) Supplemental Cash flow Information - Supplemental cash flow information is
as follows for fiscal 2002, 2001 and 2000 (amounts in thousands):
==========================================================================================
Year Ended September 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------
Cash paid (received) for -
Income taxes $ 242 $(4,242) $4,259
Interest 2,113 2,447 2,318
Non-cash items -
Capital lease financing -- 214 522
Note received on sale of Gull Laboratories facility -- -- 950
Viral Antigens earnout obligation 1,407 800 --
==========================================================================================
(m) Intangible Assets and Adoption of SFAS No. 142 and 144: - Effective
October 1, 2001, Meridian adopted SFAS No. 142, Goodwill and other
Intangible Assets. SFAS No. 142 addresses accounting and reporting for
acquired goodwill and other intangible assets. Among other things, SFAS
No. 142 provides that goodwill and other intangible assets with indefinite
lines are no longer subject to amortization over their useful lives, but
rather, are now subject to an annual impairment review (or more frequently
if impairment indicators arise) by applying a fair-value based test.
Meridian has no intangible assets with indefinite lives other than
goodwill. Meridian completed the transition analysis required by SFAS No.
142 during the first quarter, and there were no impairments. Pursuant to
the provisions of SFAS No. 142, an intangible asset representing a
workforce acquired in a past acquisition was reclassified to goodwill. The
net book value of the acquired workforce at the time of transfer was
$73,000, including deferred income taxes of $45,000. The following table
reconciles reported net income (loss) to amounts adjusted to add back
goodwill and workforce amortization (in thousands, except per share
amounts).
================================================================================
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Reported net income (loss) $5,031 $(10,275) $7,111
Add back: Goodwill amortization after-tax -- 152 199
Workforce amortization after-tax -- 41 60
- --------------------------------------------------------------------------------
Adjusted net income (loss) $5,031 $(10,082) $7,370
================================================================================
Reported basic earnings (loss) per share $ 0.34 $ (0.70) $ 0.49
Goodwill and workforce amortization after-tax -- 0.01 0.02
- --------------------------------------------------------------------------------
Adjusted basic earnings (loss) per share $ 0.34 $ (0.69) $ 0.51
================================================================================
Reported diluted earnings (loss) per share $ 0.34 $ (0.70) $ 0.49
Goodwill and workforce amortization after-tax -- 0.01 0.01
- --------------------------------------------------------------------------------
Adjusted diluted earnings (loss) per share $ 0.34 $ (0.69) $ 0.50
================================================================================
31
A summary of Meridian' acquired intangible assets subject to amortization,
as of September 30, 2002 and 200l is as follows (in thousands).
==================================================================================================
2002 2001
Gross 2002 Gross 2001
Carrying Accumulated Carrying Accumulated
As of September 30, Value Amortization Value Amortization
- --------------------------------------------------------------------------------------------------
Covenants not to compete $ 800 $ 694 $ 1,600 $1,389
Core products 3,199 1,097 3,199 908
Manufacturing technologies 5,747 2,327 5,747 1,986
Trademarks, licenses and patents 1,787 1,007 1,975 1,050
Customer lists and supply agreements 7,367 2,360 7,367 1,867
Workforce -- -- 500 382
- --------------------------------------------------------------------------------------------------
$18,900 $ 7,485 $20,388 $7,582
==================================================================================================
The actual aggregate amortization expense for these intangible assets for
fiscal 2002 was $ 1,407,000. The estimated aggregate amortization expense
for these intangible assets for each of the five succeeding fiscal years
is as follows: fiscal 2003 - $1,242,000, fiscal 2004 - $1,176,000, fiscal
2005 - $1,090,000, fiscal 2006 - $1,086,000 and fiscal 2007 - $1,086,000.
Effective October 1, 2002, Meridian adopted SFAS No. 144, Accounting for
Impairment or Disposal of Long-lived Assets. SFAS No. 144 establishes a
single model for accounting for impairment or disposal of long-lived
assets, including the disposal of a segment of a business. Long-lived
assets, excluding goodwill and identifiable intangibles with indefinite
lives, are reviewed for impairment when events or circumstances indicate
that such assets may not be recoverable at their carrying value. Whether
an event or circumstance triggers an impairment is determined by comparing
an estimate of the assets' future cash flows to its carrying value. If an
impairment has occurred it is measured by a fair-value based test. SFAS
No. 144 requires companies to separately report discontinued operations
and extends the reporting to a component of an entity that either has been
disposed of (by sale, abandonment or distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the
lower of carrying value or fair value, less costs to sell. . There was no
impact on results of operations or financial condition from the adoption
of SFAS No. 144.
Meridian's ability to recover its intangible assets, both identifiable
intangibles and goodwill, is dependent upon the future cash flows of the
related acquired businesses and assets. The application of SFAS Nos. 142
and 144 requires management to make judgments and assumptions regarding
future cash flows, including sales levels, gross profit margins, operating
expense levels, working capital levels and capital expenditures. With
respect to identifiable intangibles, management also makes judgments and
assumptions regarding useful lives.
Management considers the following factors in evaluating events and
circumstances for possible impairment: (i) significant under-performance
relative to historical or projected operating results, (ii) negative
industry trends, (iii) sales levels of specific groups of products
(related to specific identifiable intangibles), (iv) changes in overall
business strategies and (v) other factors.
If actual cash flows are less favorable than projections, this could
trigger impairment of intangible assets and other long-lived assets. If
impairment were to occur, this would negatively affect overall results of
operations.
(n) Recently Issued Accounting Standards - In June 2002, the FASB issued
Statement of Financial Accounting Standards No. 146, Accounting for Exit
or Disposal Activities. SFAS No. 146 addresses the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities in situations that do not involve a business
combination. SFAS No. 146 requires liabilities associated with exit and
disposal activities to be expensed as incurred, rather than recognized at
the date an entity commits to an exit plan. SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002.
32
(3) Viral Antigens Acquisition
On September 15, 2000, Meridian acquired all of the outstanding common stock of
Viral Antigens, Inc. for $9.6 million in cash, including transaction costs. VAI
manufactures infectious disease antigens that are used in common diagnostic
technologies and distributes a Pseudorabies Virus anti-body test kit for the
veterinary market. VAI's facilities include a specialty laboratory for protein
production that is near completion, providing Meridian the opportunity to serve
as an enabler to biopharmaceutical companies in the development of new drugs and
vaccines. The purchase agreement provides for additional consideration, up to a
maximum remaining amount of $5,938,000 contingent upon VAI's future earnings
through September 30, 2006. Earnout consideration is payable each year,
following the period earned. During fiscal 2002 and fiscal 2001, $1,407,000 and
$905,000, respectively, of additional consideration was earned pursuant to this
provision, and is included in goodwill in the accompanying consolidated balance
sheet. Future earnout payment consideration, if any, will be allocated to
goodwill, and will be recorded in the period in which it is earned and becomes
payable. The initial $9.6 million purchase price was funded with bank debt from
Meridian's existing line of credit facility and cash on hand.
The following unaudited pro forma combined results of operations for fiscal 2000
assume the VAI acquisition occurred October 1, 1999. Pro forma adjustments,
utilizing historical purchase accounting considerations, consist of (i)
amortization of goodwill and other intangible assets acquired, (ii) purchased
in-process research and development, (iii) reduction in interest income due to
cash and investments used to fund a portion of the purchase price, (iv)
additional interest expense related to bank borrowings to fund most of the
purchase price and (v) adjustments to the tax provision (amounts in thousands,
except per share data).
Fiscal 2000
-----------
Net sales $62,129
Net earnings 5,817
Basic EPS 0.40
Diluted EPS 0.40
(4) FDA Matters
During January 2001, the FDA completed a follow-up inspection of Meridian's
compliance with the Quality Systems Regulations that govern the manufacturing of
in vitro diagnostics. This inspection included a review of, among other things,
procedures for validation, document control, corrective actions and design
control. In June 2001, Meridian received a Warning Letter from the FDA which
summarized and reiterated certain of the observations made by the FDA during
their follow-up inspection completed in January 2001. Meridian responded to the
Warning Letter on July 20, 2001.
In January 2001, Meridian submitted a comprehensive plan to the FDA outlining
specific steps it committed to undertake to improve its quality systems. To
concentrate and focus resources on QSR compliance, Meridian discontinued the
manufacturing and distribution of approximately 30 products. The costs of
implementing the plan included costs for outside consultants with experience in
the quality system regulations, validation and computer software and equipment.
During fiscal 2001, Meridian incurred plan implementation costs in the amount of
$2,322,000, primarily related to consulting fees. Meridian has considered the
effects of incremental costs of compliance with QSR in its cost structure.
Meridian continues to engage in activities designed to reduce costs, improve
operations and replace products that were discontinued.
As a result of the decision to discontinue the manufacturing and distribution of
approximately 30 products, Meridian could not recover the cost of certain
assets, and consequently, recorded the following pre-tax charges during fiscal
2001 (in thousands):
33
====================================================================
Product inventory write-off $ 4,000
Product recall costs 181
Write-off of sales-type lease receivables 336
Impaired instrumentation equipment 666
Impaired intangible assets 7,569
--------------------------------------------------------------------
$12,752
====================================================================
Impaired intangible assets included portions of manufacturing technologies, core
products, customer lists and goodwill related to these products. Impairment
amounts for long-lived assets were measured by comparing discounted future cash
flow projections to the net book value of the assets.
In accordance with the FDA's directive in the Warning Letter, in September 2001,
Meridian engaged an independent auditor to evaluate Meridian's progress in
implementing its corrective plan. Based on an extensive review of documents and
an on-site visit, the auditors substantiated Meridian's progress in addressing
the issues raised in the FDA inspection and Warning Letter. As anticipated by
Meridian, the FDA commenced an on-site follow-up inspection in late fiscal 2002.
This follow-up inspection was completed in August 2002. The FDA issued several
observations primarily aimed at fine-tuning established quality control systems
and procedures. Meridian submitted written corrective action plans to address
these refinements and continues its periodic communications with the FDA on the
progress of its plan submitted to the FDA in January 2001 and the observations
from the recently completed inspection.
Meridian expects cash flows from operations to be sufficient to fund working
capital needs, debt service and dividends during fiscal 2003. Meridian is
communicating with the FDA on a periodic basis to advise it on the progress of
its plan. At present, it is uncertain whether Meridian's actions will be
sufficient so that no further remedial action or enforcement action by the FDA
will occur.
(5) European Restructuring
During the fourth quarter of fiscal 2000, a plan was implemented to restructure
European distribution operations and improve operating results. Effective
October 1, 2000, the European export business was transferred from Germany to
Belgium. During the second quarter of fiscal 2001, Meridian completed the
transfer of the German business to an independent distributor. Total costs for
the European restructuring plan were $2,310,000, including $800,000 recognized
in the fourth quarter of fiscal 2000. Restructuring costs included severance,
future lease costs and asset writedowns for accounts receivable, fixed assets
and certain intangible assets. The reserve for restructuring costs at September
30, 2002 was $83,000 and related to remaining severance obligations not yet
paid. During fiscal 2002, provisions to the reserve were $78,000 and payments
against the reserve were $119,000, both relating primarily to severance
obligations. The restructuring plan is complete and Meridian does not expect to
incur additional restructuring costs.
34
(6) Inventories
Inventories are comprised of the following (amounts in thousands):
====================================================================
As of September 30, 2002 2001
--------------------------------------------------------------------
Raw materials $ 4,465 $ 3,256
Work-in-process 3,858 4,928
Finished goods 4,412 3,955
--------------------------------------------------------------------
$12,735 $12,139
====================================================================
(7) Bank Credit Arrangements
Meridian has a $25,000,000 credit facility with a commercial bank. This facility
includes $5,000,000 of term debt and capital lease capacity and a $20,000,000
revolving line of credit which bears interest at a LIBOR based rate, and expires
in September 2004. This line of credit is secured by Meridian's business assets
except for those of the VAI subsidiary and non-domestic subsidiaries. Borrowings
of $2,945,000 and $5,885,000 were outstanding on this line of credit at
September 30, 2002 and 2001, respectively, at weighted average interest rates of
3.1% and 4.9%, respectively. Available borrowings under this line of credit were
$17,055,000 at September 30, 2002. In connection with this bank credit
arrangement, Meridian is required to comply with financial covenants that limit
the amount of debt obligations, require a minimum amount of tangible net worth,
and require a minimum amount of fixed charge coverage. Meridian is in compliance
with all covenants. Meridian is also required to maintain a cash compensating
balance with the bank in the amount $600,000 pursuant to this bank credit
arrangement.
Meridian's VAI subsidiary has a $1,000,000 line of credit that bears interest at
a variable rate and expires in February 2003. There were no borrowings
outstanding on this line of credit at September 30, 2002. This line of credit is
secured by VAI's accounts receivable and inventory.
35
(8) Long-Term Obligations
(a) Long-term debt and capital lease obligations are comprised of the
following at (amounts in thousands):
=================================================================================================================
As of September 30, 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Convertible subordinated debentures, unsecured, 7% interest payable semi-annually on
March 1 and September 1, principal due September 1, 2006 $ 20,000 $ 20,000
Bank term loan, denominated in Euro, interest based on Euro LIBOR (4.58% at
September 30, 2002), quarterly payments of $101, matures in June 2006 1,508 1,786
Bank term loan, denominated in Euro, interest based on Euro LIBOR (4.58% at
September 30, 2002), quarterly payments of $68 based on ten-year amortization,
balloon payment of $ 1,360 matures in June 2006 2,381 2,481
Bank mortgage loan, annual interest fixed at 7.75%, monthly payments of $15 based
on 15-year amortization, balloon payment due at maturity in January 2002, secured by
certain real estate -- 1,113
Bank loan, interest at US LIBOR (3.82 % at September 30, 2002), monthly payments
of $7 based on four-year amortization, matures November 2003, secured by certain
equipment 62 136
Capital leases and other debt obligations 618 965
- -----------------------------------------------------------------------------------------------------------------
24,569 26,481
Less current portion (943) (2,132)
- -----------------------------------------------------------------------------------------------------------------
$ 23,626 $ 24,349
=================================================================================================================
Maturities of long-term debt and capital lease obligations for fiscal 2003
through fiscal 2007 are $943,000, $841,000, $757,000, $21,955,000, and $73,000,
respectively.
Meridian's debentures are convertible into common stock at $16.09 per share.
These debentures were issued at par and do not have a discount feature. The fair
value of Meridian's debentures is estimated to be approximately $14,800,000
based on very limited trading. The accompanying consolidated balance sheet
includes offering costs which have been deferred and are being amortized over
the life of the debentures. The net amount of such costs was $517,000 and
$652,000 at September 30, 2002 and 2001 (net of accumulated amortization of
$812,000 and $676,000, respectively).
36
(b) Capital Lease Obligations - At September 30, 2002, Meridian has equipment
under capital leases expiring in various years through 2007. The future
minimum annual rentals under the capital leases at September 30, 2002 are
as follows (amounts in thousands):
===============================================================
2003 $ 238
2004 178
2005 93
2006 93
2007 16
---------------------------------------------------------------
Subtotal 618
Portion of payments representing interest 57
---------------------------------------------------------------
Present value of future lease payments $ 561
===============================================================
(9) Income Taxes
(a) Earnings before income taxes, and the related provision for income taxes
for the years ended September 30, 2002, 2001 and 2000 were as follows (in
thousands).
==============================================================================================
Year Ended September 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Earnings (loss) before income taxes -
Domestic $6,979 $(15,206) $ 8,766
Foreign 1,264 300 (1,828)
- ----------------------------------------------------------------------------------------------
Total $8,243 $(14,906) $ 6,938
==============================================================================================
Provision (credit) for income taxes -
Federal -
Current provision $ -- $ -- $ --
Temporary differences
Fixed asset basis differences and depreciation (108) 39 (608)
Intangible asset basis differences and amortization (213) (2,890) (490)
Currently non-deductible expenses and reserves (149) 203 (54)
Currency translation (31) 178 (148)
Abandoned acquisition costs (412) -- --
Net operating loss carryforwards 3,248 (1,853) --
Other, net (75) (17) 378
- ----------------------------------------------------------------------------------------------
Subtotal 2,260 (4,340) (922)
State and local 438 (731) (490)
Foreign 514 440 1,239
- ----------------------------------------------------------------------------------------------
Total $3,212 $ (4,631) $ (173)
==============================================================================================
(b) The following is reconciliation between the statutory US income tax rate
and the effective rate derived by dividing the provision for income taxes
by earnings before income taxes (dollars in thousands).
37
============================================================================================================================
Year Ended September 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Computed income taxes at statutory rate $ 2,802 34.0% $(5,068) (34.0%) $ 2,428 35.0%
Increase/(decrease) in taxes resulting from -
Goodwill amortization and impairment -- -- 414 2.8 96 1.4
Acquired in-process research and development -- -- 275 1.8 -- --
State and local income taxes 295 3.6 (472) (3.2) (134) (1.9)
Subpart F income taxes 228 2.8 -- -- -- --
Foreign taxes 168 2.0 73 0.5 94 1.4
Extra territorial income exclusion (170) (2.1) (85) (0.6) (91) (1.3)
Liquidation of German subsidiary -- -- (274) (1.8) (4,176) (60.2)
Valuation allowance (52) (0.6) 588 4.0 1,718 24.8
Other, net (59) (0.7) (82) (0.6) (108) (1.7)
- ----------------------------------------------------------------------------------------------------------------------------
$ 3,212 39.0% $(4,631) (31.1%) $ (173) (2.5%)
============================================================================================================================
(c) The components of net deferred tax assets (liabilities) were as follows at
(amounts in thousands):
================================================================================
As of September 30, 2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets -
Valuation reserves and non-deductible expenses $ 967 $ 885
Net operating loss carryforwards - domestic -- 1,853
Net operating loss carryforwards - foreign 2,151 2,332
Abandoned acquisition costs 459 --
Foreign tax credits 173 --
- --------------------------------------------------------------------------------
Subtotal 3,750 5,070
Less valuation allowance 1,706 1,670
- --------------------------------------------------------------------------------
Deferred tax assets 2,044 3,400
- --------------------------------------------------------------------------------
Deferred tax liabilities -
Fixed asset basis differences and depreciation (125) (341)
Intangible asset basis differences and amortization (2,201) (2,451)
Inventory basis differences (338) (263)
Other (221) (1,031)
- --------------------------------------------------------------------------------
Deferred tax liabilities (2,885) (4,086)
- --------------------------------------------------------------------------------
Net deferred tax liability $ (841) $ (686)
================================================================================
For income tax purposes, Meridian has tax benefits related to operating loss
carryforwards in Belgium and France. The operating loss carryforward in Belgium
has no expiration. The operating loss carryforward in France expires between
2003 and 2007. Meridian has recorded deferred tax assets for these
carryforwards, inclusive of valuation allowances in the amount of $1,706,000 at
September 30, 2002. Valuation allowances for pre-acquisition net operating loss
carryforwards amount to $1,331,000, while valuation allowances for
post-acquisition net operating loss carryforwards are $375,000. If tax benefits
are recognized in future years for pre-acquisition operating losses,
38
such benefits will be allocated to reduce goodwill and acquired intangible
assets. The valuation allowance recorded against deferred tax assets at
September 30, 2001 was $1,670,000, and related solely to operating loss
carryforwards in foreign jurisdictions.
The realization of deferred tax assets in foreign jurisdictions is dependent
upon the generation of future taxable income in certain European countries.
Management has considered the levels of currently anticipated pre-tax income in
foreign jurisdictions in assessing the required level of the deferred tax asset
valuation allowance. Taking into consideration historical and current operating
results, and other factors, management believes that it is more likely than not
that the net deferred tax asset for foreign jurisdictions, after consideration
of the valuation allowance which has been established, will be realized. The
amount of the net deferred tax asset considered realizable in foreign
jurisdictions, however, could be reduced in future years if estimates of future
taxable income during the carryforward period are reduced.
Meridian's former German distribution operation, incurred substantial operating
losses subsequent to acquisition, and as of September 30, 2000, was insolvent.
During the fourth quarter of fiscal 2000, a plan was implemented to restructure
European distribution operations, improve operating results and address the
insolvency of the German subsidiary. Effective October 1, 2000, the European
export business was transferred from Germany to Belgium, and the German
distribution center was shut down. Meridian has substantially completed the
liquidation of the insolvent German subsidiary. As a result of the restructuring
plan and the insolvency of the German subsidiary, Meridian wrote off its
investment in its German distribution operation in fiscal 2000. For US tax
purposes, these action steps have resulted in tax benefits because Meridian's
tax basis in the German subsidiary exceeded its book basis.
Undistributed earnings re-invested indefinitely in the Italian operation were
approximately $5,127,000 at September 30, 2002. US deferred tax liabilities on
such earnings have not been recorded. Management believes that such US taxes
would be largely offset by foreign tax credits for taxes paid in applicable
foreign jurisdictions.
(10) Employee Benefits
(a) Savings and Investment Plan - Meridian has a profit sharing and retirement
savings plan covering substantially all full-time employees. Profit
sharing contributions to the plan, which are discretionary, are determined
by the Board of Directors. The plan permits participants to contribute to
the plan through salary reduction. Under terms of the plan, Meridian will
match up to 3% of an employee's contributions. Discretionary and matching
contributions by Meridian to the plan amounted to approximately $665,000,
$265,000, and $455,000, during fiscal 2002, 2001 and 2000, respectively.
(b) Stock-Based Compensation Plans - Meridian has two active stock based
compensation plans, the 1996 Stock Option Plan Amended and Restated
effective January 23, 2001 ("The 1996 Plan"), the 1999 Directors' Stock
Option Plan ("The 1999 Plan"), and an Employee Stock Purchase Plan ("The
ESP Plan") which became effective October 1, 1997.
Meridian may grant options for up to 1,200,000 shares under the 1996 Plan
and 50,000 shares under the 1999 Plan. Meridian has granted 1,037,567
options under the 1996 Plan and 25,487 shares under the 1999 plan through
September 30, 2002. Options may be granted at exercise prices varying from
95% to 110% of the market value of the underlying common stock on the date
of grant and have maximum terms ranging from five to ten years.. Vesting
schedules are established at the time of grant and may be (a) set ratably
over designated periods of time, (b) set at the end of a designated period
of time or (c) set at the earlier of the date a performance target is
achieved or a designated period of time. All options contain provisions
restricting their transferability and limiting their exercise in the event
of termination of employment or the disability or death of the optionee.
Meridian has granted options for 1,020,414 shares under similar plans that
have expired.
Effective October 1, 1997, Meridian may sell shares of stock to its
full-time and part-time employees under the ESP Plan up to the number of
shares equivalent to a 1% to 15% payroll deduction from an employee's base
salary plus an additional 5% dollar match of this deduction by Meridian.
39
A summary of the status of Meridian's stock option plans at September 30, 2002,
2001 and 2000 and changes during the years then ended is presented in the tables
and narrative below:
==========================================================================================================
Year Ended September 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Wtd Wtd Wtd
Avg Ex Avg Ex Avg Ex
Shares Price Shares Price Shares Price
--------------------------------------------------------------
Outstanding beginning of period 1,062,828 $7.38 837,394 $8.06 836,774 $6.84
Grants 244,868 4.84 295,218 5.42 166,751 7.88
Exercises (35,649) 4.25 (10,881) 1.45 (157,785) 1.13
Expirations and forfeitures (20,073) 5.52 (58,903) 7.83 (8,346) 8.76
- ----------------------------------------------------------------------------------------------------------
Outstanding end of period 1,251,974 $7.00 1,062,828 $7.38 837,394 $8.06
==========================================================================================================
Exercisable end of period 709,566 $8.13 609,033 $8.08 486,138 $7.73
==========================================================================================================
Weighted average fair value of grants $1.67 $2.14 $3.23
==========================================================================================================
The range of exercise prices, the weighted average exercise price and the
weighted average remaining contractual life is summarized below for options
which are outstanding and those that are exercisable at September 30, 2002.
==========================================================================================================
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Wtd Avg
Options Remaining Wtd Avg Options Wtd Avg
Range of Exercise Prices Outstanding Life (Yrs.) Ex Price Outstanding Ex Price
- ----------------------------------------------------------------------------------------------------------
$1.00 - $5.00 322,049 8.7 $4.13 21,495 $3.15
$5.01 - $10.00 737,174 5.2 6.83 495,370 6.66
$10.01 - $16.00 192,751 4.9 12.44 192,701 12.44
- ----------------------------------------------------------------------------------------------------------
1,251,974 6.1 $7.00 709,566 $8.13
==========================================================================================================
Meridian accounts for its stock-based compensation plans under APB Opinion No.
25, under which no compensation cost has been recognized for options granted to
employees. Had compensation cost for these plans been determined using the
fair-value method, Meridian's net income and earnings per share would have been
reduced to the following pro forma amounts (amounts in thousands, except per
share data):
40
================================================================================
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Net income -
As reported $5,031 $(10,275) $7,111
Pro forma 4,610 (10,879) 6,609
Basic EPS -
As reported $ 0.34 $ (0.70) $ 0.49
Pro forma 0.32 (0.75) 0.45
Diluted EPS -
As reported $ 0.34 $ (0.70) $ 0.49
Pro forma 0.31 (0.75) 0.45
================================================================================
Because the fair value method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
================================================================================
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Risk-free interest rates 4.0%-5.3% 4.4% - 6.0% 5.7% - 6.7%
Dividend yield 4.1%-6.0% 3.0%-10.4% 2.2%
Life of option 8 yrs. 8 yrs. 3-8 yrs.
Share price volatility 56%-57% 46%-57% 46%
================================================================================
Subsequent to year-end 132,000 stock options were granted which would have had
no impact on the diluted EPS, if granted prior to year-end.
(11) Major Customers and Segment Data
Meridian was formed in June 1976 and functions as a research, development,
manufacturing, marketing and sales organization with primary emphasis in the
field of diagnostic tests for infectious diseases. Meridian grants credit under
normal terms to its customers, primarily to hospitals, commercial laboratories
and distributors in the United States and the rest of the world.
Sales to individual customers constituting 10% or more of net consolidated sales
were as follows (dollars in thousands):
================================================================================
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Customer A $8,479 (14%) $7,990 (14%) $8,482 (15%)
Customer B 6,526 (11%) $5,124 (9%) 6,713 (12%)
================================================================================
Meridian operates in two geographic segments, Meridian Bioscience, Inc. (MBI)
and Meridian Bioscience Europe (MBE). MBI operations consist of manufacturing
operations in Cincinnati, Memphis (Viral Antigens subsidiary)
41
and Saco, Maine (BIODESIGN subsidiary) and sale of diagnostic test kits in the
U.S. and countries outside of Europe, Africa and the Middle East. It also
includes sales of bioresearch reagents and sales of proficiency tests, which
combined, represented approximately 11% of total Company revenues in fiscal
2002. MBI export sales were $6,073,000, $5,702,000 and $5,019,000 in fiscal
years 2002, 2001 and 2000, respectively. Two products accounted for 18% of total
sales in fiscal 2002.
MBE distributes diagnostic test kits in Europe, Africa and the Middle East.
Accounts receivables, which are largely dependent upon funds from the Italian
government, represent approximately 24% of the accounts receivable balance at
September 30, 2002. Significant country information for MBE is as follows (in
thousands):
================================================================================
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Italy -
Sales $4,694 $4,864 $4,839
Identifiable assets 5,978 6,498 5,968
Belgium -
Sales $7,226 $7,557 $ --
Identifiable assets 4,034 5,150 --
Germany -
Sales $ -- $ -- $9,465
Identifiable assets -- -- 5,253
================================================================================
Sales are attributed to the geographic area based on the location from which the
product is shipped to the customer.
42
Segment information for the years ended September 30, 2002, 2001, and 2000 is as
follows (in thousands):
================================================================================
MBI MBE Elim (1) Total
- --------------------------------------------------------------------------------
Fiscal Year 2002 -
Net sales $ 52,085 $ 11,920 $ (4,901) $ 59,104
Depreciation and amortization 3,548 171 -- 3,719
Operating income (loss) 8,437 1,565 (8) 9,994
Total assets 71,816 10,229 (16,950) 65,095
Capital expenditures 3,504 46 -- 3,550
- --------------------------------------------------------------------------------
Fiscal Year 2001 -
Net sales $ 49,406 $ 12,421 $ (5,300) $ 56,527
Depreciation and amortization 4,593 153 -- 4,746
Operating income (loss) (11,673) (725) (109) (12,507)
Total assets 72,904 11,239 (18,161) 65,982
Capital expenditures 1,787 136 -- 1,923
- --------------------------------------------------------------------------------
Fiscal Year 2000 -
Net sales $ 49,188 $ 14,257 $ (6,349) $ 57,096
Depreciation and amortization 4,613 198 -- 4,811
Operating income (loss) 9,461 (566) 459 9,354
Total assets 94,464 10,839 (20,586) 84,717
Capital expenditures 3,552 495 -- 4,047
================================================================================
(1) Eliminations consist of intersegment transactions.
================================================================================
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Segment operating income (loss) $ 9,994 $(12,507) $ 9,354
Interest income 38 166 382
Interest expense (1,974) (2,546) (2,124)
Other, net 185 (19) (674)
- --------------------------------------------------------------------------------
Consolidated earnings (loss)
before income taxes $ 8,243 $(14,906) $ 6,938
================================================================================
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2. Transactions between
geographic segments are accounted for at established intercompany prices for
internal and management purposes with all intercompany amounts eliminated in
consolidation. The MBI segment data for total assets includes corporate goodwill
and intangibles of $15,957,000, $15,762,000, and $24,014,000 for the years ended
September 30, 2002, 2001, and 2000 respectively.
43
(12) Commitments and Contingencies
(a) Royalty Commitments -Meridian has entered into various license agreements
that require payment of royalties based on a specified percentage of the
sales of licensed products (1% to 8%). These royalty expenses are
recognized on an as-earned basis and recorded in the year earned as a
component of cost of sales. Annual royalty expenses associated with these
agreements were approximately $860,000, $699,000, and, $942,000,
respectively, for the years ended September 30, 2002, 2001 and 2000.
(b) Contingencies In June 2000, Meridian filed suit against a former employee
and certain other defendants for breach of an employment agreement and
misappropriation of trade secrets in Ohio. The lawsuit sought injunctive
relief as well as compensatory and punitive damages against the
defendants. Meridian successfully obtained a temporary restraining order
and a preliminary injunction against its former employee and an affiliated
corporation. The matter is currently pending appeal.
The former employee and affiliated corporation filed for bankruptcy
protection in May 2001 but the bankruptcy court has modified the
applicable bankruptcy stay to allow Meridian to continue to pursue this
litigation.
In July 2000, the former employee commenced a separate action against
Meridian in California which was transferred to Ohio, and has been
consolidated with Meridian's Ohio case. Subsequent to the initiation of
the litigation in Ohio and California, the former employee filed two
actions in the Republic of China. The first action, which is characterized
as a "criminal" action, claimed Meridian, an unrelated third party
defendant and two officers of Meridian should be jointly and severally
liable for damages in the amount of approximately $28 million in lost
profits due to Meridian's alleged anticompetitive actions. Although in
August 2002 the Taipei District Court dismissed the criminal complaints
filed in this action, the former employee has filed appeals from these
decisions. In the second action, the former employee filed an
administrative complaint with the Fair Trade Commission in the Republic of
China also asserting unfair competition. In November 2002, the Fair Trade
Commission dismissed the complaint in the administrative action.. Meridian
plans to continue to vigorously defend these matters which it believes are
motivated in large part by the former employee's disappointment over the
outcome to date of the U.S. litigation. Legal fees related to all of these
actions amounted to $150,000, $440,000 and $450,000 in fiscal 2002, 2001
and 2000, respectively. Based on the status of the case to date, the
ultimate resolution of this matter is not expected to have a material
adverse effect on Meridian's financial position, results of operations or
cash flows.
In July 2001, Meridian was sued, along with an unrelated third party
defendant in Italy, for unfair competition. The basis of the claim is the
publication of results of a clinical trial study involving the plaintiff's
diagnostic test kit which plaintiff believes were not accurate. The
plaintiffs seek approximately $5 million in damages. Meridian intends to
vigorously defend this case. Meridian also may challenge the sale and
distribution of the diagnostic test kit; and accordingly, the plaintiff's
right to sell the diagnostic kit may be the subject of further litigation.
To date litigation costs related to this matter have been immaterial.
Based on the status of the case to date, the ultimate resolution of this
matter is not expected to have a material adverse effect on Meridian's
financial position, results of operations or cash flows.
Meridian is a party to other litigation that it believes is in the normal
course of business. The ultimate resolution of these matters is not
expected to have a material adverse effect on Meridian's financial
position, results of operations or cash flows.
44
(13) Quarterly Financial Data (Unaudited)
Amounts are in thousands except per share data. The sum of the earnings
(loss) per common share and cash dividends per share may not equal the
corresponding annual amounts due to interim quarter rounding.
=========================================================================================================
For the Quarter Ended in Fiscal 2002 December 31 March 31 June 30 September 30
- ---------------------------------------------------------------------------------------------------------
Net sales $13,555 $15,092 $14,898 $15,559
Gross profit 8,011 8,659 8,572 9,356
Net earnings 1,187 1,425 1,556 863
Basic earnings per common share 0.08 0.10 0.11 0.06
Diluted earnings per common share 0.08 0.10 0.11 0.06
Cash dividends per common share 0.065 0.07 0.07 0.07
=========================================================================================================
For the Quarter Ended in Fiscal 2001 December 31 March 31 June 30 September 30
- ---------------------------------------------------------------------------------------------------------
Net sales $15,254 $13,866 $13,906 $13,501
Gross profit 5,433 6,912 8,350 6,011
Net earnings (loss) (8,192) (1,616) (638) 171
Basic earnings (loss) per common share (0.56) (0.11) (0.04) 0.01
Diluted earnings (loss) per common share (0.56) (0.11) (0.04) 0.01
Cash dividends per common share 0.06 0.065 0.065 0.065
=========================================================================================================
Net earnings for the fourth quarter of fiscal 2002 include a charge of $751,000,
or $0.05 per diluted share, for costs of the abandoned Biotrin acquisition. The
net loss for the first quarter of fiscal 2001 includes charges of $8,539,000
($0.58 per share) and $657,000 ($0.04 per share) for asset impairment and other
costs related to FDA matters and European restructuring, respectively. The net
loss for the second quarter of fiscal 2001 includes charges of $612,000 ($0.04
per share) and $221,000 ($0.02 per share) for costs related to FDA matters and
European restructuring, respectively. The net loss for the third quarter of
fiscal 2001 includes charges of $562,000 ($0.04 per share) and $800,000 ($0.05
per share) for costs related to FDA matters and acquired in-process research and
development, respectively.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure. Item 9 of
Part II is incorporated by reference into the Registrant's Proxy Statement for
its 2003 Annual Shareholders Meeting to be filed with the Commission pursuant to
Regulation 14A.
PART III
Items 10., 11., 12., and 13., of Part III are incorporated by reference to the
Registrant's Proxy Statement for its 2003 Annual Shareholders' Meeting to be
filed with the Commission pursuant to Regulation 14A.
45
ITEM 14.
CONTROLS AND PROCEDURES
As of December 10, 2002, an evaluation was completed under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of December 10, 2002. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to December 10, 2002.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES.
All financial statements and schedules required to be filed by Item 8 of this
Form and included in this report have been listed previously under Item 8. No
additional financial statements or schedules are being filed since the
requirements of paragraph (d) under Item 15 are not applicable to Meridian.
(a) (3) EXHIBITS.
Exhibit Number Description of Exhibit Filing Status
- -------------- ---------------------- -------------
3.1 Articles of Incorporation, including amendments not related to Company A
name change
3.2 Code of Regulations B
4 Indenture between Meridian and Star Bank, National Association, as C
Trustee, relating to Meridian's 7% Convertible Subordinated Debentures
due 2006
10.3 License Agreement dated October 6, 1983 with Marion Laboratories, Inc. B
10.5 Sublicense Agreement dated June 17, 1993 among Johnson & Johnson, the D
Scripps Research Institute and Meridian Concerning certain Patent
Rights
10.6 Assignment dated June 17, 1993 from Ortho Diagnostic Systems Inc. to D
Meridian concerning certain Patent Rights
10.7 Agreement dated January 24, 1994 between Meridian Diagnostics, Inc. E
and Immulok, Inc.
10.8 Asset Purchase Agreement dated June 24, 1996 between Cambridge Biotech F
Corporation and Meridian Diagnostics, Inc.
10.9 Merger Agreement among Gull Laboratories, Inc., Meridian Diagnostics, G
Inc. Fresenius AG and Meridian Acquisition Co. dated as of September
15, 1998
10.10* Savings and Investment Plan, as amended H
46
Exhibit Number Description of Exhibit Filing Status
- -------------- ---------------------- -------------
10.11* Savings and Investment Plan Trust I
10.12* 1986 Stock Option Plan J
10.14* 1994 Directors' Stock Option Plan K
10.15* 1996 Stock Option Plan L
10.16* Salary Continuation Agreement for John A. Kraeutler M
10.17 First Amendment to Merger Agreement Among Gull Laboratories, Inc., N
Meridian Diagnostics, Inc. Fresenius AG and Meridian Acquisition Co.
10.18* 1999 Directors' Stock Option Plan O
10.20 Dividend Reinvestment Plan Q
10.21 Merger Agreement dated September 13, 2000 among Meridian and the
Shareholders of Viral Antigens, Inc. P
10.22 Loan and Security Agreement among Meridian, certain of its Available upon
subsidiaries and Fifth Third Bank Dated as of September 20, 2001 request
10.23* Employment Agreement Dated February 15, 2001 between Meridian and John Available upon
A. Kraeutler, including the Addendum to Employment Agreement dated request
April 24, 2001 between Meridian and John A. Kraeutler
Available upon
10.24* Sample Option Agreement Dated October 1, 2001 request
Available upon
10.25* Sample Option Agreement Dated October 1, 2001 request
10.26* 1996 Stock Option Plan as Amended and Restated Effective January 23,
2001 R
13 2002 Annual Report to Shareholders (1)
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Accountants Filed herewith
(1) Only portions of the 2002 Annual Report to Shareholders specifically are
incorporated by reference in this Form 10-K as filed herewith. A supplemental
paper copy of the 2002 Annual Report to Shareholders has been provided to the
Securities and Exchange Commission for informational purposes only.
47
*Management Compensatory Contracts
Incorporated by reference to:
A. Registration Statement No. 333-02613 on Form S-3 filed with the Securities
and Exchange Commission on April 18, 1996.
B. Registration Statement No. 33-6052 filed under the Securities Act of 1933.
C. Registration Statement No. 333-11077 on Form S-3 filed with the Securities
and Exchange Commission on August 29, 1996.
D. Meridian's Form 8-K filed with the Securities and Exchange Commission on
June 17, 1993.
E. Meridian's Forms 8-K filed with the Securities and Exchange Commission on
February 8, 1994 and April 6, 1994.
F. Meridian's Form 8-K filed with the Securities and Exchange Commission on
July 2, 1996.
G. Meridian's Form 8-K filed with the Securities and Exchange Commission on
September 17, 1998.
H. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1994 and to Registration Statement No. 33-65443 on Form S-8 filed with
the Securities and Exchange Commission on December 28, 1995.
I. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1994.
J. Registration Statement No. 33-89214 on Form S-8 filed with the Securities
and Exchange Commission on April 5, 1995.
K. Registration Statement No. 33-78868 on Form S-8 filed with the Securities
and Exchange Commission on May 12, 1994.
L. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1996.
M. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1995.
N. Company's Report on Form 8-K filed with the Securities and Exchange
Commission filed on November 13, 1998.
O. Meridian's Proxy Statement filed with the Securities and Exchange
Commission on December 21, 1998.
P. Meridian's Current Report on Form 8-K dated September 29, 2000.
Q. Meridian's Annual Report on Form 10-K for the Fiscal Year Ended September
30, 1999.
R. Registration Statement No. 333-75312 on Form S-8 filed with the Securities
and Exchange Commission on December 17, 2001
(b) REPORTS ON FORM 8-K.
None during the fourth quarter.
48
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MERIDIAN BIOSCIENCE, INC.
By: /s/ William J. Motto
--------------------
Date: December 13, 2002 William J. Motto
Chairman of the Board of
Directors and Chief Executive
Officer (Principal Executive Officer)
49
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ William J. Motto Chairman of the Board of Directors and Chief December 13, 2002
- ---------------------------------------- Executive Officer (Principal Executive Officer)
William J. Motto
/s/ John A. Kraeutler President and Chief Operating December 13, 2002
- ---------------------------------------- Officer, Director
John A. Kraeutler
/s/ Melissa Lueke Vice President and Chief Financial Officer December 13, 2002
- ----------------------------------------
Melissa Lueke
/s/ James A. Buzard Director December 13, 2002
- ----------------------------------------
James A. Buzard
/s/ Gary P. Kreider Director December 13, 2002
- ----------------------------------------
Gary P. Kreider
/s/ David C. Phillips Director December 13, 2002
- ----------------------------------------
David C. Phillips
/s/ Robert J. Ready Director December 13, 2002
- ----------------------------------------
Robert J. Ready
50
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, William J. Motto the principal executive officer of Meridian Bioscience, Inc.
certify that:
1. I have reviewed this annual report on Form 10-K of Meridian Bioscience,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 13, 2002
/s/ William J. Motto
--------------------
William J. Motto
Principal Executive Officer
51
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Melissa Lueke, the principal financial officer of Meridian Bioscience, Inc.
certify that:
1. I have reviewed this annual report on Form 10-K of Meridian Bioscience,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 13, 2002
/s/ Melissa Lueke
-----------------
Melissa Lueke
Principal Financial Officer
52
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of the
Annual Report Meridian Bioscience, Inc. (the "Company") on Form 10-K for the
year ending September 30, 2002 (the "Report"), I, William J. Motto, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ William J. Motto
- --------------------
William J. Motto
Chief Executive Officer
December 13, 2002
53
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of the
Annual Report Meridian Bioscience, Inc. (the "Company") on Form 10-K for the
year ending September 30, 2002 (the "Report"), I, Melissa Lueke, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of
my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Melissa Lueke
- -----------------
Melissa Lueke
Chief Financial Officer
December 13, 2002
54
SCHEDULE II
Meridian Bioscience, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
(Amounts in Thousands)
Years Ended September 30, 2002, 2001 and 2000
=======================================================================================================================
Charged
Balance at to Costs Charged Balance
Beginning of and to Other at End of
Description Period Expenses Accounts Deductions Other (a) Period
- -----------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2002:
Allowance for doubtful accounts $ 889 $ 94 $ -- $ (46) $ 50 $ 987
Inventory realizability reserves 774 1,399 -- (1,443) -- 730
European restructuring reserves 119 78 -- (119) 5 83
Year Ended September 30, 2001:
Allowance for doubtful accounts $ 438 $ 528 $ -- $ (109) $ 32 $ 889
Inventory realizability reserves 685 4,486 -- (4,498) 101 774
European restructuring reserves(b) 800 1,321 -- (2,002) -- 119
Year Ended September 30, 2000:
Allowance for doubtful accounts $ 380 $ 122 $ -- $ (45) $ (19) $ 438
Inventory realizability reserves 1,013 568 -- (806) (90) 685
European restructuring reserves -- 800 -- -- -- 800
Merger integration reserves 157 -- -- (157) -- --
=======================================================================================================================
(a) Balances reflect the effects of currency translation (fiscal years
2000-2002) and acquired valuation accounts related to the Viral Antigens
acquisition (fiscal year 2001).
(b) European restructuring reserves for fiscal year 2001 exclude charges and
period-end balance for allowance for doubtful accounts of $189 and $345,
respectively. Such amounts are included in the allowance for doubtful
accounts caption above.
55