diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/filing.txt b/raw/filings/0000320187/2003/0001193125-04-128270/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..397fe1db8c4a9f23ecb2de9397e96a4b86ee6965 --- /dev/null +++ b/raw/filings/0000320187/2003/0001193125-04-128270/filing.txt @@ -0,0 +1,4550 @@ +10-K +1 +d10k.htm +FORM 10-K +Form 10-K +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended May 31, 2004 +or +¨ +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. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +Oregon +93-0584541 +(State or other jurisdiction +of incorporation) +(IRS Employer +Identification No.) +One Bowerman Drive +(503) 671-6453 +Beaverton, Oregon 97005-6453 +(Registrant’s Telephone Number, Including Area Code) +(Address of principal executive offices) (Zip Code) +Securities +registered pursuant to Section 12(b) of the Act: +Class B Common Stock +New York Stock Exchange +(Title of each class) +(Name of each exchange on which registered) +Securities +registered pursuant to Section 12(g) of the Act: +None +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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing +requirements for the past 90 days. Yes þ No ¨ +Indicate by check mark if disclosure of delinquent +filers pursuant to Item 405 of Regulation S-K (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. ¨ +Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange +Act of 1934. Yes þ No ¨ +As of November 30, 2003, the aggregate market value of the Registrant’s +Class A Common Stock held by nonaffiliates of the Registrant was $1,209,841,286 and the aggregate market value of the Registrant’s Class B Common Stock held by nonaffiliates of the Registrant was $11,519,983,440. +As of July 26, 2004, the number of shares of the Registrant’s Class A +Common Stock outstanding was 77,581,484 and the number of shares of the Registrant’s Class B Common Stock outstanding was 185,783,487. +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the annual meeting of shareholders to be held on September 20, 2004 are incorporated by reference into Part +III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +2 +General +2 +Products +2 +Sales and Marketing +3 +United States Market +3 +International Markets +4 +Orders +5 +Product Research and Development +5 +Manufacturing +5 +International Operations and Trade +6 +Competition +8 +Trademarks and Patents +8 +Employees +8 +Executive Officers of the Registrant +9 +Item 2. +Properties +11 +Item 3. +Legal Proceedings +11 +Item 4. +Submission of Matters to a Vote of Security Holders +11 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +12 +Item 6. +Selected Financial Data +13 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +14 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +29 +Item 8. +Financial Statements and Supplemental Data +33 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +60 +Item 9A. +Controls and Procedures +60 +PART III +(Except for the information set forth under “Executive Officers of the Registrant” in +Item 1 above, Part III is incorporated by reference from the Proxy Statement for +the +NIKE, Inc. 2004 annual meeting of shareholders.) +Item 10. +Directors and Executive Officers of the Registrant +61 +Item 11. +Executive Compensation +61 +Item 12. +Security Ownership of Certain Beneficial Owners and Management +61 +Item 13. +Certain Relationships and Related Transactions +61 +Item 14. +Principal Accountant Fees and Services +61 +PART IV +Item 15. +Exhibits, Financial Statement Schedules and Reports on Form 8-K +62 +Signatures +S-1 +1 +Table of Contents +PART I +Item 1. Business +General +NIKE, Inc. was +incorporated in 1968 under the laws of the state of Oregon. As used in this report, the terms “we”, “us”, “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless +the context indicates otherwise. Our Internet address is www.nike.com . On our NIKE Corporate web site, located at www.nikebiz.com , we post the following filings as soon as reasonably practicable after they are electronically filed with +or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of +the Securities and Exchange Act of 1934. All such filings on our NIKE Corporate web site are available free of charge. Also available on the NIKE Corporate web site are the charters of the committees of our board of directors, as well as our +corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and +worldwide marketing of high quality footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic apparel in the world. We sell our products to retail accounts and through a mix of independent +distributors, licensees and subsidiaries in over 120 countries around the world. Virtually all of our products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while +equipment products are produced both in the United States and abroad. +Products +NIKE’s athletic +footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovative design for men, women +and children. Running, basketball, children’s, cross-training and women’s shoes are currently our top-selling product categories and we expect them to continue to lead in product sales in the near future. However, we also market shoes +designed for outdoor activities, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking, and other athletic and recreational uses. +We sell active sports apparel covering most of the above categories, +athletically inspired lifestyle apparel, as well as athletic bags and accessory items. NIKE apparel and accessories are designed to complement our athletic footwear products, feature the same trademarks and are sold through the same marketing and +distribution channels. We often market footwear, apparel and accessories in “collections” of similar design or for specific purposes. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the NIKE ® brand name, including sport balls, eyewear, skates, +bats, gloves, and other equipment designed for sports activities. We also have agreements for licensees to produce and sell NIKE brand swimwear, women’s sports bras, cycling apparel, maternity exercise wear, children’s clothing, school +supplies, timepieces, and electronic media devices. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. and plastic injected and metal products to other manufacturers +through our wholly-owned subsidiary, BAUER Italia S.p.A. +We +sell a line of dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan ® , g Series © , and Bragano © through our wholly-owned subsidiary, Cole Haan Holdings Incorporated, headquartered in Yarmouth, Maine. +2 +Table of Contents +Our wholly-owned subsidiary, Bauer NIKE Hockey Inc., headquartered in Greenland, New Hampshire, +manufactures and distributes ice skates, skate blades, in-line roller skates, protective gear, hockey sticks, hockey jerseys, licensed apparel and accessories under the Bauer ® and NIKE ® brand names. Bauer also offers a full selection of products for street and roller hockey. +Our wholly-owned subsidiary Hurley International LLC, headquartered in Costa Mesa, California, designs and distributes a +line of action sports apparel for surfing, skateboarding, and snowboarding, and youth lifestyle apparel and footwear under the Hurley ® brand name. +On September 4, 2003, the Company purchased Converse Inc., headquartered in North Andover, Massachusetts, which designs and distributes athletic and +casual footwear, apparel, and accessories under the Converse ® , Chuck Taylor ® , All +Star ® , One Star ® , and Jack Purcell ® brand names. +Sales and Marketing +Financial +information about geographic and segment operations appears in Note 17 of the consolidated financial statements on page 57. +We experience moderate fluctuations in aggregate sales volume during the year. However, the mix of product sales may vary considerably from time to time +as a result of changes in seasonal and geographic demand for particular types of footwear, apparel, and equipment. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand +for our products. We must therefore respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories, and influencing sports and fitness preferences through +aggressive marketing. This is a continuing risk. Failure to timely and adequately respond could have a material adverse affect on our sales and profitability. +United States Market +During +fiscal 2004, sales in the United States (including U.S. sales of Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf, and Converse) accounted for approximately 47 percent of total revenues, compared to 49 percent in fiscal 2003 and 53 percent in fiscal +2002. We sell to approximately 28,000 retail accounts in the United States. The NIKE brand domestic retail account base includes a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf +shops, and other retail accounts. During fiscal year 2004, our three largest customers accounted for approximately 26 percent of NIKE brand sales in the United States excluding sales from NIKE Golf and Bauer NIKE Hockey, and 23 percent of total +sales in the United States. +We make substantial use of our +“futures” ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that 90 percent of their orders will be delivered within a set time period at a fixed price. In fiscal year 2004, 90 +percent of our U.S. wholesale footwear shipments (excluding Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf, and Converse) were made under the futures program, compared to 91 percent in fiscal 2003 and 92 percent in fiscal 2002. In fiscal 2004 and +2003, 67 percent of our U.S. wholesale apparel shipments (excluding U.S. licensed team apparel, Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf and Converse) were made under the futures program, compared to 69 percent in 2002. +3 +Table of Contents +We utilize 21 NIKE sales offices to solicit sales in the United States. We also utilize 10 independent +sales representatives to sell specialty products for golf, cycling, water sports and outdoor activities. In addition, we operate the following retail outlets in the United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily B-grade and closeout merchandise) +78 +NIKE stores (including NIKE Women Stores) +5 +NIKETOWNs (designed to showcase NIKE products) +13 +Employee-only stores +4 +Cole Haan stores (including factory and employee stores) +65 +Total +165 +NIKE’s domestic +distribution centers for footwear are located in Wilsonville, Oregon, Memphis, Tennessee, and Greenland, New Hampshire. Apparel and equipment products are shipped from our Memphis, Tennessee, Tigard, Oregon, and Foothill Ranch, California +distribution centers. Cole Haan and Bauer NIKE Hockey products are distributed primarily from Greenland, New Hampshire, Converse products are shipped from Ontario and Fontana, California, and Hurley products are shipped from Costa Mesa, California. +International Markets +We sell our +products in over 120 countries outside of the United States through retail accounts, independent distributors, licensees, subsidiaries and branch offices. Non-U.S. sales (including Non-U.S. sales of Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf, +and Converse) accounted for 53 percent of total revenues in fiscal 2004, compared to 51 percent in fiscal 2003 and 47 percent in fiscal 2002. We operate 23 distribution centers in Europe, Asia, Australia, Latin America, Africa and Canada, and also +distribute through independent distributors and licensees. We estimate that we sell to more than 23,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. In many countries and regions, including +Japan, Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United States futures program described above. NIKE’s three largest customers outside of the U.S. accounted for +approximately 13 percent of non-U.S. sales. +We operate the +following retail outlets outside the United States: +Non-U.S. Retail Stores +Number +NIKE factory stores +126 +NIKE stores and employee-only stores +2 +NIKETOWNs +2 +Cole Haan stores (including factory and employee stores) +35 +Total +165 +International branch +offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, Indonesia, India, Ireland, Israel, Italy, Japan, +Korea, Lebanon, Malaysia, Mexico, New Zealand, The Netherlands, Norway, Peoples Republic of China, The Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, +Turkey, the United Kingdom, and Vietnam. +4 +Table of Contents +Orders +Worldwide futures orders +for NIKE brand athletic footwear and apparel, scheduled for delivery from June through November 2004, were $5.6 billion compared to $5.0 billion for the same period last year. Based upon historical data, we expect that approximately 95 percent of +these orders will be filled in that time period, although some orders may be cancelled. Futures orders are not necessarily indicative of future sales trends. This is because the mix of orders can shift between advance/futures and at-once orders. In +addition, exchange rate fluctuations as well as differing levels of order cancellations can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures +orders, including wholesale sales of equipment, U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan, Converse, NIKE Golf, Hurley, and retail sales across all brands. +Product Research and Development +We believe that our research and development efforts are a key factor in our past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce +products that reduce injury, aid athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, exercise physiology, engineering, industrial design and related fields, we also utilize research committees and advisory boards made up +of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials and concepts for product improvement. Employee athletes wear-test and evaluate products during the +design and development process. +Manufacturing +Virtually all of +our footwear is produced outside of the United States. In fiscal 2004, contract suppliers in China, Indonesia, Vietnam, and Thailand manufactured 36 percent, 24 percent, 22 percent, and 16 percent of total NIKE brand footwear, respectively. We also +have manufacturing agreements with independent factories in Argentina, Brazil, India, Mexico, and South Africa to manufacture footwear for sale primarily within those countries. Our largest single footwear supplier accounted for approximately 7 +percent of total fiscal 2004 footwear production. +Almost all +of NIKE brand apparel production for sale to the United States market was manufactured outside of the United States by independent contract manufacturers located in 37 countries. Most of this apparel production occurred in Bangladesh, China, Greece, +Honduras, India, Indonesia, Malaysia, Mexico, Pakistan, The Philippines, Sri Lanka, Taiwan, Thailand, and Turkey. All of our apparel production for sale to the international market was manufactured outside the U.S. Our largest single apparel +supplier accounted for approximately 5 percent of total fiscal 2004 apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas, and polyurethane films used to make AIR-SOLE cushioning +components. NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, is our sole supplier of the AIR-SOLE cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads, plastic +and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture. NIKE and its contractors and suppliers buy raw materials in bulk. Most raw materials are available in the countries +where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”) and its predecessor, Nissho Iwai American Corporation, a subsidiary of Nissho Iwai +Corporation, a large Japanese trading company that recently merged with Nichimen Corporation, have performed significant import-export financing services for us. Currently, Sojitz +5 +Table of Contents +America provides such financing services with respect to at least 80% of the NIKE products sold outside of the United States, Europe and Japan. Approximately +12% of NIKE products are sold outside of the United States, Europe and Japan. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and +to deliver products to our customers outside of the United States, Europe and Japan. Such a disruption could result in cancelled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short +term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2005. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export duties, anti-dumping duties, quotas, safeguard measures, trade restrictions, +restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring. We +believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers outside of the United States. If events prevented us from acquiring products from our +suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe that we could abate any such disruption within a period of no more than 12 months, and that +much of the adverse impact on supply would, therefore, be of a short-term nature. We believe that our principal competitors are subject to similar risks. +As a result of the Trade Act of 2003, the United States has implemented significant new Federal requirements for cargo security, focused on imports of +containerized cargo. We are a significant importer of containerized cargo. Accordingly, we participate actively in appropriate governmental programs, such as the Customs Trade Partnership Against Terrorism (“C-TPAT”), to reduce risks of +possible supply disruptions caused by U.S. and international cargo security mandates and terrorism. +All of our products manufactured overseas and imported into the United States and other countries are subject to customs duties collected by customs +authorities. Customs information submitted by us is routinely subject to review by customs authorities. We are unable to predict whether additional customs duties, anti-dumping duties, quotas, safeguard measures, or other trade restrictions may be +imposed on the importation of our products in the future. Such actions could result in increases in the cost of our products generally and might adversely affect the sales or profitability of NIKE and the imported footwear and apparel industry as a +whole. Accordingly, we are actively monitoring the developments described below. +Imports into the European Union +In 1994, the European Commission (“EU”) imposed quotas on certain types of footwear manufactured in China. These quotas replaced national quotas that had previously been in effect in several European Member States. Footwear +designed for use in sporting activities, meeting certain technical criteria and having a CIF (cost, insurance and freight) price above 9 euros (“Special Technology Athletic Footwear” or “STAF”), has been excluded from the quotas. +As a result of the STAF exclusion, and the amount of quota made available to us, the quotas have not, to date, had a material effect on our business. In addition, the EU has confirmed that footwear quotas will be eliminated globally beginning +January 1, 2005. However, as part of China’s 2001 accession to the World Trade Organization (“WTO”), China entered into an agreement with the EU and other WTO members to abide by a special safeguard arrangement whereby quotas could be +imposed on any product sourced in China, including footwear, if there was a surge in imports from China into another WTO country, and after a legal proceeding it was determined that such imports were injuring a domestic producer. Additionally, under +longstanding WTO rules, all WTO member countries reserve the right to impose (1) safeguard measures +6 +Table of Contents +(temporary quotas) if it can be demonstrated in a legal proceeding that increased imports are injuring another WTO member’s domestic industry; and (2) +anti-dumping measures if it can be demonstrated in a legal proceeding that imports are being sold at an unfair low price in another WTO member’s home market. +Accordingly, with the phase-out of the quotas at the beginning of 2005, and the expiration of a separate EU anti-dumping +case in 2003 against footwear made in China, Indonesia and Thailand, there may be renewed pressure from some sectors within Europe to re-impose some level of trade protection on imported footwear. While it is unlikely that the EU will pursue any +such action, we will monitor the circumstances closely and if action is initiated, we will work to mitigate any significant business risks. We believe that our major competitors stand in much the same position of risk regarding these potential trade +measures. +On May 1, 2004 ten new countries joined the EU and +the EU single market. An agreement was reached to increase the current EU quotas on footwear to account for the enlarged EU market. NIKE and other manufacturers do not expect this expansion of the EU single market to present any significant +challenges to the importation into the EU of sports footwear produced in China, since the EU increased quotas take into account the enlarged consumer and market demand. +If EU trade measures become substantially more restrictive we would consider shifting, to the extent possible, the +production of our sports footwear to other countries in order to maintain competitive pricing and access to these markets. We believe that we are prepared to deal effectively with any such change of circumstances and that any adverse impact would be +of a temporary nature. We continue to closely monitor international restrictions and maintain our multi-country sourcing strategy and contingency plans. We believe that our principal competitors are subject to similar risks regarding these trade +measures. +Imports into the United States +We currently source a portion of our footwear and apparel products from +factories in Vietnam. In 2001, the United States Congress and the Vietnamese National Assembly approved a comprehensive bilateral trade agreement, which, among other things, provides reciprocal, non-discriminatory Normal Trade Relations +(“NTR”) between the U.S. and Vietnam. Following that approval, the U.S. granted an annual extension of NTR to Vietnam. The U.S. President must renew this grant annually with the opportunity for review by Congress. In June 2004, President +Bush renewed NTR for Vietnam for an additional year and we anticipate Congress will support this decision. We currently believe that, absent unforeseen circumstances, the President will continue his annual extensions of NTR to Vietnam and that +Congress will support the President’s decisions. The annual extensions on NTR will remain in place until Vietnam enters the WTO, at which time the U.S. must grant Vietnam permanent NTR. Vietnam’s WTO accession negotiations are ongoing, and +may conclude as early as the end of 2005. Ongoing NTR trading status for Vietnam will allow us to expand our production and marketing opportunities in Vietnam and allow for Vietnamese-sourced product to continue to enter the United States at NTR +tariff rates. +Expiration of the Textile and Apparel +Multi-Fiber Arrangement +Under the WTO, the Multi-Fiber +Arrangement, a four-decade old agreement that allows WTO countries to impose quotas on the import of textile and apparel products, will expire on January 1, 2005. This effectively means that all trade of textile and apparel products between WTO +members will be free from quotas at the end of the 2004 calendar year. Elimination of textile and apparel quotas is significant for NIKE and other textile and apparel companies as it provides these companies greater flexibility in their global +sourcing decisions. At the same time, we are monitoring closely actions by textile and apparel importing countries to ensure that they do not unilaterally attempt to re-impose restrictions through some other legal mechanism, such as safeguards, +anti-dumping measures, or in the case of China (as part of the agreement reached in China’s 2001 WTO accession), through the short-term re-imposition of quotas on certain categories of textile and apparel products in order to +7 +Table of Contents +protect a domestic market from surging Chinese imports. In the event of any significant protectionist trade actions, we will evaluate alternative sourcing +options and will work to mitigate any significant business risks. We believe that our principal competitors are subject to similar risks regarding these potential trade measures. +Competition +The athletic +footwear, apparel and equipment industry is keenly competitive in the United States and on a worldwide basis. We compete internationally with an increasing number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports +equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel and equipment, including Reebok, Adidas and others. The intense competition and the rapid changes in technology and consumer preferences in the +markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear and athletic apparel in the world. Performance and reliability of shoes, apparel, and equipment, new +product development, price, product identity through marketing and promotion, and customer support and service are important aspects of competition in the athletic footwear, apparel and equipment industry. To help market our products, we contract +with prominent and influential athletes, coaches, teams, colleges, and sports leagues to endorse our brands and use our products, and we actively sponsor sporting events and clinics. We believe that we are competitive in all of these areas. +Trademarks and Patents +We +utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the +goods of others. We consider our NIKE ® and Swoosh Design ® +trademarks to be among our most valuable assets and we have registered these trademarks in over 100 countries. In addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks +against infringement. +NIKE has an exclusive, worldwide license +to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR ® +patents have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE AIR patents will not expire for several years. We also have hundreds of U.S. and foreign patents covering components, features, and +designs used in various athletic and leisure shoes, apparel, and equipment. These patents expire at various times, and have a remaining duration of from now to at least 2024, although the duration of patents varies by country. We believe that our +success depends primarily upon skills in design, research and development, production and marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on inventions, +designs and improvements that we deem valuable. +Employees +We had approximately +24,667 employees at May 31, 2004. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, with the exception of Bauer NIKE Hockey Inc. Of Bauer NIKE Hockey’s North American +employees, approximately 47 percent, or approximately 232, are covered by three union collective bargaining agreements with three separate bargaining units, and all of Bauer NIKE Hockey’s approximately 130 non-immigrant employees in Italy are +covered by three collective bargaining agreements. The collective bargaining agreements expire on various dates from 2005 through 2007. There has never been a material interruption of operations due to labor disagreements. +8 +Table of Contents +Executive Officers of the Registrant +The executive officers of NIKE as of July 25, 2004 are as follows: +Philip H. Knight, Chief Executive Officer, Chairman of the Board, and President — Mr. Knight, 66, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September +1984, served as its President from 1968 to 1990, and from June 2000 to present. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at +Portland State University. +Donald W. Blair, Vice +President and Chief Financial Officer — Mr. Blair, 46, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with Pepsico, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice +President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining Pepsico, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Thomas E. Clarke, President of New Ventures — Dr. Clarke, 53, a +director since 1994, joined the Company in 1980. He was appointed divisional Vice President in charge of marketing in 1987, elected corporate Vice President in 1989, appointed General Manager in 1990, and served as President and Chief Operating +Officer from 1994 to 2000. Dr. Clarke previously held various positions with the Company, primarily in research, design, development and marketing. Dr. Clarke holds a doctorate degree in biomechanics. +Wesley A. Coleman , Vice President, Global Human Resources — Mr. +Coleman, 54, has been employed by Nike since 2002 in his current role. Prior to joining NIKE, he held a number of Human Resource positions over a 20-year period with S.C. Johnson and Sons, Inc., including Vice President HR, North America and Vice +President HR, Asia/Pacific. +Charles D. Denson, +President of the NIKE Brand — Mr. Denson, 48, has been employed by NIKE since February 1979. Mr. Denson held several positions within the Company, including his appointments as Director of USA Apparel Sales in 1994, divisional Vice +President, US Sales in 1994, divisional Vice President European Sales in 1997, divisional Vice President and General Manager, NIKE Europe in 1998, Vice President and General Manager of NIKE USA in June 2000, and President of the NIKE Brand in March +2001. +Gary M. DeStefano, President of USA Operations +— Mr. DeStefano, 47, has been employed by NIKE since 1982, with primary responsibilities in sales and regional administration. Mr. DeStefano was appointed Director of Domestic Sales in 1990, divisional Vice President in charge of domestic sales +in 1992, Vice President of Global Sales in 1996, Vice President and General Manager of Asia Pacific in March 1997, and President of USA Operations in March 2001. +Trevor Edwards , Vice President, Global Brand Management — Mr. Edwards, 41, joined the Company in 1992. He was +appointed Marketing Manager, Strategic Accounts, Foot Locker in 1993, Director of Marketing, the Americas in 1995, Director of Marketing, Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999, and Vice President, US +Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in November 2002. +Mindy F. Grossman, Vice President of Global Apparel — Ms. Grossman, 46, joined NIKE in October 2000. Prior to joining NIKE, she was President +and Chief Executive Officer of Polo Jeans Company/Ralph Lauren, a division of Jones Apparel Group, Inc. from 1995 to 2000. Prior to that, Ms. Grossman was Vice President of New Business Development at Polo Ralph Lauren Corp. from 1994 to 1995, +President of The Warnaco Group Inc. Chaps Ralph Lauren division, and Senior Vice President of The Warnaco Group Inc. Menswear division from 1991 to 1994. +9 +Table of Contents +Adam S. Helfant , Vice President, Global Sports Marketing — Mr. Helfant, 39, joined NIKE in +1995 in the Company’s legal department, and was appointed Director of Business Affairs for Global Sports Marketing in 1997, Director of Global Sports Marketing in 1998, Director of US Sports Marketing in 2001, Vice President of US Sports +Marketing in 2003, and corporate Vice President, Global Sports Marketing effective August 2004. Prior to joining NIKE, he was in private practice and an attorney for NHL Enterprises, Inc. +P. Eunan McLaughlin, Vice President, Europe, Middle East & Africa — Mr. McLaughlin, 46, joined NIKE as +Director of Sales, NIKE Europe in February 1999, and was appointed Vice President Commercial Sales and Retail in 2000, Vice President, Asia Pacific in 2001, and Vice President, Europe, Middle East & Africa in May 2004. Prior to joining NIKE, he +was Partner and Vice President of Consumer & Retail Practices Division, Korn/Ferry International from 1996 to 1999. From 1983 to 1996 Mr. McLaughlin held various positions with Mars, Inc. in Finance, Sales, Marketing and General Management. +D. Scott Olivet, Vice President, NIKE Subsidiaries and +New Business Development — Mr. Olivet, 42, joined NIKE in August 2001. Prior to joining NIKE, he was a Senior Vice President of Gap Inc., responsible for real estate, store design, and construction across Gap, Banana Republic, and Old Navy +brands from 1998 to 2001. Prior to that, Mr. Olivet was employed by Bain & Company, an international strategic consulting firm from 1984 to 1998 (a Partner from 1993 to 1998). In addition to direct client work, Mr. Olivet was the leader of the +firm’s worldwide practice in organizational effectiveness and change management. +Mark G. Parker, President of the NIKE Brand — Mr. Parker, 48, has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand +management. Mr. Parker was appointed divisional Vice President in charge of development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in March 2001. +Eric D. Sprunk, Vice President, Global Footwear — +Mr. Sprunk, 40, joined the Company in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director, NIKE Europe in 1995, Regional General Manager, NIKE Europe Footwear in 1998, and Vice President & +General Manager of the Americas in 2000. Mr. Sprunk was appointed corporate Vice President, Global Footwear in June 2001. +Lindsay D. Stewart, Vice President and Chief of Staff, and Secretary — Mr. Stewart, 57, joined NIKE as Assistant Corporate Counsel in 1981. +Mr. Stewart became Corporate Counsel in 1983. He was appointed Vice President and General Counsel in 1991, and Chief of Staff in March 2001. Prior to joining NIKE, Mr. Stewart was in private practice and an attorney for Georgia-Pacific Corporation. +Roland P. Wolfram, Vice President and General Manager, +Asia Pacific — Mr. Wolfram, 44, joined NIKE as Vice President, Strategic Planning in November 1998, and was appointed Vice President, Global Operations & Technology in 2002, and Vice President, Asia Pacific in April 2004. Prior to NIKE, Mr. +Wolfram was Vice President and General Manager at Pacific Bell Video Services. +10 +Table of Contents +Item 2. Properties +Following is a summary of principal properties owned or leased by NIKE. +The NIKE World Campus, owned by NIKE and located in Beaverton, Oregon, USA, is a 176 acre facility of 16 buildings which functions as our world +headquarters and is occupied by almost 6,000 employees engaged in management, research, design, development, marketing, finance, and other administrative functions from nearly all divisions of the Company. We also lease various office facilities in +the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, The Netherlands, which serves as the headquarters for the Europe, Middle East and Africa Region. +There are three significant distribution and customer service facilities for +NIKE brand products in the United States. Two of them are located in Memphis, Tennessee, one of which is leased, and one is located in Wilsonville, Oregon, which is leased. Cole Haan and Bauer NIKE Hockey also operate a leased distribution facility +in Greenland, New Hampshire. Leased distribution facilities for other brands and subsidiaries are located in various parts of the country. We also lease distribution and customer service facilities in many parts of the world, the most significant of +which are the Japan distribution facility located in Tomisatomachi, Japan, and the Europe distribution facility located in Laakdal, Belgium. +We manufacture NIKE Air-Sole cushioning materials and components at a NIKE IHM, Inc. manufacturing facility located in Beaverton, Oregon. +Aside from the principal properties described above, we lease approximately +22 production offices outside the United States, approximately 100 sales offices and showrooms worldwide, and approximately 65 administrative offices worldwide. We lease approximately 330 retail stores worldwide, which consist primarily of factory +outlet stores. See “United States Market” and “International Markets” on pages 3 and 4 of this report. Our leases expire at various dates through the year 2034. +Item 3. Legal Proceedings +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which +any of our property is the subject. +Item 4. Submission of Matters to a Vote of Security Holders +No matter was submitted during the fourth quarter of the 2004 fiscal year to a vote of security holders, through the solicitation of proxies or otherwise. +11 +Table of Contents +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange +and trades under the symbol NKE. At July 26, 2004, there were 19,069 holders of record of our Class B Common Stock and 21 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. +The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. +We refer to the table entitled “Selected Quarterly Financial Data” in Item 6, which lists, for the periods indicated, the range of high and low +closing sales prices on the New York Stock Exchange. That table also describes the amount and frequency of all cash dividends declared on our common stock for the 2004 and 2003 fiscal years. +The following table presents a summary of share repurchases made by NIKE +during the quarter ended May 31, 2004 under the four-year $1.0 billion share repurchase program authorized by our Board of Directors and announced in June 2000. +Period +Total Number of +Shares Purchased +Average Price +Paid per +Share +Total Number of Shares +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Dollar +Value of Shares that May +Yet Be Purchased +Under the Plans or Programs +(in millions) +March 1 — March 31, 2004 +701,700 +$ +74.89 +701,700 +$ +118.2 +April 1 — April 30, 2004 +1,580,992 +$ +74.75 +1,580,992 +May 1 — May 31, 2004 +— +— +— +— +Total +2,282,692 +$ +74.79 +2,282,692 +— +During the quarter +ended May 31, 2004 we completed the $1.0 billion share repurchase program. On June 24, 2004, our Board of Directors authorized and announced a new $1.5 billion share repurchase program to be completed over the next four fiscal years. +12 +Table of Contents +Item 6. Selected Financial Data +Financial History +2004 +2003 +2002 +2001 +2000 +(In millions, except per share data and financial ratios) +Year Ended May 31, +Revenues +$ +12,253.1 +$ +10,697.0 +$ +9,893.0 +$ +9,488.8 +$ +8,995.1 +Gross margin +5,251.7 +4,383.4 +3,888.3 +3,703.9 +3,591.3 +Gross margin % +42.9 +% +41.0 +% +39.3 +% +39.0 +% +39.9 +% +Restructuring charge, net +— +— +— +0.1 +(2.5 +) +Income before accounting change +945.6 +740.1 +668.3 +589.7 +579.1 +Cumulative effect of change in accounting principle +— +266.1 +5.0 +— +— +Net income +945.6 +474.0 +663.3 +589.7 +579.1 +Basic earnings per common share: +Income before accounting change +3.59 +2.80 +2.50 +2.18 +2.10 +Cumulative effect of change in accounting principle +— +1.01 +0.02 +— +— +Net income +3.59 +1.79 +2.48 +2.18 +2.10 +Diluted earnings per common share: +Income before accounting change +3.51 +2.77 +2.46 +2.16 +2.07 +Cumulative effect of change in accounting principle +— +1.00 +0.02 +— +— +Net income +3.51 +1.77 +2.44 +2.16 +2.07 +Average common shares outstanding +263.2 +264.5 +267.7 +270.0 +275.7 +Diluted average common shares outstanding +269.7 +267.6 +272.2 +273.3 +279.4 +Cash dividends declared per common share +0.74 +0.54 +0.48 +0.48 +0.48 +Cash flow from operations +1,514.4 +922.0 +1,082.2 +656.5 +699.6 +Price range of common stock +High +78.56 +57.85 +63.99 +59.438 +64.125 +Low +49.60 +38.53 +40.81 +35.188 +26.563 +At May 31, +Cash and equivalents +$ +828.0 +$ +634.0 +$ +575.5 +$ +304.0 +$ +254.3 +Short-term investments +400.8 +— +— +— +— +Inventories +1,633.6 +1,514.9 +1,373.8 +1,424.1 +1,446.0 +Working capital +3,503.0 +2,766.5 +2,321.5 +1,838.6 +1,456.4 +Total assets +7,891.6 +6,821.1 +6,440.0 +5,819.6 +5,856.9 +Long-term debt +682.4 +551.6 +625.9 +435.9 +470.3 +Redeemable Preferred Stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +4,781.7 +3,990.7 +3,839.0 +3,494.5 +3,136.0 +Year-end stock price +71.15 +55.99 +53.75 +41.100 +42.875 +Market capitalization +18,724.2 +14,758.8 +14,302.5 +11,039.5 +11,559.1 +Financial Ratios: +Return on equity +21.6 +% +18.9 +% +18.2 +% +17.8 +% +17.9 +% +Return on assets +12.9 +% +11.2 +% +10.9 +% +10.1 +% +10.4 +% +Inventory turns +4.4 +4.4 +4.3 +4.0 +4.1 +Current ratio at May 31 +2.7 +2.4 +2.3 +2.0 +1.7 +Price/Earnings ratio at May 31 (Diluted before accounting change) +20.3 +20.2 +21.8 +19.0 +20.7 +13 +Table of Contents +The Company’s Class B Common Stock is listed on the New York Stock Exchange and trades under the +symbol NKE. At May 31, 2004, there were approximately 160,000 shareholders of Class A and Class B common stock. +Selected Quarterly Financial Data +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2004 +2003 +2004 +2003 +2004 +2003 +2004 +2003 +(Unaudited) +(In millions, except per share data and financial ratios) +Revenues +$ +3,024.9 +$ +2,796.3 +$ +2,837.1 +$ +2,514.7 +$ +2,904.0 +$ +2,400.9 +$ +3,487.1 +$ +2,985.1 +Gross margin +1,301.5 +1,157.1 +1,199.6 +1,010.1 +1,221.9 +976.0 +1,528.7 +1,240.2 +Gross margin % +43.0 +% +41.4 +% +42.3 +% +40.2 +% +42.1 +% +40.7 +% +43.8 +% +41.5 +% +Income before accounting change +261.2 +217.2 +179.1 +152.0 +200.3 +124.7 +305.0 +246.2 +Basic earnings per common share before accounting change +0.99 +0.82 +0.68 +0.57 +0.76 +0.47 +1.16 +0.93 +Diluted earnings per common share before accounting change +0.98 +0.81 +0.66 +0.57 +0.74 +0.47 +1.13 +0.92 +Net income (loss) +261.2 +(48.9 +) +179.1 +152.0 +200.3 +124.7 +305.0 +246.2 +Average common shares outstanding +262.9 +265.3 +263.3 +264.7 +263.5 +263.9 +263.2 +264.0 +Diluted average common shares outstanding +267.2 +269.1 +269.5 +267.5 +271.1 +266.7 +270.8 +267.6 +Cash dividends declared per common share +0.14 +0.12 +0.20 +0.14 +0.20 +0.14 +0.20 +0.14 +Price range of common stock +High +57.50 +57.85 +67.48 +48.23 +74.60 +48.43 +78.56 +56.56 +Low +49.60 +40.50 +55.07 +38.53 +63.22 +41.19 +65.81 +45.51 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +NIKE designs, develops and markets high quality footwear, apparel, equipment, and accessory products worldwide. We are the largest seller of athletic +footwear and athletic apparel in the world and sell our products primarily through a combination of retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in over 120 countries. Our goal is to +deliver value to five constituencies: shareholders, consumers, business partners, employees and the community. We aim to deliver that value by focusing on our mission … +To bring inspiration and innovation to every athlete* in the world +*If you have a body, you are an athlete. +and building our capabilities in four key areas: +• +Deepening our relationship with consumers; +• +Delivering superior, innovative product to the marketplace; +• +Making our supply chain a competitive advantage, through operational discipline and excellence; and +• +Accelerating growth through focused execution. +We believe we can create value for our shareholders in striving for the following key long-term financial goals: +• +High single digit revenue growth; +• +Mid-teens earnings per share growth; +• +Increased return on invested capital and accelerated cash flows; and +• +Delivery of consistent results through management of our diversified portfolio of businesses. +14 +Table of Contents +In fiscal 2004 we met or surpassed these goals primarily through a combination of revenue growth and +gross margin improvements across our businesses, management of working capital and share repurchases. In addition, the impact of foreign currency changes has had a significant favorable impact on this year’s financial results. Although in any +particular quarter or even annual period we may not meet some or all of the financial goals outlined above, we believe these are appropriate goals for the longer term. +Results of Operations +2004 +2003 +% Change +2002 +% Change +Revenues +$ +12,253.1 +$ +10,697.0 +15 +% +$ +9,893.0 +8 +% +Cost of sales +7,001.4 +6,313.6 +11 +% +6,004.7 +5 +% +Gross margin +5,251.7 +4,383.4 +20 +% +3,888.3 +13 +% +Gross margin % +42.9 +% +41.0 +% +39.3 +% +Selling and administrative +3,702.0 +3,154.1 +17 +% +2,835.8 +11 +% +% of Revenues +30.2 +% +29.5 +% +28.7 +% +Income before cumulative effect of accounting change +945.6 +740.1 +28 +% +668.3 +11 +% +Net income +945.6 +474.0 +99 +% +663.3 +(29 +)% +Diluted earnings per share — before accounting change +3.51 +2.77 +27 +% +2.46 +13 +% +Diluted earnings per share +3.51 +1.77 +98 +% +2.44 +(27 +)% +Fiscal 2004 +Compared to Fiscal 2003 +Consolidated Operating +Results +In fiscal 2004, consolidated revenues grew 15 +percent versus fiscal 2003; seven percentage points of this growth can be attributed to changes in currency exchange rates, primarily the stronger euro. Excluding the impact of changes in foreign currency, revenue growth in our international regions +contributed 3 percentage points to the consolidated revenue growth and all three of our international regions posted higher revenues, with our Asia Pacific Region making the largest contribution. Converse, which was acquired at the beginning of the +second quarter of fiscal 2004, contributed 2 percentage points of consolidated revenue growth. See the accompanying Notes to Consolidated Financial Statements (Note 15 — Acquisition) for additional information related to the +acquisition . Improved sales in the U.S Region and increases in our Other businesses drove the balance of the consolidated revenue growth. +During fiscal 2004, our consolidated gross margin percentage improved 190 basis points versus the prior year, from 41.0% to 42.9%. The primary factors +contributing to the improved gross margin percentage for fiscal 2004 were as follows: +(1) +Changes in hedge rates, primarily the euro, represented 70 basis points of improvement for fiscal 2004. The positive impact of hedge rates on the fiscal 2004 gross margin percentage +was most significant in the fourth quarter, contributing 140 basis points of the year-over-year quarterly improvement. As a majority of product purchases for fiscal 2005 have been hedged, we expect a positive impact on our gross margin percentage in +fiscal 2005 due to improved year-over-year hedge rates, primarily for the euro. See the accompanying Notes to Consolidated Financial Statements (Note 16 — Risk Management and Derivatives) for additional information on hedges. +(2) +Higher in-line pricing margins (net revenue for current product offerings minus landed product cost) drove approximately 70 basis points of the improvement in the consolidated gross +margin percentage for fiscal 2004. This is primarily attributable to improved footwear margins as a result of lower product costs due to manufacturing efficiencies, reduced materials costs and lower air freight. +15 +Table of Contents +(3) +Improved profitability on wholesale closeout sales (non-current product offerings), primarily in the U.S. and Europe, Middle East and Africa (EMEA) regions due to improved closeout +pricing margins, partially offset by increased obsolescence reserves due to a less favorable mix of product remaining in closeout inventory. These factors represented approximately 10 basis points of the improvement in the consolidated gross margin +percentage for fiscal 2004. +(4) +Most of the remaining increase was due to improved gross margin percentages for NIKE-owned retail stores in the U.S. and EMEA regions, which contributed approximately 30 basis +points of the improvement in consolidated gross margins for fiscal 2004. +Fiscal 2004 selling and administrative expense, comprised of demand creation and operating overhead, grew 17% versus fiscal 2003. Demand creation (advertising and promotion) expense grew 18% to $1,377.9 million in +fiscal 2004. Seven percentage points of the increase in demand creation was due to changes in currency exchange rates. Excluding the impact of changes in foreign currency rates, the increase in demand creation spending for the fiscal year was +attributable to higher spending on endorsement contracts in the U.S., primarily basketball (3 percentage point impact), incremental investment in retail marketing in the U.S., EMEA, and Asia Pacific regions (3 percentage point impact), and +higher advertising spending in the Asia Pacific region (1 percentage point impact). The addition of Converse contributed 2 percentage points of the demand creation increase for the year. +Operating overhead for fiscal 2004 was $2,324.1 million, a 17% increase over fiscal 2003. Currency exchange rates +contributed 5 percentage points of the increase. The addition of Converse accounted for 2 percentage points of growth. Other key factors driving the increase in operating overhead for the fiscal year were: (a) increased incentive-based +compensation for employees (3 percentage points); and (b) increased costs to support the growth of our NIKE Golf, Cole Haan, Bauer NIKE Hockey and Hurley businesses (2 percentage points). The remaining increase, about 5 percentage points, is +primarily attributable to normal wage increases and some added infrastructure necessary to support global business growth, including costs related to our worldwide supply chain initiative and additional factory outlet stores in the EMEA Region. +Over the last five years, as part of the ongoing initiative to +upgrade our worldwide supply chain, we have implemented new systems in Canada, the U.S. and EMEA regions and are now implementing them in Japan, Southeast Asia and our Hong Kong Apparel operations. Over the next few years, we will work to continue +to enhance the systems and related processes in these operations and complete the implementation of new systems in the remainder of our global operations. This initiative is intended to improve revenue (by increasing our ability to respond to market +conditions); improve margins (by lowering the volume of close-out inventories and distribution costs including inbound air freight); and improve cash flow (by reducing inventories and accounts receivable through better visibility). In the U.S. and +EMEA regions, where the new systems have been in place for over a year, we have begun to see improvements in several key performance measures including gross margins (see above) and cash flows (see below). The ultimate level of benefit to revenues, +margins, and cash flows will not be known until the new systems and processes have been implemented in the remaining countries in which we operate and globally integrated in subsequent years. At fiscal year end, approximately 80 percent of +NIKE’s businesses had completed implementation of the new systems. During the period of implementation, operating overhead expense will continue to include both the cost of implementing and operating new systems and the cost of supporting the +legacy systems. We anticipate completing the majority of the remaining implementations over the next two years. +Other expense, net, was $74.7 million for fiscal 2004 compared to $77.5 million in fiscal 2003. Beginning this fiscal year, interest income and profit +sharing expense previously included in other expense, net, are included in interest expense, net, and selling and administrative expense, respectively. The presentation of prior year amounts has been adjusted to conform to the current +classification. The most significant components of other expense, net (comprising approximately 64 percent of this year’s net expense and 79 percent of fiscal 2003’s net expense), was foreign currency losses (primarily hedge losses on +intercompany charges to a European subsidiary, whose functional currency is the euro), and hedge losses from that subsidiary’s investments in U.S. Dollar denominated debt securities available-for-sale. These losses are reflected in the +Corporate line in our segment +16 +Table of Contents +presentation of pre-tax income in the accompanying Notes to Consolidated Financial Statements (Note 17 — Operating Segments and Related +Information) . The hedge losses reflect that the euro has strengthened considerably since we entered into these hedge contracts. Also included in other expense, net, for fiscal 2004 was an increase in net losses on asset disposals, including a +loss of $5.3 million on land gifted to the NIKE Foundation in the first quarter. +In 2004, net foreign currency losses in other expense, net, were more than offset by favorable translation of foreign currency denominated profits, most significantly in EMEA. Our estimate of the net impact of these +losses and the favorable translation is a $157 million addition to consolidated income before income taxes compared to the prior year. Consistent with our existing policies, in fiscal 2005 we have continued to hedge a portion of anticipated +intercompany charges and investments in U.S. Dollar denominated debt securities available-for-sale. We expect the net impact of any hedge losses or gains and the offsetting translation impact will result in a significantly lower net benefit to +fiscal 2005 than was realized in fiscal 2004. +Our effective +tax rate for fiscal 2004 was 34.8%, which is higher than the fiscal 2003 rate of 34.1% as a result of a higher tax provision on foreign earnings in fiscal 2004. +Included in net income for fiscal 2003 was a $266.1 million charge for the cumulative effect of implementing Statement of Financial Accounting Standard +(SFAS) No. 142, “Goodwill and Other Intangible Assets,” (FAS 142). This charge related to the impairment of goodwill and trademarks associated with Bauer NIKE Hockey and the goodwill of Cole Haan, reflecting that the fair values we +estimated for these assets were less than the carrying values. See the accompanying Notes to Consolidated Financial Statements (Note 4 — Identifiable Intangible Assets and Goodwill) for further information. +Worldwide futures and advance orders for footwear and apparel scheduled for +delivery from June through November 2004 were 11.3% higher than such orders reported for the comparable period of fiscal 2003. One point of this reported increase was due to changes in currency exchange rates versus the same period last year. +Excluding this currency impact, higher average selling prices for footwear across all regions contributed 3 points of the growth in overall futures and advance orders. The remaining increase was due to volume increases for both apparel and footwear. +On our June 24, 2004 press release, we reported that worldwide futures and advance orders for this period were up 10.7% as compared to last year. Our futures program permits changes to orders for a short period of time following the order deadline. +Such changes to orders, most notably in the U.S. and Asia Pacific regions, increased the growth in worldwide futures for the June through November period by 0.6 percentage points to 11.3%. As always, the reported futures orders growth is not +necessarily indicative of our expectation of revenue growth during this period. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, exchange rate fluctuations as well as differing levels of order +cancellations can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including wholesale sales of equipment, U.S. licensed team apparel, +Bauer NIKE Hockey, Cole Haan, Converse, NIKE Golf, Hurley, and retail sales across all brands. +17 +Table of Contents +Operating Segments +The breakdown of revenues follows: +Fiscal +2004 +Fiscal +2003 +FY04 vs. +FY03 +% CHG +Fiscal +2002 +FY03 vs. +FY02 +% CHG +(Dollars in millions) +U.S. Region +Footwear +$ +3,070.4 +$ +3,019.5 +2 +% +$ +3,135.5 +(4 +)% +Apparel +1,433.5 +1,351.0 +6 +% +1,255.7 +8 +% +Equipment +289.8 +287.9 +1 +% +278.4 +3 +% +Total U.S. +4,793.7 +4,658.4 +3 +% +4,669.6 +— +EMEA Region +Footwear +2,232.2 +1,896.0 +18 +% +1,543.8 +23 +% +Apparel +1,333.8 +1,133.1 +18 +% +977.9 +16 +% +Equipment +268.4 +212.6 +26 +% +174.8 +22 +% +Total EMEA +3,834.4 +3,241.7 +18 +% +2,696.5 +20 +% +Asia Pacific Region +Footwear +855.3 +730.6 +17 +% +638.2 +14 +% +Apparel +612.3 +497.8 +23 +% +400.6 +24 +% +Equipment +145.8 +120.8 +21 +% +96.1 +26 +% +Total Asia Pacific +1,613.4 +1,349.2 +20 +% +1,134.9 +19 +% +Americas Region +Footwear +412.0 +337.3 +22 +% +359.1 +(6 +)% +Apparel +165.8 +148.1 +12 +% +167.1 +(11 +)% +Equipment +47.0 +41.6 +13 +% +41.9 +(1 +)% +Total Americas +624.8 +527.0 +19 +% +568.1 +(7 +)% +10,866.3 +9,776.3 +11 +% +9,069.1 +8 +% +Other +1,386.8 +920.7 +51 +% +823.9 +12 +% +Total Revenues +$ +12,253.1 +$ +10,697.0 +15 +% +$ +9,893.0 +8 +% +The discussion +following includes disclosure of “pre-tax income” for our operating segments. We have reported pre-tax income for each of our operating segments in accordance with Statement of Financial Accounting Standard No. 131, “Disclosures about +Segments of an Enterprise and Related Information.” As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to Consolidated Financial Statements , certain corporate costs are not included +in pre-tax income of our operating segments. +For EMEA, our +largest international region, changes in foreign currency exchange rates accounted for 16 percentage points of the reported increase in revenues in fiscal 2004. The remaining increase over the prior year was primarily driven by NIKE-owned retail +(due to the addition of new stores in fiscal 2004) and increased footwear volume (led by soccer product). Excluding the impact of currency exchange movements, sales in each EMEA business unit (footwear, apparel, equipment) grew versus fiscal 2003. +After several years in which the region’s revenues grew +substantially faster than the overall market in Europe, fiscal 2004 revenue growth for EMEA was more in line with the growth of the overall market. Futures orders for the region scheduled for delivery from June through November 2004 were 9 +percentage points higher than such orders received for the comparable period of fiscal 2003; changes in currency exchange rates accounted for about 3 percentage points of this growth. An increase in the region’s footwear average price per pair +contributed to this futures order growth . +18 +Table of Contents +EMEA pre-tax income for fiscal 2004 was $750.7 million, up 41% versus the prior year. Higher revenues and +gross margin improvements drove the increase, more than offsetting incremental selling and administrative costs. The improved gross margins were primarily the result of improved year-over-year hedge rates and higher in-line and closeout pricing +margins. +In the Asia Pacific Region, fiscal 2004 +revenues increased 20% year-over-year. Eight percentage points of growth for the fiscal year were due to changes in currency exchange rates. Excluding the impact of currency exchange movements, sales in each Asia Pacific business unit grew versus +fiscal 2003. The region’s revenue growth was primarily due to unit volume increases, with significant revenue growth in China (driven by expansion of retail distribution and strong consumer demand) and Japan (driven by strong consumer demand). +Pre-tax income for the Asia Pacific Region increased to $354.9 +million in fiscal 2004, up 21% versus fiscal 2003. Higher revenues and gross margin improvements drove the increase, more than offsetting incremental selling and administrative costs. The higher gross margins were primarily attributable to higher +in-line pricing margins and the benefit of better hedge rates on product purchases, partially offset by lower profitability of closeouts. +In the Americas Region, revenues increased 19% compared to fiscal 2003, with 8 percentage points of the growth due to changes in currency exchange rates. +Excluding the currency effects, the revenue growth was driven primarily by stronger consumer demand in South America and sales in each Americas business unit grew versus fiscal 2003. +In fiscal 2004, pre-tax income for the Americas Region increased 6% from the prior year, to $101.9 million. The increase in +pre-tax income was attributable to changes in currency exchange rates slightly offset by reduced gross margins and higher selling and administrative costs. Gross margins fell due to lower in-line pricing margins as well as weaker currency exchange +rates in Mexico. +In the U.S. Region, revenues for fiscal 2004 +grew 3% versus fiscal 2003, as revenues increased in each business unit. The increase in apparel sales was primarily driven by growth in sport performance product and increased consumer demand for team licensed apparel primarily in the first half of +fiscal 2004. +The increase in footwear revenue was due to an +increase in average wholesale selling price per pair and increased sales in NIKE-owned retail stores, partially offset by a slight decline in wholesale unit sales. The increase in average wholesale selling price per pair was partially due to a +larger percentage of sales of products with a suggested retail price over $100. The slight decline in U.S. footwear wholesale unit sales was largely due to changes in distribution to several retail customers. For the first half of the year, sales to +our largest customer, Foot Locker, were lower as a result of changes to our distribution strategy implemented in fiscal 2002 and 2003; while the decline in first half sales resulted in slightly lower sales for the full year, our year-over-year sales +to Foot Locker grew in the second half of fiscal 2004. In addition, fiscal 2004 sales declined for another large customer, Footstar, which declared bankruptcy in March 2004. The sales declines for Foot Locker and Footstar were partially offset by +increased sales to other accounts. +For the U.S. Region, +futures orders scheduled for delivery from June through November 2004 increased 11 percentage points versus the prior year. Higher orders from Foot Locker were a factor in this increase. During our fiscal fourth quarter, Foot Locker acquired +additional stores from Footstar. Further, as announced in November 2003 additional premium product offerings were made available to select Foot Locker locations beginning with the Fall 2004 season. Growth in futures orders from Foot Locker as +compared to the prior year’s orders from Foot Locker and Footstar combined, contributed 3 percentage points of the overall region’s futures orders growth. Additionally, futures orders grew as a result of increases in average wholesale +selling price per pair for footwear, due to increased orders for products with a suggested retail price over $100. +19 +Table of Contents +For fiscal 2004, pre-tax income for the U.S. Region was $1,015.1 million, a 5% increase versus fiscal +2003. Higher revenues and gross margins drove the increase, more than offsetting higher selling and administrative costs. The improved gross margins were primarily the result of higher in-line and closeout pricing margins and expanded retail +margins. +The Other segment includes results from Bauer +NIKE Hockey Inc., Cole Haan Holdings Incorporated, Converse Inc., Hurley International LLC and NIKE Golf. Revenues for Other grew 51% in fiscal 2004 compared to fiscal 2003; the addition of Converse contributed 24 percentage points of the increase. +The remainder of the increase was due to revenue growth at NIKE Golf, Cole Haan, Hurley and Bauer NIKE Hockey. +Pre-tax income for Other improved to $75.3 million in fiscal 2004, versus income of $5.2 million in fiscal 2003. The addition of Converse, combined with +improved results from NIKE Golf and Cole Haan, drove the year-over-year improvement. +Fiscal 2003 Compared to Fiscal 2002 +Consolidated Operating Results +Revenue growth in our international regions drove the 8% increase in consolidated revenues in fiscal 2003 as compared to fiscal 2002. Changes in currency exchange rates, primarily the euro, contributed 4 percentage points of the +consolidated revenue growth. +In fiscal 2003, our consolidated +gross margin percentage improved 170 basis points as compared to fiscal 2002, from 39.3% to 41.0%. Significant factors contributing to the improved gross margin percentage were as follows: +(1) +Product cost reductions resulting from our global initiatives to improve efficiency and reduce materials costs; and +(2) +A higher mix of sales of classic footwear models which are generally more profitable than our more complex performance models. +Lower pricing of NIKE Golf products as a result of market conditions discussed below +partially offset these positive margin drivers. Changes in currency exchange rates did not have a material impact on our gross margin percentage in fiscal 2003 as the benefit of stronger hedge rates in some currencies was offset by weaker hedge +rates in other currencies. +Selling and administrative expense +increased as a percentage of revenues from 28.7% in fiscal 2002 to 29.5% in fiscal 2003. Both demand creation and operating overhead expense increased as a percentage of revenues. Demand creation expense grew from $1,027.9 million in fiscal 2002 to +$1,166.8 million in fiscal 2003. Higher costs incurred in the EMEA Region drove the growth in demand creation expense, reflecting, 1) a stronger euro currency exchange rate compared to the U.S. dollar, which resulted in higher U.S. dollar expenses +for costs that are euro-denominated, 2) our new endorsement agreement with the Manchester United soccer team that became effective in August 2002, and 3) costs of our World Cup marketing campaign incurred in the first quarter of fiscal 2003. Higher +demand creation expenses were also incurred in the Asia Pacific and Americas regions due to the World Cup marketing campaign. We also increased demand creation spending in the U.S. in order to drive continued consumer demand for footwear while we +realigned our distribution to retail customers. +Operating +overhead increased from $1,807.9 million in fiscal 2002 to $1,987.3 million in fiscal 2003. Major drivers of this increase were the stronger euro exchange rate, incremental costs related to our on-going development of systems and processes +supporting our worldwide supply chain, (primarily reflected in the corporate line in our segment presentation of pre-tax income in Note 17 — Operating Segments and Related Information) , investments in headcount for our NIKE Golf +business, the addition of Hurley overhead costs beginning in the fourth quarter of fiscal 2002, and overhead costs of additional retail stores in the EMEA and Asia Pacific regions. +20 +Table of Contents +Interest expense, net, decreased from $34.0 million in fiscal 2002 to $28.8 million in fiscal 2003, a +decline of 15%. The decrease reflected both lower interest rates and lower average debt levels, as we have used cash flow from operations to reduce total debt. +Other expense, net was $77.5 million in fiscal 2003 compared to $1.2 million in fiscal 2002. Significant amounts included in other expense, net were +goodwill amortization (fiscal 2002 only), and certain foreign currency gains and losses. +An increase in net foreign currency losses was the largest contributor to the increase in other expense, net for fiscal 2003 versus fiscal 2002. These foreign currency losses were primarily due to hedge losses on +intercompany charges to a European subsidiary, whose functional currency is the euro. These losses are reflected in the Corporate line in our segment presentation of pre-tax income in the accompanying Notes to Consolidated Financial +Statements ( Note 17 — Operating Segments and Related Information) . The hedge losses reflected that the euro had strengthened considerably since we entered into these hedge contracts. In fiscal 2003, net foreign currency losses in +other expense, net were more than offset by favorable translation of foreign currency denominated profits. Our estimate of the net impact of these losses and the favorable translation was a $13 million addition to consolidated income before income +taxes. +Our fiscal 2003 effective tax rate was 34.1%, +relatively consistent with the fiscal 2002 effective rate of 34.3%. +Included in fiscal 2003 net income was a $266.1 million charge for the cumulative effect of implementing FAS 142. This charge related to the impairment of goodwill and trademarks associated with Bauer NIKE Hockey and the goodwill of +Cole Haan, reflecting that the fair values we estimated for these assets were less than the carrying values. In addition, the adoption of this accounting standard resulted in a reduction to goodwill and intangible asset amortization of $13.1 million +as compared to fiscal 2002. See the accompanying Notes to Consolidated Financial Statements (Note 4 — Identifiable Intangible Assets and Goodwill) for further information. +Operating Segments +Our largest international region, EMEA, reported 20% revenue growth in fiscal 2003 compared to fiscal 2002. This growth reflected a 15 percentage point +improvement due to changes in currency exchange rates. Growth in the emerging markets in Central and Eastern Europe was the key driver of the balance of the increase, as our distribution continued to expand in these markets and customer demand +increased. Excluding the effect from changes in currency exchange rates, each of our EMEA business units delivered revenue growth versus the prior year. +EMEA pre-tax income grew from $422.4 million in fiscal 2002 to $532.0 million in fiscal 2003. Higher revenues and improved gross margins drove the +increase, more than offsetting incremental selling and administrative costs. +In Asia Pacific, revenues increased 19% in fiscal 2003; five percentage points of this growth were due to changes in currency exchange rates. Excluding the benefit from changes in currency exchange rates, sales in +each Asia Pacific business unit grew in fiscal 2003, as did sales in almost every country of the region, particularly Japan and Korea, driven primarily by heightened consumer demand for our products following the 2002 World Cup and our related +marketing campaign, and China, driven primarily by an expansion of retail distribution of our products. +Pre-tax income for the Asia Pacific Region increased from $216.2 million in fiscal 2002 to $292.6 million in fiscal 2003. This increase reflected higher +revenues and improved gross margins that more than offset higher selling and administrative costs. +In the Americas Region, fiscal 2003 revenues decreased 7% compared to fiscal 2002, reflecting higher sales in local currencies that were more than offset +by a 15 percentage point decline due to changes in currency exchange rates. This currency exchange impact was due to weaker currencies in the Latin American markets, partially offset by the stronger Canadian dollar. Excluding the currency exchange +rate impact, the region +21 +Table of Contents +experienced sales growth in the footwear and equipment business units slightly offset by a small percentage decrease in the apparel business unit. On a +geographic basis, excluding currency exchange rate impacts, the region experienced sales growth in Brazil, Argentina, and Mexico, reflecting stronger consumer demand. The sales growth in Argentina reflected a rebound since fiscal 2002 when that +country underwent an economic crisis. +Pre-tax income for the +Americas Region grew from $92.1 million in fiscal 2002 to $96.5 million in fiscal 2003. Pre-tax income improved despite lower reported revenues primarily due to an improved gross margin percentage. +In the U.S. Region, revenues were down slightly in fiscal 2003, at $4,658.4 +million versus $4,669.6 million in fiscal 2002. U.S. footwear revenues were down 4%, more than offsetting sales growth in U.S. apparel and equipment. U.S. apparel sales increased $95.3 million, primarily driven by increased consumer demand for team +licensed apparel. Lower revenues in the footwear business unit were largely the result of a significant change in our U.S. footwear distribution. +During fiscal 2003, we began a realignment of our U.S. footwear distribution to address the changing retail marketplace, including our largest +customer’s (Foot Locker) reduction in emphasis on premium footwear in its offerings. The objectives of this realignment were to improve the presentation and profitability of the NIKE brand in the U.S. As a result of changes in both Foot +Locker’s orders and our product offerings to this account, our fiscal 2003 sales to Foot Locker in the U.S. were significantly below the level of fiscal 2002. At the same time, we expanded the premium products available to other athletic +specialty and independent retailers that focus on premium footwear offerings, increasing sales to these accounts significantly. +Our unit sales of footwear in the U.S. increased slightly as compared to fiscal 2002. However, this volume increase was more than offset by a decline in +the average price per pair of footwear sold. The reduction in average price per pair in fiscal 2003 versus fiscal 2002 reflected a higher percentage of sales of classic footwear and kids’ models, which have a lower average price than our more +complex adult performance models. +U.S. Region pre-tax income +increased from $956.0 million in fiscal 2002 to $963.2 million in fiscal 2003. Pre-tax income improved, despite lower revenues and higher selling and administrative expense, due to improved gross margins. +Revenues for Other grew 12% in fiscal 2003 compared to fiscal 2002. The +addition of revenues from our Hurley business, purchased in the fourth quarter of fiscal 2002, drove the increase in Other revenues. +Pre-tax income for Other declined from $43.7 million in fiscal 2002 to $5.2 million in fiscal 2003. Reduced profitability at NIKE Golf drove this decline, +reflecting significantly weaker demand in the U.S. golf market versus fiscal 2002 and start-up issues we experienced at a third-party distribution facility. +Liquidity and Capital Resources +Fiscal 2004 Cash Flow Activity +Cash provided by operations was $1.5 billion in fiscal 2004, compared to $922.0 million in fiscal 2003. Our primary source of operating cash flow was net +income of $945.6 million. In addition to the improvement in net income, the increase in cash compared to the prior year was attributable to changes in our investment in working capital primarily driven by accounts receivable and accounts payable +(excluding the acquisition of Converse and the effects of foreign currency, which were reported separately). In fiscal 2004 accounts receivable provided cash to the Company due to improved account management through better utilization of supply +chain systems, especially in EMEA. Accounts payable provided cash to the Company due to the timing of inventory receipts and vendor payments. The changes in other working capital components were consistent with normal business operations. +Cash used by investing activities during fiscal 2004 was +$946.5 million, compared to $215.6 million invested during fiscal 2003. The most significant uses of cash for investing activities in fiscal 2004 were the +22 +Table of Contents +purchase of short-term investments and the acquisition of Converse, which accounted for $400.8 million and $289.1 million, respectively. The remaining +investing activities are consistent with the prior year and primarily reflect capital expenditures on computer equipment and software to support both normal business operations as well as our supply chain systems upgrade, continued investment in +NIKE-owned retail stores, and construction of a storage facility in Japan, which was completed in fiscal 2004. +Cash used by financing activities in fiscal 2004 was $398.5 million, down from $606.5 million in the prior year. In fiscal 2004, the principal uses of +cash for financing activities were share repurchases, payments of long-term debt, and dividends, offset by proceeds from the exercise of stock options and debt issuance. Net cash used by financing activities was higher in fiscal 2003 primarily due +to increased repayments of short-term debt in that period. +The +share repurchases were part of a $1.0 billion share repurchase program that began in fiscal 2001. In fiscal 2004, we repurchased 6.4 million shares of NIKE’s Class B common stock for $414.3 million, completing the program. Over the course of +the four-year program, we purchased a total of 18.7 million shares of NIKE’s Class B common stock. In June 2004, the Board of Directors approved a new $1.5 billion share repurchase program to be completed over the next four years. We expect to +continue to fund the new program from operating cash flow. The timing and the ultimate amount of shares purchased under the program will be dictated by our capital needs and stock market conditions. +Dividends declared per share of common stock for fiscal 2004 were $0.74, +compared to $0.54 in fiscal 2003. We have paid a dividend every quarter since February 1984. We review our dividend policy from time to time, and based upon current projected earnings and cash flow requirements we anticipate continuing to pay a +quarterly dividend in the foreseeable future. +Contractual Obligations +Our +significant long-term contractual obligations as of May 31, 2004 are as follows: +Cash Payments Due During the Year Ended May 31, +Description of Commitment +2005 +2006 +2007 +2008 +2009 +Thereafter +Total +(In millions) +Operating Leases +$ +171.7 +$ +143.4 +$ +120.9 +$ +103.4 +$ +85.3 +$ +523.5 +$ +1,148.2 +Long-term Debt +6.6 +6.1 +255.8 +31.1 +6.1 +380.0 +685.7 +Endorsement Contracts 1 +355.5 +322.7 +323.1 +208.6 +128.4 +375.2 +1,713.5 +Product Purchase Obligations 2 +1,648.9 +— +— +— +— +— +1,648.9 +Other 3 +260.5 +19.8 +8.2 +5.9 +3.9 +1.3 +299.6 +Total +$ +2,443.2 +$ +492.0 +$ +708.0 +$ +349.0 +$ +223.7 +$ +1,280.0 +$ +5,495.9 +1 +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete +and sport team endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product +sales in future periods. Actual payments under some contracts may also be lower as a limited number of contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish the endorsers with NIKE products for their use. It is not possible to determine how much we will spend on this product +on an annual basis as the contracts do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors including general playing conditions, the number of sporting +events in which they participate, and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source, and purchase the products furnished to the endorsers are incurred over a period of time and are +not necessarily tracked separately from similar costs incurred for products sold to customers. +23 +Table of Contents +2 +We generally order product four to five months in advance of sale based primarily on advanced futures orders received from customers. The amounts listed for product +purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. The reported amounts exclude product +purchase liabilities included in accounts payable on the Consolidated Balance Sheet. +3 +Other amounts primarily include service and marketing commitments made in the ordinary course of business. The amounts represent the minimum payments required by +legally binding contracts and agreements, including open purchase orders for non-product purchases. The reported amounts exclude those liabilities included in accounts payable or accrued liabilities on the Consolidated Balance Sheet. +Excluded from the table above is a commitment to +an outsourcing contractor that provides us with information technology operations management services through 2006. The amount of the payments in future years depends on our level of monthly use of the different elements of the contractor’s +services. If we were to terminate the entire contract as of May 31, 2004, we would be required to provide the contractor with four months’ notice and pay a termination fee of $18.7 million. Our monthly payments to the contractor currently +approximate $6 million. +We also have the following outstanding +short-term debt obligations as of May 31, 2004. Please refer to the accompanying Notes to Consolidated Financial Statements (Note 6 — Short-term Borrowings and Credit Lines ) for further description and interest rates related to the +short-term debt obligations listed below. +Outstanding as of +May 31, 2004 +(In millions) +Notes payable, due at mutually agreed-upon dates, generally ninety days from issuance or on demand +$ +146.0 +Payable to Sojitz Corporation of America (Sojitz America) for the purchase of inventories, generally due sixty days after shipment of goods +from a foreign port +$ +43.9 +As of May 31, 2004, +letters of credit of $551.6 million were outstanding, primarily for the purchase of inventory. All letters of credit generally expire within one year. +Capital Resources +In October 2001, we filed a shelf registration statement with the Securities and Exchange Commission (“SEC”) under which $1 billion in debt +securities may be issued. In May 2002, we commenced a medium-term note program under the shelf registration that allows us to issue up to $500 million in medium-term notes, as our capital needs dictate. We entered into this program to provide +additional liquidity to meet our working capital and general corporate cash requirements. During fiscal 2004, we issued five notes under the medium-term note program totaling $150 million. Four of those notes totaling $100 million have fixed coupon +interest rates of 5.15% and mature on October 15, 2015. The other $50 million note has a fixed coupon interest rate of 4.70% and matures on October 1, 2013. For each of the notes, we have entered into interest rate swap agreements whereby we receive +fixed interest payments at the same rate as the notes and pay variable interest payments based on the three-month or six-month London Inter Bank Offering Rate (“LIBOR”) plus a spread. The swaps have the same notional amounts and maturity +dates as the notes, and are accounted for as fair value hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS 133), except for the swap for the $50 million note maturing October 1, 2013. The +swap for that note has the same notional amount and fixed coupon interest rate as the note, but expires October 2, 2006. Accordingly, the swap does not qualify for fair value hedge accounting, so changes in the fair value of this swap are recorded +in net income each period as a component of other expense, net. After issuance of these notes, $760 million remains available to be issued under the shelf registration. We may issue additional notes under the shelf registration in fiscal 2005 +depending on general corporate needs. +24 +Table of Contents +As of May 31, 2004, we had a 5-year $750 million revolving credit facility in place with a group of +banks, and we currently have no amounts outstanding under the facility. The maturity date is November 20, 2008 and the facility can be extended for one additional year on the anniversary date. Based on our current long-term senior unsecured debt +ratings of A and A2 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.22%. The facility fee is 0.08% of the total +commitment. +If our long-term debt rating were to decline, the +facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger +acceleration of maturity of any then outstanding borrowings or any future borrowings under the committed credit facilities. Under this committed credit facility, we have agreed to various covenants. These covenants include limits on our disposal of +fixed assets and the amount of debt secured by liens we may incur, and set a minimum capitalization ratio. In the event we were to have any borrowings outstanding under this facility, failed to meet any covenant, and were unable to obtain a waiver +from a majority of the banks, any borrowings would become immediately due and payable. As of May 31, 2004, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the +foreseeable future. +Liquidity is also provided by our +commercial paper program, under which there was no amount outstanding at May 31, 2004 or May 31, 2003. We currently have short-term debt ratings of A1 and P1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively. +We currently believe that cash generated by operations, +together with access to external sources of funds as described above, will be sufficient to meet our operating and capital needs in the foreseeable future. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have +been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, +liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. +We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our +financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of +these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the reserve for uncollectible accounts receivable, inventory reserves, and contingent payments under endorsement contracts. +These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the +six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three quarters. +Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result +in materially different amounts being reported. +Revenue +Recognition +We record wholesale revenues when title +passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. +Retail store revenues are recorded at the time of sale. +25 +Table of Contents +In some instances, we ship product directly from our supplier to the customer and recognize revenue when +the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several weeks. +In certain countries outside of the U.S., precise information regarding the date of receipt by the customer is not readily +available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially +inaccurate historically. +As part of our revenue recognition +policy, we record estimated sales returns and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. We base our estimates on historical rates of product returns and claims, and specific identification of +outstanding claims and outstanding returns not yet received from customers. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims were +significantly greater or lower than the reserves we had established, we would record a reduction or increase to net revenues in the period in which we made such determination. +Reserve for Uncollectible Accounts Receivable +We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated +losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based +on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to +deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling and administrative expense +in the period in which we made such a determination. +Inventory Reserves +We also make +ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory +recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions +in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of sales. +Contingent Payments under Endorsement Contracts +A significant portion of our demand creation expense relates to payments +under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual +contract. +Some of the contracts provide for contingent +payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record selling and administrative expense for these amounts when the endorser achieves the specific goal. +Some of the contracts provide for payments based upon endorsers maintaining a +level of performance in their sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts are reported in selling and administrative expense when we determine that it is probable that the specified +level of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or decreased selling +and administrative expense may be reported in a future period. +26 +Table of Contents +Some of the contracts provide for royalty payments to endorsers based upon a predetermined percentage of +sales of particular products. We expense these payments in cost of sales as the related sales are made. In certain contracts, we offer minimum guaranteed royalty payments. For contractual obligations for which we estimate that we will not meet the +minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in selling and administrative expense uniformly over the remaining guarantee period. +Property, Plant and Equipment +Property, plant and equipment, including buildings, equipment, and computer +hardware and software is recorded at cost (including, in some cases, the cost of internal labor) and is depreciated over its estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can +result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the +asset’s net book value to its salvage value. +When events +or circumstances indicate that the carrying value of property, plant and equipment may be impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists. If the +carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair market value. Any impairment charges are recorded as other +expense, net. We estimate future undiscounted cash flows using assumptions about our expected future operating performance. Our estimates of undiscounted cash flows may change in future periods due to, among other things, technological changes, +economic conditions, changes to our business operations or inability to meet business plans. Such changes may result in impairment charges in the period in which such changes in estimates are made. +Goodwill and Other Intangible Assets +We adopted FAS 142 effective for the first quarter of fiscal 2003. In +accordance with FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but instead measured for impairment at least annually in the fourth quarter, or when events indicate that an impairment exists. As required by FAS +142, in our impairment tests for goodwill and other indefinite-lived intangible assets, we compare the estimated fair value of goodwill and other intangible assets to the carrying value. If the carrying value exceeds our estimate of fair value, we +calculate impairment as the excess of the carrying value over our estimate of fair value. Our estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including our +assumptions about the expected future operating performance of our reporting units. Our estimates may change in future periods due to, among other things, technological change, economic conditions, changes to our business operations or inability to +meet business plans. Such changes may result in impairment charges recorded in future periods. +As discussed further above, upon adoption of FAS 142 in fiscal 2003, we recorded an impairment charge related to goodwill and other indefinite-lived intangible assets of $266.1 million. This charge is shown on our +consolidated statement of income as the cumulative effect of accounting change. Post the first quarter of fiscal 2003, any goodwill impairment charges would be classified as a separate line item on our consolidated statement of income as part of +income before income taxes and cumulative effect of accounting change. Other indefinite-lived intangible asset impairment charges would be classified as other expense, net. +Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for +impairment only when events or circumstances indicate the carrying value may be impaired. In these cases, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists. If the +carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair value. Any impairment charges would be classified as other +expense, net. +27 +Table of Contents +Hedge Accounting for Derivatives +We use forward exchange contracts and option contracts to hedge certain +anticipated foreign currency exchange transactions, as well as any resulting receivable or payable balance. When specific criteria required by FAS 133 have been met, changes in fair values of hedge contracts relating to anticipated transactions are +recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income. In most cases, this results in gains and losses on hedge derivatives being released from other comprehensive income into net +income some time after the maturity of the derivative. One of the criteria for this accounting treatment is that the forward exchange contract amount should not be in excess of specifically identified anticipated transactions. By their very nature, +our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decrease below hedged levels, or when the timing of transactions +changes significantly, we are required to reclassify at least a portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to other expense, net during the quarter in which such changes occur. +Once an anticipated transaction estimate or actual transaction amount decreases below hedged levels, we make adjustments to the related hedge contract in order to reduce the amount of the hedge contract to that of the revised anticipated +transaction. +Taxes +We record valuation allowances against our deferred tax assets, when +necessary, in accordance with SFAS No. 109, “Accounting for Income Taxes.” Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. At least +quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing +our income tax expense in the year such determination is made. +In addition, we have not recorded U.S. income tax expense for foreign earnings that we have declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely +reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of +foreign earnings to be indefinitely reinvested offshore. +We +carefully review all factors that drive the ultimate disposition of foreign earnings declared as reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination +involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our +current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested +offshore. Conversely, our approach may also result in accumulated foreign earnings (for which U.S. income taxes have been provided) being determined in the future to be indefinitely reinvested offshore. In this case, our income tax expense would be +reduced in the year of such determination. +On an interim +basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we continually refine our estimate based upon +actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the +quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. +28 +Table of Contents +Other Contingencies +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, +product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when it is probable that a liability has been incurred and the amount of +the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in +some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims +will have a material impact on our financial position or results of operations. However, if actual or estimated probable future losses exceed our recorded liability for such claims, we would record additional charges as other expense, net during the +period in which the actual loss or change in estimate occurred. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure +to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for +speculative purposes. +We are exposed to foreign currency +fluctuation as a result of our international sales, product sourcing and funding activities. Our foreign currency risk management objective is to reduce the variability of local entity cash flows as a result of exchange rate movements. We use +forward exchange contracts, options and cross-currency swaps to hedge certain anticipated but not yet firmly committed transactions as well as certain firm commitments and the related receivables and payables, including third party or intercompany +transactions. +When we begin hedging exposures depends on the +nature of the exposure and market conditions. Generally, all anticipated and firmly committed transactions that are hedged are to be recognized within twelve months, although at May 31, 2004 we had forward contracts hedging anticipated transactions +that will be recognized in as many as 18 months. The majority of the contracts expiring in more than twelve months relate to the anticipated purchase of inventory by our European and Japanese subsidiaries. We use forward contracts and +cross-currency swaps to hedge foreign currency denominated payments under intercompany loan agreements. When intercompany loans are hedged, it is typically for their expected duration. Hedged transactions are principally denominated in European +currencies, Japanese yen, Canadian dollars, Korean won, Mexican pesos and Australian dollars. +Our earnings are also exposed to movements in short and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash +flows, and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of medium and long-term fixed rate debt, commercial paper, and bank loans and have entered into interest rate swaps under which we receive fixed interest +and pay variable interest. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives +using a variety of techniques including a review of market value, sensitivity analysis, and Value-at-Risk (VaR). Our market-sensitive derivative and other financial instruments, as defined by the SEC, are foreign currency forward contracts, foreign +currency option contracts, cross-currency swaps, interest rate swaps, intercompany loans denominated in foreign currencies, fixed interest rate U.S. dollar denominated debt, and fixed interest rate Japanese yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency +forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market +conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR +29 +Table of Contents +computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These +interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one year. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency +rate. We adjusted the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations +on the derivative instruments only, and hence does not include the impact of such rate fluctuations on the underlying based transactions that are anticipated transactions, firm commitments, cash balances and accounts and loans receivable and payable +denominated in foreign currencies, including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur, nor does it consider the potential effect of favorable changes in market rates. It also does not +represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, +timing and other factors. +The estimated maximum one-day loss +in fair value on our foreign currency sensitive financial instruments, derived using the VaR model, was $24.9 million and $21.0 million at May 31, 2004 and May 31, 2003, respectively. The increase in VaR as of May 31, 2004 occurred due to the effect +of currency volatility on existing trades on the May 31, 2004 VaR computation versus the effect of currency volatility on existing trades on the May 31, 2003 VaR computation. Such a hypothetical loss in fair value of our derivatives would be offset +by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $50.0 million and $43.3 million for fiscal 2004 +and fiscal 2003, respectively. +Details of other +market-sensitive financial instruments and derivative financial instruments not included in the VaR calculation above are provided in the table below, except the interest rate swaps which are described below. These instruments include intercompany +loans denominated in foreign currencies, fixed interest rate Japanese yen denominated debt, fixed interest rate U.S. dollar denominated debt, cross-currency swaps and interest rate swaps. For debt obligations, the table presents principal cash flows +and related weighted average interest rates by expected maturity dates. +Expected Maturity Date +Year Ended May 31, +2005 +2006 +2007 +2008 +2009 +Thereafter +Total +Fair Value +(In millions, except interest rates) +Foreign Exchange Risk +Euro Functional Currency +Intercompany loan — U.S. dollar denominated — +Fixed rate +Principal payments +$ +— +— +— +— +— +270.4 +$ +270.4 +$ +270.4 +Average interest rate +— +— +— +— +— +2.4 +% +2.4 +% +Intercompany loan — British pound denominated — Fixed rate +Principal payments +$ +68.8 +— +— +— +— +— +$ +68.8 +$ +68.8 +Average interest rate +4.8 +% +— +— +— +— +— +4.8 +% +U.S. Dollar Functional Currency +Intercompany loan — Japanese yen denominated — Variable rate +Principal payments +$ +207.7 +— +— +— +— +— +$ +207.7 +$ +207.7 +Average interest rate +0.3 +% +— +— +— +— +— +0.3 +% +Intercompany loan — Canadian dollar denominated — Fixed rate +Principal payments +$ +25.8 +— +— +— +— +— +$ +25.8 +$ +25.8 +Average interest rate +2.3 +% +— +— +— +— +— +2.3 +% +Japanese Yen Functional Currency +Long-term Japanese yen debt — Fixed rate +30 +Table of Contents +Expected Maturity Date +Year Ended May 31, +2005 +2006 +2007 +2008 +2009 +Thereafter +Total +Fair Value +(In millions, except interest rates) +Principal payments +$ +5.9 +5.9 +5.9 +5.9 +5.9 +161.3 +$ +190.8 +$ +215.4 +Average interest rate +3.3 +% +3.4 +% +3.4 +% +3.4 +% +3.5 +% +2.5 +% +2.9 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese yen debt — Fixed rate +Principal payments +$ +5.9 +5.9 +5.9 +5.9 +5.9 +161.3 +$ +190.8 +$ +215.4 +Average interest rate +3.3 +% +3.4 +% +3.4 +% +3.4 +% +3.5 +% +2.5 +% +2.9 +% +U.S. Dollar Functional Currency +Long-term U.S. dollar debt — Fixed rate +Principal payments +$ +— +— +250.0 +25.0 +— +215.0 +$ +490.0 +$ +502.6 +Average interest rate +5.3 +% +5.3 +% +5.2 +% +5.1 +% +5.1 +% +5.1 +% +5.2 +% +Intercompany loans and +related interest amounts eliminate in consolidation. Intercompany loans are generally hedged against foreign exchange risk through the use of forward contracts and swaps with third parties. +The fixed interest rate Japanese yen denominated debts were issued by and are +accounted for by two of our Japanese subsidiaries. Accordingly, the monthly remeasurement of these instruments due to changes in foreign exchange rates is recognized in accumulated other comprehensive loss upon the consolidation of these +subsidiaries. +There were no significant changes in debt or +cross-currency swap market risks during fiscal 2004. Cross-currency swaps outstanding as of May 31, 2003 matured in fiscal 2004 and no new cross-currency swaps were executed during fiscal 2004. The U.S. dollar fair values of intercompany loans +denominated in foreign currencies was $711.8 million at May 31, 2003, which is the same as the carrying values of the loans prior to their elimination. The U.S. dollar fair value of the fixed rate Japanese yen denominated debt that was outstanding +at May 31, 2003 was $234.5 million versus a carrying value of $190.1 million at that date. The U.S. dollar fair values of the fixed rate U.S. dollar denominated debt, the euro swap payable and the U.S. dollar swap receivable as of May 31, 2003 were +$582.2 million, $193.5 million and $211.6 million, respectively, versus carrying values of $540.0 million, $186.0 million and $200.0 million, respectively, at that date. +In fiscal 2002 we issued a $250 million long-term fixed-rate corporate bond which matures in August 2006. In fiscal 2003 and +2004, we issued an additional $240 million in long-term fixed-rate corporate bonds which mature on various dates beginning in July 2007 through October 2015. Fixed interest rates on these bonds range from 4.7% to 5.66%. For each of the bonds issued +in fiscal 2002, 2003 and fiscal 2004, we have entered into interest rate swap agreements whereby we receive fixed interest payments at the same rate as the bonds and pay variable interest payments based on the three-month or six-month LIBOR plus a +spread. Each swap has the same notional amount and maturity date as the corresponding bond, except for one swap for a $50 million bond issued in fiscal 2004 maturing in October 2013. That swap expires in October 2006. As a result of the interest +rate swap agreements, the average effective interest rate payable on these bonds was 2.4% at May 31, 2004 and 2.5% at May 31, 2003. These interest rate swaps are accounted for as fair value hedges, so changes in the recorded fair values of the swaps +are offset by changes in the recorded fair value of the related debt, except for the $50 million swap expiring in October 2006 which is not accounted for as a hedge. Accordingly, changes in the fair value of this swap are recorded to net income each +period. The recorded fair value of the interest rate swaps accounted for as fair value hedges was a net $3.3 million gain at May 31, 2004 and a $25.5 million gain at May 31, 2003. The fair value of the $50 million interest rate swap expiring October +2006 was a $0.6 million loss at May 31, 2004. +In fiscal 2003 +we also entered into an interest rate swap agreement related to a Japanese yen denominated intercompany loan with one of our Japanese subsidiaries. The Japanese subsidiary pays variable interest on the intercompany loan based on 3-month LIBOR plus a +spread. Under the interest rate swap agreement, the subsidiary pays fixed interest payments at 0.8% and receives variable interest payments based on 3-month LIBOR plus a spread based on a notional amount of 8 billion Japanese yen. This interest rate +swap is not accounted for as a hedge, accordingly changes in the fair value of the swap are recorded to net income each period. The recorded fair value of the swap was a $0.4 million gain at May 31, 2004 and a $1.0 million loss at May 31, 2003. +31 +Table of Contents +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historical +information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, made or incorporated by reference from time to +time by NIKE or its representatives in this report, other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private +Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or +achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or words or phrases +of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by +NIKE with the SEC, including Forms 8-K, 10-Q, and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel, and equipment +markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel, and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, +categories of products, and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products, and the various market factors described above; +difficulties in implementing, operating, and maintaining NIKE’s increasingly complex information systems and controls, including, without limitation, the systems related to demand and supply planning, and inventory control; interruptions in +data and communications systems; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance “futures” orders may not be indicative of future revenues due to the changing mix of +futures and at-once orders, currency exchange rate fluctuations, order cancellations, and the fact that a significant portion of our revenue is not derived from futures orders; the ability of NIKE to sustain, manage or forecast its growth and +inventories; the size, timing and mix of purchases of NIKE’s products; new product development and introduction; the ability to secure and protect trademarks, patents, and other intellectual property; performance and reliability of products; +customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any +decline in our debt ratings; changes in business strategy or development plans; general risks associated with doing business outside the United States, including without limitation, import duties, tariffs, quotas, political and economic instability, +and terrorism; changes in government regulations; liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of +this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it +is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on NIKE’s business or the extent to which any factor, or combination of factors, may cause actual results to differ +materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, +communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any +statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports +issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +32 +Table of Contents +Item 8. Financial Statements and Supplemental Data +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in +conformity with the generally accepted accounting principles we considered appropriate in the circumstances and include some amounts based on our best estimates and judgments. Other financial information in this report is consistent with these +financial statements. +Our accounting systems include controls +designed to reasonably assure that assets are safeguarded from unauthorized use or disposition and which provide for the preparation of financial statements in conformity with generally accepted accounting principles. These systems are supplemented +by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An Internal Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently consisting of three outside +directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews with the independent registered public accounting firm, management and the internal audit staff, the scope and the +results of the annual examination, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as they deem appropriate. The independent registered public accounting firm and the internal auditors +have full access to the Committee, with and without the presence of management, to discuss any appropriate matters. +33 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and +Shareholders of NIKE, Inc. +In our opinion, the consolidated financial statements listed in the index appearing under Item 15(A)(1) present fairly, in all material respects, the +financial position of NIKE, Inc. and its subsidiaries at May 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2004 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 index appearing under Item 15(A)(2) 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 and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with standards of the Public Company Accounting Oversight Board (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, +assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. +As discussed in Note 4 to the consolidated financial statements, effective +June 1, 2002, the Company changed its method of accounting for goodwill and intangible assets in accordance with the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. In addition, as discussed in +Note 1 to the consolidated financial statements, effective June 1, 2001, the Company changed its method of accounting for derivative instruments in accordance with the Statement of Financial Accounting Standards No. 133, “Accounting for +Derivative Instruments and Hedging Activities” and Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” +/s/ P RICEWATERHOUSE C OOPERS LLP +Portland, Oregon +June 24, 2004 +34 +Table of Contents +NIKE, INC. +CONSOLIDATED +STATEMENTS OF INCOME +Year Ended May 31, +2004 +2003 +2002 +(In millions, except per share data) +Revenues +$ +12,253.1 +$ +10,697.0 +$ +9,893.0 +Cost of sales +7,001.4 +6,313.6 +6,004.7 +Gross Margin +5,251.7 +4,383.4 +3,888.3 +Selling and administrative +3,702.0 +3,154.1 +2,835.8 +Interest expense, net (Notes 6 and 7) +25.0 +28.8 +34.0 +Other expense, net (Note 16) +74.7 +77.5 +1.2 +Income before income taxes and cumulative effect of accounting change +1,450.0 +1,123.0 +1,017.3 +Income taxes (Note 8) +504.4 +382.9 +349.0 +Income before cumulative effect of accounting change +945.6 +740.1 +668.3 +Cumulative effect of accounting change, net of income taxes of ($-, $- and $3.0) (Note 4, Note 1) +— +266.1 +5.0 +Net income +$ +945.6 +$ +474.0 +$ +663.3 +Basic earnings per common share — before accounting change (Notes 1 and 11) +$ +3.59 +$ +2.80 +$ +2.50 +Cumulative effect of accounting change +— +1.01 +0.02 +$ +3.59 +$ +1.79 +$ +2.48 +Diluted earnings per common share — before accounting change (Notes 1 and 11) +$ +3.51 +$ +2.77 +$ +2.46 +Cumulative effect of accounting change +— +1.00 +0.02 +$ +3.51 +$ +1.77 +$ +2.44 +The accompanying notes +to consolidated financial statements are an integral part of this statement. +35 +Table of Contents +NIKE, INC. +CONSOLIDATED +BALANCE SHEETS +May 31, +2004 +2003 +(In millions) +ASSETS +Current Assets: +Cash and equivalents +$ +828.0 +$ +634.0 +Short-term investments +400.8 +— +Accounts receivable, less allowance for doubtful accounts of $95.3 and $81.9 +2,120.2 +2,083.9 +Inventories (Note 2) +1,633.6 +1,514.9 +Deferred income taxes (Note 8) +165.0 +221.8 +Prepaid expenses and other current assets +364.4 +332.5 +Total current assets +5,512.0 +4,787.1 +Property, plant and equipment, net (Note 3) +1,586.9 +1,620.8 +Identifiable intangible assets, net (Note 4) +366.3 +118.2 +Goodwill (Note 4) +135.4 +65.6 +Deferred income taxes and other assets (Note 8) +291.0 +229.4 +Total assets +$ +7,891.6 +$ +6,821.1 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current Liabilities: +Current portion of long-term debt (Note 7) +$ +6.6 +$ +205.7 +Notes payable (Note 6) +146.0 +75.4 +Accounts payable (Note 6) +763.8 +572.7 +Accrued liabilities (Notes 5 and 16) +974.4 +1,036.2 +Income taxes payable +118.2 +130.6 +Total current liabilities +2,009.0 +2,020.6 +Long-term debt (Note 7) +682.4 +551.6 +Deferred income taxes and other liabilities (Note 8) +418.2 +257.9 +Commitments and contingencies (Notes 14 and 16) +— +— +Redeemable Preferred Stock (Note 9) +0.3 +0.3 +Shareholders’ Equity: +Common Stock at stated value (Note 10): +Class A convertible — 77.6 and 97.8 shares outstanding +0.1 +0.2 +Class B — 185.5 and 165.8 shares outstanding +2.7 +2.6 +Capital in excess of stated value +887.8 +589.0 +Unearned stock compensation +(5.5 +) +(0.6 +) +Accumulated other comprehensive loss (Note 13) +(86.3 +) +(239.7 +) +Retained earnings +3,982.9 +3,639.2 +Total shareholders’ equity +4,781.7 +3,990.7 +Total liabilities and shareholders’ equity +$ +7,891.6 +$ +6,821.1 +The accompanying notes +to consolidated financial statements are an integral part of this statement. +36 +Table of Contents +NIKE, INC. +CONSOLIDATED +STATEMENTS OF CASH FLOWS +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Cash provided (used) by operations: +Net income +$ +945.6 +$ +474.0 +$ +663.3 +Income charges not affecting cash: +Cumulative effect of accounting change +— +266.1 +5.0 +Depreciation +252.1 +239.3 +223.5 +Deferred income taxes +19.0 +55.0 +15.9 +Amortization and other +58.3 +23.2 +48.1 +Income tax benefit from exercise of stock options +47.2 +12.5 +13.9 +Changes in certain working capital components: +Decrease (increase) in accounts receivable +82.5 +(136.3 +) +(135.2 +) +(Increase) decrease in inventories +(55.9 +) +(102.8 +) +55.4 +(Increase) decrease in prepaids and other current assets +(103.5 +) +60.9 +16.9 +Increase in accounts payable, accrued liabilities and income taxes payable +269.1 +30.1 +175.4 +Cash provided by operations +1,514.4 +922.0 +1,082.2 +Cash provided (used) by investing activities: +Purchases of short-term investments +(400.8 +) +— +— +Additions to property, plant and equipment and other +(213.9 +) +(185.9 +) +(282.8 +) +Disposals of property, plant and equipment +11.6 +14.8 +15.6 +Increase in other assets +(53.4 +) +(46.3 +) +(28.7 +) +(Decrease) increase in other liabilities +(0.9 +) +1.8 +(6.9 +) +Acquisition of subsidiary, net of cash acquired +(289.1 +) +— +— +Cash used by investing activities +(946.5 +) +(215.6 +) +(302.8 +) +Cash provided (used) by financing activities: +Proceeds from long-term debt issuance +153.8 +90.4 +329.9 +Reductions in long-term debt including current portion +(206.6 +) +(55.9 +) +(80.3 +) +Decrease in notes payable +(0.3 +) +(351.1 +) +(433.1 +) +Proceeds from exercise of stock options and other stock issuances +253.6 +44.2 +59.5 +Repurchase of stock +(419.8 +) +(196.3 +) +(226.9 +) +Dividends — common and preferred +(179.2 +) +(137.8 +) +(128.9 +) +Cash used by financing activities +(398.5 +) +(606.5 +) +(479.8 +) +Effect of exchange rate changes +24.6 +(41.4 +) +(28.1 +) +Net increase in cash and equivalents +194.0 +58.5 +271.5 +Cash and equivalents, beginning of year +634.0 +575.5 +304.0 +Cash and equivalents, end of year +$ +828.0 +$ +634.0 +$ +575.5 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +37.8 +$ +38.9 +$ +54.2 +Income taxes +418.6 +330.2 +262.0 +The accompanying notes +to consolidated financial statements are an integral part of this statement. +37 +Table of Contents +NIKE, INC. +CONSOLIDATED +STATEMENTS OF SHAREHOLDERS’ EQUITY +Common Stock +Capital in +Excess of +Stated +Value +Unearned +Stock +Compensation +Accumulated +Other +Comprehensive +Income (Loss) +Retained +Earnings +Total +Class A +Class B +Shares +Amount +Shares +Amount +(In millions, except per share data) +Balance at May 31, 2001 +99.1 +$ +0.2 +169.5 +$ +2.6 +$ +459.4 +$ +(9.9 +) +$ +(152.1 +) +$ +3,194.3 +$ +3,494.5 +Stock options exercised +1.7 +72.9 +72.9 +Conversion to Class B Common Stock +(1.0 +) +1.0 +— +Repurchase of Class B Common Stock +(4.3 +) +(5.2 +) +(232.5 +) +(237.7 +) +Dividends on Common stock ($.48 per share) +(128.6 +) +(128.6 +) +Issuance of shares to employees and others +0.2 +13.2 +(1.9 +) +11.3 +Amortization of unearned compensation +6.5 +6.5 +Forfeiture of shares from employees +(0.1 +) +(1.6 +) +0.2 +(1.5 +) +(2.9 +) +Comprehensive income (Note 13): +Net income +663.3 +663.3 +Other comprehensive income (net of tax benefit of $13.0): +Foreign currency translation +(1.5 +) +(1.5 +) +Cumulative effect of change in accounting principle (Note 1) +56.8 +56.8 +Adjustment for fair value of hedge derivatives +(95.6 +) +(95.6 +) +Comprehensive income +(40.3 +) +663.3 +623.0 +Balance at May 31, 2002 +98.1 +$ +0.2 +168.0 +$ +2.6 +$ +538.7 +$ +(5.1 +) +$ +(192.4 +) +$ +3,495.0 +$ +3,839.0 +Stock options exercised +1.3 +48.2 +48.2 +Conversion to Class B Common Stock +(0.3 +) +0.3 +— +Repurchase of Class B Common Stock +(4.0 +) +(4.8 +) +(186.2 +) +(191.0 +) +Dividends on Common stock ($.54 per share) +(142.7 +) +(142.7 +) +Issuance of shares to employees +0.3 +9.6 +(0.2 +) +9.4 +Amortization of unearned compensation +3.7 +3.7 +Forfeiture of shares from employees +(0.1 +) +(2.7 +) +1.0 +(0.9 +) +(2.6 +) +Comprehensive income (Note 13): +Net income +474.0 +474.0 +Other comprehensive income (net of tax benefit of $72.8): +Foreign currency translation +127.4 +127.4 +Adjustment for fair value of hedge derivatives +(174.7 +) +(174.7 +) +Comprehensive income +(47.3 +) +474.0 +426.7 +Balance at May 31, 2003 +97.8 +$ +0.2 +165.8 +$ +2.6 +$ +589.0 +$ +(0.6 +) +$ +(239.7 +) +$ +3,639.2 +$ +3,990.7 +Stock options exercised +5.5 +284.9 +284.9 +Conversion to Class B Common Stock +(20.2 +) +(0.1 +) +20.2 +0.1 +— +Repurchase of Class B Common Stock +(6.4 +) +(7.6 +) +(406.7 +) +(414.3 +) +Dividends on Common stock ($.74 per share) +(194.9 +) +(194.9 +) +Issuance of shares to employees +0.4 +23.2 +(7.5 +) +15.7 +Amortization of unearned compensation +2.6 +2.6 +Forfeiture of shares from employees +(1.7 +) +(0.3 +) +(2.0 +) +Comprehensive income (Note 13): +Net income +945.6 +945.6 +Other comprehensive income (net of tax expense of $69.0): +Foreign currency translation +27.5 +27.5 +Adjustment for fair value of hedge derivatives +125.9 +125.9 +Comprehensive income +153.4 +945.6 +1,099.0 +Balance at May 31, 2004 +77.6 +$ +0.1 +185.5 +$ +2.7 +$ +887.8 +$ +(5.5 +) +$ +(86.3 +) +$ +3,982.9 +$ +4,781.7 +The accompanying notes +to consolidated financial statements are an integral part of this statement. +38 +Table of Contents +NIKE, INC. +NOTES TO +CONSOLIDATED FINANCIAL STATEMENTS +Note 1 — Summary of Significant +Accounting Policies +Basis of Consolidation +The consolidated financial statements include the +accounts of NIKE, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. +Recognition of Revenues +Wholesale revenues are recognized when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title +passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale. Provisions for sales discounts, returns and +miscellaneous claims from customers are made at the time of sale. +Shipping and Handling Costs +Shipping +and handling costs are expensed as incurred and included in cost of sales. +Advertising and Promotion +Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement costs are expensed in the month the advertising appears. A significant amount of the Company’s +promotional expenses result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed uniformly over the term of the contract after giving +recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in prepaid expenses and other current assets or other assets depending on the length of the contract. Through cooperative +advertising programs, we reimburse our retail customers for certain of their costs of advertising our products. We record these costs in selling and administrative expense at the point in time when we are obligated to our customers for the costs. +This obligation may arise prior to the related advertisement being run. Total advertising and promotion expenses were $1,377.9, $1,166.8 million, and $1,027.9 million for the years ended May 31, 2004, 2003 and 2002, respectively. Prepaid advertising +and promotion expenses recorded as appropriate in prepaid expenses and other current assets and other assets totaled $154.6 million and $135.2 million at May 31, 2004 and 2003, respectively. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid +investments with original maturities of three months or less at date of purchase. The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents approximate fair value due to the short maturities. +Short-term Investments +Short-term investments consist of U.S. Treasury debt securities with +original maturities of six months or less. Debt securities which the Company has the ability and positive intent to hold to maturity are carried at amortized cost. Available-for-sale debt securities are recorded at fair value with any net unrealized +gains and losses reported, net of tax, in other comprehensive income. Realized gains or losses are determined based on the specific identification method. The Company holds no investments considered to be trading securities. Amortized cost of both +available-for-sale and held-to-maturity debt securities approximates fair market value due to their short maturities. All investments held at May 31, 2004 have remaining maturities of 120 days or less. +39 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Included in interest expense, net for the years ended May 31, 2004, 2003, and 2002, was interest income of $15.3 million, $14.1 million and $13.6 million, +respectively, related to short-term investments and cash and cash equivalents. +Inventory Valuation +Inventories are stated at the lower of cost or market. Inventories are valued on a first-in, first-out (FIFO) or moving-average cost basis. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation for financial reporting purposes is determined on a straight-line basis for buildings and +leasehold improvements over 2 to 40 years and principally on a declining balance basis for machinery and equipment over 2 to 15 years. Computer software is depreciated on a straight-line basis over 3 to 10 years. +Impairment of Long-Lived Assets +In accordance with Statement of Financial Accounting Standards (SFAS) No. +144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144), the Company estimates the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists when events or +circumstances indicate the carrying value of a long-lived asset may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our +estimate of its fair market value. +Identifiable +Intangible Assets and Goodwill +In accordance with +SFAS No. 142 “Goodwill and Other Intangible Assets” (FAS 142), goodwill and intangible assets with indefinite lives are no longer amortized but instead are measured for impairment at least annually in the fourth quarter, or when events +indicate that an impairment exists. As required by FAS 142, in the Company’s impairment test of goodwill, we compare the fair value of the applicable reporting unit to its carrying value. If the carrying value of the reporting unit exceeds the +estimate of fair value, we calculate the impairment as the excess of the carrying value of goodwill over its implied fair value. In the impairment tests for indefinite-lived intangible assets, we compare the estimated fair value of the +indefinite-lived intangible assets to the carrying value. If the carrying value exceeds the estimate of fair value, we calculate impairment as the excess of the carrying value over the estimate of fair value. See Note 4 for discussion of the +Company’s adoption of FAS 142. +Intangible assets that are +determined to have definite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired in accordance with FAS 144 discussed above. +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign +functional currency financial statements into U.S. dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive income (loss) in shareholders’ equity. +Transaction gains and losses generated by the effect of foreign exchange on +recorded assets and liabilities denominated in a currency different from the functional currency of the applicable Company entity are recorded in other expense, net in the period in which they occur. +40 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to limit exposure to +changes in foreign currency exchange rates and interest rates. The Company accounts for derivatives pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (FAS 133), which was +adopted on June 1, 2001. FAS 133 establishes accounting and reporting standards for derivative instruments and requires that all derivatives be recorded at fair value on the balance sheet. Changes in the fair value of derivative financial +instruments are either recognized in other comprehensive income (a component of shareholders’ equity) or net income depending on whether the derivative is being used to hedge changes in cash flows or changes in fair value. +In accordance with the transition provisions, the Company recorded a one-time +transition adjustment as of June 1, 2001 on both the consolidated statement of income and the consolidated balance sheet. The transition adjustment on the consolidated statement of income was a charge of $5.0 million, net of tax effect. This amount +related to an investment that was adjusted to fair value in accordance with FAS 133. The transition adjustment on the consolidated balance sheet represented the initial recognition of the fair values of hedge derivatives outstanding on the adoption +date and realized gains and losses on effective hedges for which the underlying exposure had not yet affected earnings. The transition adjustment on the consolidated balance sheet was an increase in current assets of $116.4 million, an increase in +noncurrent assets of $87.0 million, an increase in current liabilities of $151.6 million, and an increase in other comprehensive income of approximately $56.8 million, net of tax effect. The majority of the $56.8 million recorded in other +comprehensive income as of June 1, 2001 related to outstanding derivatives at that date. Because exchange rates on the transition date were different from those on the maturity dates of these derivatives and because some contracts maturing during +the year ended May 31, 2002 were entered into after the transition date, amounts ultimately reclassified to earnings during the year ended May 31, 2002, as described in Note 13, were significantly different from this amount. +Unrealized derivative gains and losses recorded in current and non-current +assets and liabilities and amounts recorded in other comprehensive income are non-cash items and therefore are taken into account in the preparation of the consolidated statement of cash flows based on their respective balance sheet classifications. +See Note 16 for more information on our Risk Management +program and Derivatives. +Stock-Based Compensation +The Company uses the intrinsic value method to +account for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” as permitted by SFAS No. 123 “Accounting for Stock-Based +Compensation” (FAS 123). The Company’s policy is to grant stock options with an exercise price equal to the market value at the date of grant, and accordingly, no compensation expense is recognized. +As required by FAS 123 and amended by SFAS No. 148 “Accounting for +Stock-Based Compensation — Transition and Disclosure” (FAS 148), the Company has computed, for pro forma disclosure purposes, the fair value of options granted and employees’ purchase rights under the Employee Stock Purchase Plan +(ESPP) during the years ended May 31, 2004, 2003 and 2002 using the Black-Scholes option pricing model. The weighted average assumptions used for stock option grants for each of these years were a dividend yield of 1%, expected volatility of the +market price of the Company’s common stock of 44%, 38%, and 38% for the years ended May 31, 2004, 2003 and 2002, respectively; a weighted-average expected life of the options of approximately five years; and interest rates of 2.9%, 3.8%, and +4.8% for the years ended May 31, 2004, 2003 and 2002, respectively. These interest rates are reflective of option grant dates throughout the year. +41 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Options were assumed to be exercised over the five year expected life for purposes of this valuation. +Adjustments for forfeitures are made as they occur. For the years ended May 31, 2004, 2003 and 2002, the total value of the options granted, for which no previous expense has been recognized, was computed as approximately $102.3 million, $89.8 +million, and $73.4 million, respectively, which would be amortized on a straight line basis over the vesting period of the options. The weighted average fair value per share of the options granted in the years ended May 31, 2004, 2003 and 2002 are +$20.36, $17.45, and $16.02, respectively. +If the Company had +accounted for these stock options and ESPP purchase rights issued to employees in accordance with FAS 123, the Company’s pro forma net income and pro forma earnings per share (EPS) would have been reported as follows: +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Net income as reported +$ +945.6 +$ +474.0 +$ +663.3 +Add: Stock-based compensation expense included in reported net income, net of tax +— +— +— +Deduct: Total stock-based employee compensation expense under fair value based method for all awards, net of tax +(48.7 +) +(42.2 +) +(36.1 +) +Pro forma net income +$ +896.9 +$ +431.8 +$ +627.2 +Earnings per Share: +Basic — as reported +$ +3.59 +$ +1.79 +$ +2.48 +Basic — pro forma +$ +3.41 +$ +1.63 +$ +2.34 +Diluted — as reported +$ +3.51 +$ +1.77 +$ +2.44 +Diluted — pro forma +$ +3.35 +$ +1.62 +$ +2.30 +The pro forma effects +of applying FAS 123 may not be representative of the effects on reported net income and earnings per share for future years since options vest over several years and additional awards are made each year. +Income Taxes +United States income taxes are provided currently on financial statement +earnings of non-U.S. subsidiaries expected to be repatriated. The Company determines annually the amount of undistributed non-U.S. earnings to invest indefinitely in its non-U.S. operations. The Company accounts for income taxes using the asset and +liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. See +Note 8 for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by +dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock +options and awards. See Note 11 for further discussion. +42 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Management Estimates +The preparation of financial statements in conformity with generally accepted accounting principles requires management to +make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and +expenses during the reporting period. Actual results could differ from these estimates. +Reclassifications +Certain prior year amounts have been reclassified to conform to fiscal year 2004 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. +Note 2 — Inventories +Inventories by major classification are as follows: +May 31, +2004 +2003 +(In millions) +Finished goods +$ +1,609.7 +$ +1,484.1 +Work-in-progress +10.6 +15.2 +Raw materials +13.3 +15.6 +$ +1,633.6 +$ +1,514.9 +Note 3 — Property, Plant and +Equipment +Property, plant and equipment includes the +following: +May 31, +2004 +2003 +(In millions) +Land +$ +179.5 +$ +191.1 +Buildings +813.6 +785.0 +Machinery and equipment +1,608.6 +1,538.7 +Leasehold improvements +470.2 +433.4 +Construction in process +60.4 +40.6 +3,132.3 +2,988.8 +Less accumulated depreciation +1,545.4 +1,368.0 +$ +1,586.9 +$ +1,620.8 +Capitalized interest +was $0.3 million, $0.8 million, and $1.7 million for the years ended May 31, 2004, 2003 and 2002, respectively. +Note 4 — Identifiable Intangible Assets and Goodwill: +Adoption of FAS 142 +The Company adopted FAS 142 effective June 1, 2002. In accordance with FAS 142, goodwill and intangible assets with indefinite lives are no longer +amortized but instead are measured for impairment at least annually in the fourth quarter, or when events indicate that an impairment exists. Intangible assets that are determined to have definite lives are amortized over their useful lives. +43 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +As required by FAS 142, the Company performed impairment tests on goodwill and other intangible +assets with indefinite lives, which consisted only of certain trademarks, as of June 1, 2002. As a result of the impairment tests, the Company recorded a $266.1 million cumulative effect of accounting change for the year ended May 31, 2003. Under +FAS 142, goodwill impairment exists if the net book value of a reporting unit exceeds its estimated fair value. The Company estimated the fair value of its reporting units by using a combination of discounted cash flow analyses and comparisons with +the market values of similar publicly-traded companies. +Included in the Company’s $266.1 million impairment charge was a $178.5 million charge related to the impairment of the goodwill associated with the Bauer NIKE Hockey (“Bauer”) and Cole Haan reporting units. These reporting +units are reflected in the Company’s Other operating segment. Since the Company’s purchase of Bauer in 1995, the hockey equipment and apparel markets have not grown as fast as expected and the in-line skate market has contracted +significantly. As a result, we determined that the goodwill acquired at Bauer had been impaired. The goodwill impairment at Cole Haan reflected the significantly lower fair value calculated on the basis of reduced operating income in the year +following the September 11, 2001 terrorist attacks. +The +remaining $87.6 million of the impairment charge relates to trademarks associated with Bauer. Under FAS 142, impairment of an indefinite-lived asset exists if the net book value of the asset exceeds its fair value. The Company estimated the fair +value of trademarks using the relief-from-royalty approach, which is a standard form of discounted cash flow analysis typically used for the valuation of trademarks. The impairment of the Bauer trademarks reflects the same circumstances as described +above related to the Bauer goodwill impairment. +The following +table summarizes the Company’s identifiable intangible assets balances as of May 31, 2004 and May 31, 2003: +May 31, 2004 +May 31, 2003 +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +(In millions) +Amortized intangible assets: +Patents +$ +27.9 +$ +(11.9 +) +$ +16.0 +$ +24.9 +$ +(10.4 +) +$ +14.5 +Trademarks +14.1 +(11.5 +) +2.6 +12.9 +(10.6 +) +2.3 +Other +17.0 +(10.8 +) +6.2 +7.5 +(1.1 +) +6.4 +Total +$ +59.0 +$ +(34.2 +) +$ +24.8 +$ +45.3 +$ +(22.1 +) +$ +23.2 +Unamortized intangible assets — Trademarks +$ +341.5 +$ +95.0 +Total +$ +366.3 +$ +118.2 +Amortization expense +of identifiable assets with definite lives, which is included in selling and administrative expense, was $12.0 million, $3.6 million and $2.6 million for the years ended May 31, 2004, 2003, and 2002, respectively. The amortization expense of +indefinite-lived intangible assets and goodwill, which was included in other expense, net, was $13.1 million for the year ended May 31, 2002. Following the adoption of FAS 142, no such amortization was recorded. The estimated amortization expense +for intangible assets subject to amortization for each of the succeeding years ending May 31, 2005 through May 31, 2009 is as follows: 2005: $3.5 million; 2006: $3.3 million; 2007: $2.8 million; 2008: $2.4 million; 2009: $2.2 million. +The results for the year ended May 31, 2002 do not reflect the provisions of +FAS 142. The reported net income before cumulative effect of accounting change was $668.3 million for the year ended May 31, 2002. Had +44 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +the Company adopted FAS 142 on June 1, 2001, for the year ended May 31, 2002, net income before cumulative effect of accounting change would have been $681.4 +million as a result of not recording $8.6 million in goodwill amortization and $4.5 million in trademark amortization. Basic and diluted earnings per common share before accounting change would have increased $0.05 for the year ended May 31, 2002. +During the second quarter ended November 30, 2003 the Company +completed the acquisition of Converse Inc. (“Converse”). As a result, $69.1 million was allocated to goodwill, $246.2 million was allocated to unamortized trademarks and $8.6 million was allocated to other amortized intangible assets and +was fully amortized over the last nine months of the year ended May 31, 2004. See Note 15 for additional information related to the acquisition. The remaining increase to goodwill for the year ended May 31, 2004 represents payments related to a +prior acquisition. The change in the book value of goodwill, which relates to the Company’s Other operating segment, is as follows (in millions): +Goodwill — May 31, 2003 +$ +65.6 +Acquisition of Subsidiaries +69.8 +Goodwill — May 31, 2004 +$ +135.4 +Note 5 — Accrued Liabilities +Accrued liabilities include the following: +May 31, +2004 +2003 +(In millions) +Fair value of derivatives +$ +141.3 +$ +313.1 +Accrued compensation and benefits +339.0 +245.7 +Accrued tax +87.5 +73.1 +Accrued endorser compensation +86.9 +70.2 +Dividends payable +52.6 +36.9 +Other 1 +267.1 +297.2 +$ +974.4 +$ +1,036.2 +1 +Other consists of various accrued expenses and no individual item accounted for more than $50 million of the balance at May 31, 2004 or 2003. +Note 6 — Short-Term Borrowings and Credit Lines +Commercial paper outstanding, notes payable to banks, and +interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”), formerly known as Nissho Iwai American Corporation (“NIAC”) as of May 31, 2004 and 2003, are summarized below: +May 31, +2004 +2003 +Borrowings +Interest +Rate +Borrowings +Interest +Rate +(In millions) +(In millions) +Notes payable and commercial paper: +U.S. operations +$ +28.3 +0.67 +% 1 +$ +2.3 +4.25 +% +Non-U.S. operations +117.7 +3.18 +% +73.1 +5.26 +% +$ +146.0 +$ +75.4 +Sojitz America +43.9 +1.88 +% +49.6 +2.06 +% +1 +Weighted average interest rate includes non-interest bearing overdrafts. +45 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The carrying amounts reflected in the consolidated balance sheet for notes payable approximate fair +value due to the short maturities. +The Company had no +commercial paper outstanding at May 31, 2004 and 2003. +The +Company purchases through Sojitz America certain athletic footwear and apparel it acquires from non-U.S. suppliers. These purchases are for the Company’s operations outside of the U.S., Europe, and Japan. Accounts payable to Sojitz America are +generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60 day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75%. +The Company has a 5-year $750 million revolving credit +facility in place with a group of banks under which no amounts are outstanding. The facility matures on November 20, 2008 and can be extended for one additional year on the anniversary date. Based on the Company’s current long-term senior +unsecured debt ratings the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.22%. The facility fee is 0.08% of the total commitment. Under this agreement, the Company must maintain, among other things, certain +minimum specified financial ratios with which the Company was in compliance at May 31, 2004. +Note 7 — Long-Term Debt +Long-term debt includes the following: +May 31, +2004 +2003 +(In millions) +6.375% Corporate Bond, payable December 1, 2003 +$ +— +$ +200.0 +5.5% Corporate Bond, payable August 15, 2006 +254.9 +266.3 +4.8% Corporate Bond, payable July 9, 2007 +25.4 +27.1 +5.375% Corporate Bond, payable July 8, 2009 +25.5 +27.6 +5.66% Corporate Bond, payable July 23, 2012 +25.5 +28.1 +5.4% Corporate Bond, payable August 7, 2012 +14.9 +16.4 +4.7% Corporate Bond, payable October 1, 2013 +50.0 +— +5.15% Corporate Bonds, payable October 15, 2015 +98.7 +— +4.3% Japanese yen note, payable June 26, 2011 +93.2 +90.1 +2.6% Japanese yen note, maturing August 20, 2001 through November 20, 2020 +67.5 +69.2 +2.0% Japanese yen note, maturing August 20, 2001 through November 20, 2020 +30.1 +30.8 +Other +3.3 +1.7 +Total +689.0 +757.3 +Less current maturities +6.6 +205.7 +$ +682.4 +$ +551.6 +The fair value of +long-term debt is estimated using discounted cash flow analyses, based on the Company’s incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt, including current portion, is +approximately $721.4 million at May 31, 2004 and $818.4 million at May 31, 2003. +The Company has interest rate swap agreements with the same notional amount and maturity dates as the $250.0 million corporate bond maturing August 15, 2006, whereby the Company receives fixed interest +46 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +payments at the same rate as the bond and pays variable interest payments based on the three-month LIBOR plus a spread. The interest rates payable on these +swap agreements were approximately 2.7% at May 31, 2004 and 2003. +The Company has an effective shelf registration statement with the Securities and Exchange Commission for $1 billion of debt securities. During the years ended May 31, 2004 and 2003, the Company issued a total of $150 million and $90 +million, respectively, in notes under the medium term note program of the shelf registration. The notes have coupon rates that range from 4.70% to 5.66%. The maturities range from July 9, 2007 to October 15, 2015. For each of these notes, the +Company has entered into interest rate swap agreements whereby the Company receives fixed interest payments at the same rate as the notes and pay variable interest payments based on the three-month or six-month LIBOR plus a spread. Each swap has the +same notional amount and maturity date as the corresponding note, except for the swap for the $50 million note maturing October 1, 2013, which expires October 2, 2006. At May 31, 2004, the interest rates payable on these swap agreements range from +approximately 1.6% to 3.3%. After issuance of these notes, $760 million remains available to be issued under the shelf registration. +In June 1996, one of the Company’s Japanese subsidiaries borrowed 10,500 million Japanese yen in a private placement with a maturity of June 26, +2011. Interest is paid semi-annually. The agreement provides for early retirement after year ten. +In July 1999, another of the Company’s Japanese subsidiaries assumed 13,000 million in Japanese yen loans as part of its agreement to purchase a +distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. Interest is also paid quarterly. +Amounts of long-term debt maturities in each of the years ending May 31, 2005 +through 2009 are $6.6 million, $6.1 million, $255.8 million, $31.1 million and $6.1 million, respectively. +Note 8 — Income Taxes +Income before income taxes and cumulative effect of accounting change is as follows: +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Income before income taxes and cumulative effect of accounting change: +United States +$ +607.7 +$ +444.8 +$ +511.2 +Foreign +842.3 +678.2 +506.1 +$ +1,450.0 +$ +1,123.0 +$ +1,017.3 +47 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The provision for income taxes is as follows: +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Current: +United States +Federal +$ +185.3 +$ +125.6 +$ +156.5 +State +43.3 +33.6 +32.0 +Foreign +266.8 +190.0 +147.7 +495.4 +349.2 +336.2 +Deferred: +United States +Federal +3.9 +11.3 +(3.3 +) +State +2.4 +8.6 +3.3 +Foreign +2.7 +13.8 +12.8 +9.0 +33.7 +12.8 +$ +504.4 +$ +382.9 +$ +349.0 +Deferred tax (assets) +and liabilities are comprised of the following: +May 31, +2004 +2003 +(In millions) +Deferred tax assets: +Allowance for doubtful accounts +$ +(13.8 +) +$ +(11.8 +) +Inventory reserves +(13.1 +) +(10.0 +) +Sales return reserves +(30.7 +) +(27.4 +) +Deferred compensation +(82.2 +) +(68.1 +) +Reserves and accrued liabilities +(27.4 +) +(28.5 +) +Tax basis inventory adjustment +(15.3 +) +(15.9 +) +Property, plant, and equipment +(36.2 +) +(28.9 +) +Foreign loss carryforwards +(29.1 +) +(32.5 +) +Foreign tax credit carryforwards +(24.4 +) +— +Hedges +(49.7 +) +(110.9 +) +Other +(17.2 +) +(17.7 +) +Total deferred tax assets +(339.1 +) +(351.7 +) +Deferred tax liabilities: +Undistributed earnings of foreign subsidiaries +95.5 +60.1 +Property, plant and equipment +109.5 +94.3 +Intangibles +101.6 +— +Hedges +5.9 +2.6 +Other +8.8 +13.7 +Total deferred tax liabilities +321.3 +170.7 +Net deferred tax asset before valuation allowance +(17.8 +) +(181.0 +) +Valuation allowance +27.1 +13.0 +Net deferred tax liability (asset) +$ +9.3 +$ +(168.0 +) +48 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate +follows: +Year Ended May 31, +2004 +2003 +2002 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +2.1 +2.5 +2.2 +Foreign earnings +(0.6 +) +(2.7 +) +(3.1 +) +Other, net +(1.7 +) +(0.7 +) +0.2 +Effective income tax rate +34.8 +% +34.1 +% +34.3 +% +The Company has +indefinitely reinvested approximately $706.1 million of the cumulative undistributed earnings of certain foreign subsidiaries, of which $180.0 million was earned during the year ended May 31, 2004. Such earnings would be subject to U.S. taxation if +repatriated to the U.S. The amount of unrecognized deferred tax liability associated with the permanently reinvested cumulative undistributed earnings was approximately $160.0 million. +Deferred tax assets at May 31, 2004 and 2003 were reduced by a valuation allowance relating to tax benefits of certain +foreign subsidiaries with operating losses where it is more likely than not that the deferred tax assets will not be realized. +A benefit was recognized for foreign loss carryforwards of $19.6 million at May 31, 2004. Such losses expire as follows (millions): +Year Ended May 31, +2007 +2008 +2009 +2010 +2011 +Indefinite +Expiration Amount +0.9 +10.4 +0.9 +0.7 +0.1 +6.6 +During the years ended +May 31, 2004, 2003, and 2002 income tax benefits attributable to employee stock option transactions of $47.2 million, $12.5 million, and $13.9 million, respectively, were allocated to shareholders’ equity. +Note 9 — Redeemable Preferred Stock +Sojitz America (formerly NIAC) is the sole owner of the Company’s +authorized Redeemable Preferred Stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million. A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends +may be declared or paid on the common stock of the Company unless dividends on the Redeemable Preferred Stock have been declared and paid in full. There have been no changes in the Redeemable Preferred Stock in the three years ended May 31, 2004. As +the holder of the Redeemable Preferred Stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on +merger, consolidation, liquidation or dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. +Note 10 — Common Stock +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 110 million and 350 million, +respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. +49 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock +Incentive Plan (the “1990 Plan”). The 1990 Plan provides for the issuance of up to 50 million shares of Class B Common Stock in connection with stock options and other awards granted under such plan. The 1990 Plan authorizes the grant of +incentive stock options, non-statutory stock options, stock appreciation rights, stock bonuses and the sale of restricted stock. The exercise price for incentive stock options may not be less than the fair market value of the underlying shares on +the date of grant and substantially all grants vest ratably over four years and expire 10 years from the date of grant. The exercise price for non-statutory stock options, stock appreciation rights and the purchase price of restricted stock may not +be less than 75% of the fair market value of the underlying shares on the date of grant. No consideration will be paid for stock bonuses awarded under the 1990 Plan. A committee of the Board of Directors administers the 1990 Plan. The committee has +the authority to determine the employees to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards. As of May 31, 2004 the committee has granted substantially all non-statutory stock options at 100% of +fair market value on the date of grant under the 1990 Plan. +From time to time, the Company grants restricted stock and unrestricted stock to key employees under the 1990 plan. The number of shares granted to employees during the years ended May 31, 2004 and May 31, 2003 were not material. Recipients +of restricted shares are entitled to cash dividends and to vote their respective shares throughout the period of restriction. The value of all of the granted shares was established by the market price on the date of grant. Unearned compensation was +charged for the market value of the restricted shares. The unearned compensation is shown as a reduction of shareholders’ equity and is being amortized ratably over the vesting period. During the years ended May 31, 2004, 2003, and 2002, +respectively, the Company recognized $2.4 million, $2.7 million and $4.3 million in selling and administrative expense related to the grants, net of forfeitures. +During the years ended May 31, 2004, 2003 and 2002, the Company also granted shares of restricted stock under the Long-Term +Incentive Plan (“LTIP”), adopted by the Board of Directors and approved by shareholders in September 1997. The LTIP provides for the issuance of up to 1,000,000 shares of Class B Common Stock. Under the LTIP, awards are made to certain +executives in their choice of either cash or stock, based on performance targets established over varying time periods. Once performance targets are achieved, cash or shares of stock are issued. For certain plan years, shares of stock issued remain +restricted for an additional three-year vesting period. In other plan years, shares are immediately vested upon grant. Unvested shares are subject to forfeiture if the executive’s employment terminates within that period. In plan years with a +three-year vesting period, plan participants are entitled to cash dividends and to vote their respective shares. The value of the restricted shares is established by the market price on the date of issuance. Unearned compensation is charged for the +market value of the restricted shares. The unearned compensation is shown as a reduction of shareholders’ equity and is being amortized ratably over the service and vesting periods. Under the LTIP 8,000 shares with a price of $54.80 were issued +with no restrictions during the year ended May 31, 2004 for the plan period ended May 31, 2003. No shares were issued during the year ended May 31, 2003 as performance targets for the plan period ended May 31, 2002 were not met. A total of 38,000 +restricted shares with an average price of $49.50 were issued during the year ended May 31, 2002 for the plan period ended May 31, 2001. Related to the LTIP the Company recognized $18.9 million, $9.9 million and $9.0 million of selling and +administrative expense in the years ending May 31, 2004, 2003 and 2002, respectively, net of forfeitures. +50 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The following summarizes the stock option transactions under plans discussed above: +Shares +Weighted +Average +Option +Price +(In thousands) +Options outstanding May 31, 2001 +14,165 +$ +41.28 +Exercised +(1,687 +) +33.62 +Surrendered +(724 +) +44.43 +Granted +4,687 +42.68 +Options outstanding May 31, 2002 +16,441 +42.31 +Exercised +(1,307 +) +29.56 +Surrendered +(713 +) +45.23 +Granted +5,278 +48.83 +Options outstanding May 31, 2003 +19,699 +44.82 +Exercised +(5,526 +) +42.67 +Surrendered +(579 +) +47.14 +Granted +5,215 +52.14 +Options outstanding May 31, 2004 +18,809 +$ +47.42 +Options exercisable at May 31, +2002 +7,590 +$ +42.30 +2003 +9,730 +44.18 +2004 +8,177 +45.00 +The following table +sets forth the exercise prices, the number of options outstanding and exercisable and the remaining contractual lives of the Company’s stock options at May 31, 2004: +Options Outstanding +Exercise Price +Number of +Options +Outstanding +Weighted +Average +Exercise Price +Weighted +Average +Contractual Life +Remaining +Options Exercisable +Number of +Options +Exercisable +Weighted +Average +Exercise Price +(In thousands) +(Years) +(In thousands) +$14.94-$27.69 +1,771 +$ +26.87 +5.20 +1,754 +$ +26.86 +28.13- 42.36 +3,223 +42.26 +7.05 +1,216 +42.14 +42.50- 48.44 +1,870 +47.57 +3.93 +1,828 +47.62 +48.65- 48.98 +4,332 +48.98 +8.12 +762 +48.98 +49.01- 52.24 +5,008 +52.19 +9.02 +135 +50.62 +52.44- 74.88 +2,605 +55.90 +4.80 +2,483 +55.71 +In September 2001, the +Company’s shareholders approved the establishment of an ESPP under which 3,000,000 shares of Class B Stock are reserved for issuance to employees. The plan qualifies as a noncompensatory employee stock purchase plan under Section 423 of the +Internal Revenue Code. In February 2003, the Company’s Board of Directors approved a Foreign Subsidiary ESPP under which 1,000,000 shares of Class B Stock are reserved for issuance to employees. Employees are eligible to participate through +payroll deductions in amounts ranging from 1% to 10% of their compensation not to exceed limitations set out under Section 423. At the end of each six-month offering period, shares are purchased by the participants at 85% of the lower of the fair +market value at the beginning or the end of the offering period. Under the ESPPs 318,000, 249,000, and 78,000 shares were issued during the years ended May 31, 2004, 2003, and 2002, respectively. +51 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Note 11 — Earnings Per Share +The following represents a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase +11.7 million and 4.2 million shares of common stock were outstanding at May 31, 2003, and 2002, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the +average market price of the common shares and, therefore, the effect would be antidilutive. There were no such antidilutive options outstanding at May 31, 2004. +Year Ended May 31, +2004 +2003 +2002 +(In millions, +except per share data) +Determination of shares: +Average common shares outstanding +263.2 +264.5 +267.7 +Assumed conversion of dilutive stock options and awards +6.5 +3.1 +4.5 +Diluted average common shares outstanding +269.7 +267.6 +272.2 +Basic earnings per common share — before cumulative effect of accounting change +$ +3.59 +$ +2.80 +$ +2.50 +Cumulative effect of accounting change +— +1.01 +0.02 +$ +3.59 +$ +1.79 +$ +2.48 +Diluted earnings per common share — before cumulative effect of accounting change +$ +3.51 +$ +2.77 +$ +2.46 +Cumulative effect of accounting change +— +1.00 +0.02 +$ +3.51 +$ +1.77 +$ +2.44 +Note 12 — Benefit Plans +The Company has a profit sharing plan available to +substantially all U.S.-based employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors. Contributions of $20.6 million, $16.0 million, and $14.4 million to the plan are included in selling +and administrative expenses in the consolidated financial statements for the years ended May 31, 2004, 2003 and 2002, respectively. The Company has a voluntary 401(k) employee savings plan. The Company matches a portion of employee contributions +with common stock. Company contributions to the savings plan were $15.9 million, $15.0 million, and $13.7 million for the years ended May 31, 2004, 2003 and 2002, respectively, and are included in selling and administrative expenses. +52 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Note 13 — Comprehensive Income +Comprehensive income is as follows: +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Net income +$ +945.6 +$ +474.0 +$ +663.3 +Other comprehensive income (loss): +Change in cumulative translation adjustment and other (net of tax (expense)/benefit of $(4.7) in 2004, $(22.4) in 2003, $2.2 in +2002) +27.5 +127.4 +(1.5 +) +Recognition in net income of previously deferred unrealized loss on securities, due to accounting change (net of tax (benefit) of +($2.2)) +— +— +3.4 +Changes due to cash flow hedging instruments (Note 16): +Initial recognition of net deferred gain as of June 1, due to accounting change (net of tax (expense) of ($28.7)) +— +— +53.4 +Net (loss) gain on hedge derivatives (net of tax benefit of $33.5 in 2004, $160.8 in 2003 and $31.5 in 2002) +(72.9 +) +(311.9 +) +(73.3 +) +Reclassification to net income of previously deferred (gains) and losses related to hedge derivatives (net of tax (benefit)/expense of ($97.8) +in 2004, ($65.6) in 2003 and $10.2 in 2002) +198.8 +137.2 +(22.3 +) +Other comprehensive income (loss) +153.4 +(47.3 +) +(40.3 +) +Total comprehensive income +$ +1,099.0 +$ +426.7 +$ +623.0 +The components of +accumulated other comprehensive loss are as follows: +May 31, +2004 +2003 +(In millions) +Cumulative translation adjustment and other +$ +4.7 +$ +(22.8 +) +Net deferred loss on hedge derivatives +(91.0 +) +(216.9 +) +$ +(86.3 +) +$ +(239.7 +) +Note 14 — Commitments and +Contingencies +The Company leases space for certain of its +offices, warehouses and retail stores under leases expiring from one to thirty years after May 31, 2004. Rent expense was $206.7 million, $183.2 million and $159.9 million for the years ended May 31, 2004, 2003 and 2002, respectively. Amounts of +minimum future annual rental commitments under non-cancelable operating leases in each of the five years ending May 31, 2005 through 2009 are $171.7 million, $143.4 million, $120.9 million, $103.4 million, $85.3 million, respectively, and $523.5 +million in later years. +As of May 31, 2004 and 2003, the +Company had letters of credit outstanding totaling $551.6 million and $704.4 million, respectively. These letters of credit were issued primarily for the purchase of inventory. +In the ordinary course of its business, the Company is involved in legal proceedings involving contractual and employment +relationships, product liability claims, trademark rights, and a variety of other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company’s financial position or results of +operations. +53 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Note 15 — Acquisition +On September 4, 2003, the Company acquired 100 percent of the equity shares of Converse. Converse designs, distributes, and +markets high performance and casual athletic footwear and apparel. The acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations”. The cash purchase price, including +acquisition costs, was approximately $310 million. The results of Converse’s operations have been included in the consolidated financial statements since the date of the acquisition as part of the Company’s Other operating segment. +All assets and liabilities of Converse have been recorded in +the Company’s consolidated balance sheet based on their estimated fair values at the date of acquisition. Identifiable intangible assets and goodwill relating to the purchase approximated $254.8 and $69.1 million, respectively. Identifiable +intangible assets include $246.2 million for trademarks that have an indefinite life, and $8.6 million of other intangible assets that were amortized over nine months. The purchase accounting included a deferred tax liability of $105.1 million +recorded for the book-tax difference in future tax consequences for the acquired identifiable indefinite-lived intangible assets, which is the primary reason that goodwill was also recorded in the transaction. The pro forma effect of the acquisition +on the combined results of operations was not significant. +Note 16 — +Risk Management and Derivatives +The Company is exposed to +global market risks, including the effect of changes in foreign currency exchange rates and interest rates. The Company uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue +derivatives for trading purposes. +The Company formally +documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to either specific assets and +liabilities on the balance sheet or specific firm commitments or forecasted transactions. +Substantially all derivatives entered into by the Company are designated as either cash flow or fair value hedges. All derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are +recorded as other current assets or other non-current assets, depending on the instrument’s maturity date. Unrealized loss positions are recorded as accrued liabilities or other non-current liabilities. Changes in fair values of outstanding +cash flow hedge derivatives that are highly effective are recorded in other comprehensive income, until net income is affected by the variability of cash flows of the hedged transaction. Fair value hedges are recorded in net income and are offset by +the change in fair value of the underlying asset or liability being hedged. +Cash Flow Hedges +The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including revenues, product costs, selling and +administrative expenses, investments in U.S. dollar-denominated available-for-sale debt securities and intercompany transactions, including intercompany borrowings, will be adversely affected by changes in exchange rates. It is the Company’s +policy to utilize derivatives to reduce foreign exchange risks where internal netting strategies cannot be effectively employed. +Derivatives used by the Company to hedge foreign currency exchange risks are forward exchange contracts, options and cross-currency swaps. These +instruments protect against the risk that the eventual net cash inflows and outflows from foreign currency denominated transactions will be adversely affected by changes in exchange rates. The cross-currency swaps are used to hedge foreign currency +denominated payments related to intercompany loan agreements. Hedged transactions are denominated primarily in European currencies, Japanese yen, Canadian dollars, Korean won, Mexican pesos, and Australian dollars. The Company hedges up to 100% of +anticipated exposures typically twelve months in advance but has hedged as much as 32 months in advance. When intercompany loans are hedged, it is typically for their expected duration. +54 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Substantially all foreign currency derivatives entered into by the Company qualify for and are +designated as foreign-currency cash flow hedges, including those hedging foreign currency denominated firm commitments. +Changes in fair values of outstanding cash flow hedge derivatives that are highly effective are recorded in other comprehensive income, until net income +is affected by the variability of cash flows of the hedged transaction. In most cases amounts recorded in other comprehensive income will be released to net income some time after the maturity of the related derivative. The consolidated statement of +income classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of revenue and product costs are recorded in revenue and cost of sales, respectively, when the underlying hedged transaction affects +net income. Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Results of hedges of both anticipated sales of U.S. dollar-denominated available-for-sale securities and +anticipated intercompany transactions are recorded in other expense, net when the transaction occurs. Hedges of recorded balance sheet positions are recorded in other expense, net currently together with the transaction gain or loss from the hedged +balance sheet position. Net foreign currency transaction gains and losses, which includes hedge results captured in revenues, cost of sales, selling and administrative expense and other expense, net, were a $304.3 million loss, a $180.9 million +loss, and a $42.7 million gain for the years ended May 31, 2004, 2003, and 2002, respectively. +Premiums paid on options are initially recorded as deferred charges. The Company assesses effectiveness on options based on the total cash flows method and records total changes in the options’ fair value to +other comprehensive income to the degree they are effective. +As of May 31, 2004, $103.3 million of deferred net losses (net of tax) on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the next twelve months as a +result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of May +31, 2004, the maximum term over which the Company is hedging exposures to the variability of cash flows for all forecasted and recorded transactions is 18 months. +The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are +used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is +not, or has ceased to be, highly effective as a hedge, the Company discontinues hedge accounting prospectively. +The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in +the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; +or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. +When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected +period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net income when the forecasted transaction affects net income. However, if it is probable that a forecasted transaction will not +occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive loss will be recognized immediately in net income. In all +situations in which hedge +55 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing +future changes in the fair value in current-period net income. Any hedge ineffectiveness is recorded in current-period net income. Effectiveness for cash flow hedges is assessed based on forward rates. +For each of the years ended May 31, 2004 and 2003 the Company recorded in +other expense, net an insignificant loss representing the total ineffectiveness of all derivatives. An insignificant gain was recorded in other expense, net for the year ended May 31, 2002. Net income for each of the years ended May 31, 2004, 2003 +and 2002 was not materially affected due to discontinued hedge accounting. +Fair Value Hedges +The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest +rate swaps. +Substantially all interest rate swap agreements +are designated as fair value hedges of the related long-term debt and meet the shortcut method requirements under FAS 133. Accordingly, changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value +of the underlying long-term debt. No ineffectiveness has been recorded to net income related to interest rate swaps designated as fair value hedges for the years ended May 31, 2004, 2003 and 2002. +As discussed in Note 7, during the year ended May 31, 2004, the Company +issued a $50 million medium-term note maturing October 1, 2013 and simultaneously entered into a received-fixed, pay-variable interest rate swap with the same notional amount and fixed interest rate as the note. However, the swap expires October 2, +2006. This interest rate swap is not accounted for as a hedge, accordingly changes in the fair value of the swap are recorded to net income each period as a component of other expense, net. As of May 31, 2004, the recorded fair value of the swap was +a $0.6 million loss. +During the year ended May 31, 2003 the +Company also entered into an interest rate swap agreement related to a Japanese yen denominated intercompany loan with one of the Company’s Japanese subsidiaries. The Japanese subsidiary pays variable interest on the intercompany loan based on +3-month LIBOR plus a spread. Under the interest rate swap agreement, the subsidiary pays fixed interest payments at 0.8% and receives variable interest payments based on 3-month LIBOR plus a spread based on a notional amount of 8 billion Japanese +yen. This interest rate swap is not accounted for as a hedge, accordingly changes in the fair value of the swap are recorded to net income each period as a component of other expense, net. As of May 31, 2004, the recorded fair value of the swap was +a $0.4 million gain. As of May 31, 2003, the recorded fair value of the swap was a $1.0 million loss. +The fair values of all derivatives recorded on the consolidated balance sheet are as follows: +May 31, +2004 +2003 +(In millions) +Unrealized Gains: +Foreign currency exchange contracts, options and cross-currency swaps +$ +83.1 +$ +71.5 +Interest rate swaps +7.0 +25.5 +Unrealized (Losses): +Foreign currency exchange contracts, options and cross-currency swaps +(144.5 +) +(322.7 +) +Interest rate swaps +(3.9 +) +(1.0 +) +56 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Concentration of Credit Risk +The Company is exposed to credit-related losses in the event of +non-performance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit +risk with these institutions. This credit risk is generally limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty +credit guidelines which are continually monitored and reported to senior management according to prescribed guidelines. The Company utilizes a portfolio of financial institutions either headquartered or operating in the same countries the Company +conducts its business. As a result of the above considerations, the Company considers the risk of counterparty default to be minimal. +In addition to hedging instruments, the Company is subject to concentrations of credit risk associated with cash and equivalents and accounts receivable. +The Company places cash and equivalents with financial institutions with investment grade credit ratings and, by policy, limits the amount of credit exposure to any one financial institution. The Company considers its concentration risk related to +accounts receivable to be mitigated by the Company’s credit policy, the significance of outstanding balances owed by each individual customer at any point in time and the geographic dispersion of these customers. +Note 17 — Operating Segments and Related Information +Operating Segments. The Company’s +operating segments are evidence of the structure of the Company’s internal organization. The major segments are defined by geographic regions for operations participating in NIKE brand sales activity excluding NIKE Golf and Bauer NIKE Hockey. +Each NIKE brand geographic segment operates predominantly in one industry: the design, production, marketing and selling of sports and fitness footwear, apparel, and equipment. The “Other” category shown below represents activities of Cole +Haan Holdings Incorporated, Bauer NIKE Hockey, Inc., Hurley International LLC, NIKE Golf, and beginning September 4, 2003, Converse Inc., which are considered immaterial for individual disclosure. +Where applicable, “Corporate” represents items necessary to +reconcile to the consolidated financial statements, which generally include corporate activity and corporate eliminations. Effective June 1, 2003 the assets, liabilities, and operating expenses of NIKE IHM, Inc. which primarily manufactures NIKE Air +components, have been reclassified to the Corporate category from the Other, reflecting current management of these operations. NIKE IHM, Inc. information for the applicable prior year periods have been reclassified to conform to the current year +presentation. +Net revenues as shown below represent sales to +external customers for each segment. Intercompany revenues have been eliminated and are immaterial for separate disclosure. The Company evaluates performance of individual operating segments based on pre-tax income. On a consolidated basis, this +amount represents income before income taxes and cumulative effect of accounting change as shown in the Consolidated Statements of Income. Reconciling items for pre-tax income represent corporate costs that are not allocated to the operating +segments for management reporting including certain currency exchange rate gains and losses on transactions, amortization of indefinite-lived intangible assets and goodwill (for the year ended May 31, 2002 only), and intercompany eliminations for +specific income statement items in the Consolidated Statements of Income. +Additions to long-lived assets as presented following represent capital expenditures and additions to identifiable intangibles and goodwill. During the year ended May 31, 2004 the Company purchased identifiable +intangible assets and goodwill relating to the acquisition of Converse which have been allocated to the Other category and have been excluded from the additions to long-lived assets presented below (see Note 15 for further information). Generally, +other additions to identifiable intangible assets are considered corporate costs and are not attributable to any specific operating segment. See Note 4 for further discussion on identifiable intangible assets and goodwill. Additions to other +long-lived assets are not significant and are comprised of additions to miscellaneous corporate assets not attributable to any specific operating segment. +57 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Accounts receivable, inventory and property, plant and equipment for operating segments are regularly +reviewed by management and are therefore provided below. Certain NIKE Golf receivables, inventories and property, plant, and equipment are managed by the regions and as a result, are included in the region’s balances. +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Net Revenue +United States +$ +4,793.7 +$ +4,658.4 +$ +4,669.6 +Europe, Middle East, and Africa +3,834.4 +3,241.7 +2,696.5 +Asia Pacific +1,613.4 +1,349.2 +1,134.9 +Americas +624.8 +527.0 +568.1 +Other +1,386.8 +920.7 +823.9 +$ +12,253.1 +$ +10,697.0 +$ +9,893.0 +Pre-tax Income +United States +$ +1,015.1 +$ +963.2 +$ +956.0 +Europe, Middle East, and Africa +750.7 +532.0 +422.4 +Asia Pacific +354.9 +292.6 +216.2 +Americas +101.9 +96.5 +92.1 +Other +75.3 +5.2 +43.7 +Corporate +(847.9 +) +(766.5 +) +(713.1 +) +$ +1,450.0 +$ +1,123.0 +$ +1,017.3 +Additions to Long-lived Assets +United States +$ +29.9 +$ +27.1 +$ +30.4 +Europe, Middle East, and Africa +28.9 +29.2 +27.2 +Asia Pacific +19.9 +26.2 +21.8 +Americas +5.8 +3.5 +4.8 +Other +25.2 +17.5 +74.7 +Corporate +104.2 +82.4 +120.1 +$ +213.9 +$ +185.9 +$ +279.0 +Depreciation +United States +$ +49.0 +$ +49.9 +$ +50.5 +Europe, Middle East, and Africa +43.6 +38.9 +35.2 +Asia Pacific +38.5 +38.5 +38.4 +Americas +3.9 +4.5 +5.3 +Other +22.2 +16.1 +13.1 +Corporate +94.9 +91.4 +81.0 +$ +252.1 +$ +239.3 +$ +223.5 +Accounts Receivable, net +United States +$ +616.6 +$ +615.5 +$ +654.4 +Europe, Middle East, and Africa +724.1 +785.8 +571.1 +Asia Pacific +272.9 +230.4 +186.0 +Americas +142.1 +128.8 +122.3 +Other +337.0 +282.0 +240.8 +Corporate +27.5 +41.4 +29.5 +$ +2,120.2 +$ +2,083.9 +$ +1,804.1 +58 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Inventory, net +United States +$ +570.6 +$ +640.6 +$ +613.4 +Europe, Middle East, and Africa +477.9 +383.4 +336.5 +Asia Pacific +163.9 +143.5 +148.0 +Americas +82.9 +84.2 +62.9 +Other +311.7 +239.4 +193.0 +Corporate +26.6 +23.8 +20.0 +$ +1,633.6 +$ +1,514.9 +$ +1,373.8 +Property, Plant and Equipment, net +United States +$ +193.0 +$ +215.7 +$ +241.9 +Europe, Middle East, and Africa +232.0 +241.4 +212.2 +Asia Pacific +379.7 +386.3 +378.4 +Americas +12.7 +11.0 +12.4 +Other +94.3 +82.1 +77.0 +Corporate +675.2 +684.3 +692.6 +$ +1,586.9 +$ +1,620.8 +$ +1,614.5 +Revenues by Major +Product Lines. Revenues to external customers for NIKE brand products are attributable to sales of footwear, apparel, and equipment. Other revenues to external customers primarily include external sales by Cole Haan +Holdings Incorporated, Bauer NIKE Hockey Inc., Hurley International LLC, NIKE Golf, and beginning September 4, 2003, Converse Inc. +Year Ended May 31, +2004 +2003 +2002 +(In millions) +Footwear +$ +6,569.9 +$ +5,983.4 +$ +5,676.6 +Apparel +3,545.4 +3,130.0 +2,801.3 +Equipment +751.0 +662.9 +591.2 +Other +1,386.8 +920.7 +823.9 +$ +12,253.1 +$ +10,697.0 +$ +9,893.0 +Revenues and +Long-Lived Assets by Geographic Area. Geographical area information is similar to that shown previously under operating segments with the exception of the Other activity, which has been allocated to the geographical areas +based on the location where the sales originated. Revenues derived in the U.S. were $5,781.0 million, $5,263.8 million, and $5,246.3 million, for the years ended May 31, 2004, 2003, and 2002, respectively. Our largest concentrations of long-lived +assets are in the U.S. and Japan. Long-lived assets attributable to operations in the U.S., which are primarily comprised of net property, plant & equipment and net identifiable intangible assets and goodwill, were $1,495.4 million, $1,223.6 +million, and $1,217.7 million at May 31, 2004, 2003, and 2002, respectively. Long-lived assets attributable to operations in Japan were $334.7 million, $336.4 million, and $321.6 million at May 31, 2004, 2003, and 2002, respectively. +Major Customers. During the years ended May 31, +2004 and 2003 the Company did not have a significant customer that accounted for more than 10% of consolidated revenues. During the year ended May 31, 2002, revenues derived from Foot Locker, Inc. represented 11% of the Company’s consolidated +revenues. Sales to this customer are included in all segments of the Company. +59 +Table of Contents +Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or +practices or financial statement disclosure required to be reported under this Item. +Item 9A. Controls and Procedures +The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s +Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s +management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes +that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit +relationship of possible controls and procedures. +The Company +carries out a variety of on-going procedures, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the +design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were +effective at the reasonable assurance level as of May 31, 2004. +There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s +internal controls over financial reporting. +60 +Table of Contents +PART III +Item 10. Directors and Executive Officers of the Registrant +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy +Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in +Item 1 of this Report. The information required by Item 405 of Regulation S-K is included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2004 Annual Meeting of Shareholders +and is incorporated herein by reference. The information required by Item 406 of Regulation S-K is included under “Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2004 Annual Meeting of Shareholders and is +incorporated herein by reference. +Item 11. Executive Compensation +The information required by this Item is included under “Director Compensation and Retirement Plan,” “Executive Compensation” (but +excluding the Performance Graph), “Compensation Committee Interlocks and Insider Participation” and “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” in the definitive Proxy Statement for our +2004 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management +The information required by this Item is included under “Stock Holdings of Certain Owners and Management” and under “Equity Compensation +Plans” in the definitive Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions +The information required by this Item is included under “Certain Transactions and Business Relationships” in the definitive Proxy Statement for +our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 14. Principal Accountant Fees and Services +The information required by this Item is included under “Ratification Of Independent Registered Public Accounting Firm” in the definitive Proxy +Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. +61 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K +(A) The following documents are filed as part of this report: +Form 10-K +Page No. +1. +FINANCIAL STATEMENTS: +Report of Independent Registered Public Accounting Firm +34 +Consolidated Statements of Income for each of the three years ended +May 31, 2004 +35 +Consolidated Balance Sheets at May 31, 2004 and 2003 +36 +Consolidated Statements of Cash Flows for each of the three years ended +May 31, 2004 +37 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2004 +38 +Notes to Consolidated Financial Statements +39 +2. +FINANCIAL STATEMENT SCHEDULE: +II — Valuation and Qualifying Accounts +F-1 +All other schedules +are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. EXHIBITS: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, +1995). +3.2 +Third Restated Bylaws, as amended. +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Third Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of December 13, 1996 between the Company and Bank One Trust Company, National Association (successor in interest to The First National Bank of Chicago), as Trustee +(incorporated by reference from Exhibit 4.01 to Amendment No. 1 to Registration Statement No. 333-15953 filed by the Company on November 26, 1996). +4.4 +Form of Officers’ Certificate relating to the Company’s 5.5% Notes and form of 5.5% Note (incorporated by reference to Exhibits 4.2 and 4.3 of the Company’s Form 8-K dated +August 17, 2001). +4.5 +Form of Officers’ Certificate relating to the Company’s Fixed Rate Medium-Term Notes and the Company’s Floating Rate Medium-Term Notes, form of Fixed Rate Note and form of +Floating Rate Note (incorporated by reference to Exhibits 4.2, 4.3 and 4.4 of the Company’s Form 8-K dated May 29, 2002). +4.6 +Credit Agreement dated as of November 20, 2003 among NIKE, Inc., Bank of America, N.A., individually and as Agent, and the other banks party thereto (incorporated by reference from Exhibit +4.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2003). +10.1 +Form of non-employee director Stock Option Agreement (incorporated by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, +2000).* +62 +Table of Contents +10.2 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference from the Company’s definitive proxy statement filed in +connection with its annual meeting of shareholders held on September 21, 1987). +10.3 +NIKE, Inc. 1990 Stock Incentive Plan.* +10.4 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference from the Company’s definitive proxy statement filed in connection with its annual meeting of shareholders held on +September 18, 2000).* +10.5 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference from the Company’s definitive proxy statement filed in connection with its annual meeting of shareholders held on September +18, 2002).* +10.6 +NIKE, Inc. Deferred Compensation Plan Amended and Restated effective June 1, 2004.* +10.7 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February +28, 2003).* +10.8 +Covenant Not To Compete And Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated October 6, 1994 (incorporated by reference from Exhibit 10.9 to the Company’s Quarterly +Report on Form 10-Q for the fiscal quarter ended August 31, 2001).* +10.9 +Employment Agreement, and Covenant Not To Compete And Non-Disclosure Agreement between NIKE, Inc. and Mindy F. Grossman dated September 6, 2000 (incorporated by reference to Exhibit 10.12 to +the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2002).* +10.10 +Amendment to Employment Agreement between NIKE, Inc. and Mindy F. Grossman dated March 17, 2003 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K +for the fiscal year ended May 31, 2003).* +10.11 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Charles D. Denson dated March 26, 2001 (incorporated by reference to Exhibit 10.16 to the Company’s Annual +Report on Form 10-K for the fiscal year ended May 31, 2003).* +10.12 +Amendment to Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Charles D. Denson dated March 4, 2003 (incorporated by reference to Exhibit 10.17 to the +Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2003).* +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (set forth on page F-2 of this Annual Report on Form 10-K). +31 +Rule 13a-14(a) Certifications. +32 +Section 1350 Certifications. +* +Management contract or compensatory plan or arrangement. +63 +Table of Contents +The exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and +its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10% of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, +that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $.10 per page, which represents our +reasonable expenses in furnishing Exhibits. +(B) Reports on Form 8-K: +The +following reports on Form 8-K were furnished during the fiscal quarter ending May 31, 2004: +March 18, 2004: Item 7. Financial Statements and Exhibits. Item 12. Results of Operations and Financial Condition. Third Quarter Earnings +Release. +March 19, 2004: Item 7. Financial +Statements and Exhibits. Item 12. Results of Operations and Financial Condition. Transcript of Earnings Conference Call. +64 +Table of Contents +SCHEDULE II +VALUATION AND +QUALIFYING ACCOUNTS +Description +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Charged to +Other +Accounts +Write-Offs +Net of +Recoveries +Balance at +End of +Period +(In millions) +For the year ended May 31, 2002: +Allowance for doubtful accounts +$ +72.1 +$ +23.7 +$ +4.2 +$ +(19.6 +) +$ +80.4 +For the year ended May 31, 2003: +Allowance for doubtful accounts +$ +80.4 +$ +25.8 +$ +1.2 +$ +(25.5 +) +$ +81.9 +For the year ended May 31, 2004: +Allowance for doubtful accounts +$ +81.9 +$ +36.4 +$ +0.1 +$ +(23.1 +) +$ +95.3 +F-1 +Table of Contents +CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +We hereby consent to the incorporation by reference in the documents listed +below of our report dated June 24, 2004, relating to the financial statements and financial statement schedule of NIKE, Inc., which appears in this Form 10-K: +1. +Registration Statement on Form S-8 (No. 2-81419) of NIKE, Inc.; +2. +Registration Statement on Form S-3 (No. 33-43205) of NIKE, Inc.; +3. +Registration Statement on Form S-3 (No. 33-48977) of NIKE, Inc.; +4. +Registration Statement on Form S-3 (No. 33-41842) of NIKE, Inc.; +5. +Registration Statement on Form S-8 (No. 33-63995) of NIKE, Inc.; +6. +Registration Statement on Form S-3 (No. 333-15953) of NIKE, Inc.; +7. +Registration Statement on Form S-8 (No. 333-63581) of NIKE, Inc.; +8. +Registration Statement on Form S-8 (No. 333-63583) of NIKE, Inc.; +9. +Registration Statement on Form S-3 (No. 333-71975) of NIKE, Inc.; +10. +Registration Statement on Form S-8 (No. 333-68864) of NIKE, Inc.; +11. +Registration Statement on Form S-8 (No. 333-68886) of NIKE, Inc.; +12. +Registration Statement on Form S-8 (No. 333-71660) of NIKE, Inc.; +13. +Registration Statement on Form S-3 (No. 333-71324) of NIKE, Inc.; +14. +Registration Statement on Form S-8 (No. 333-104822) of NIKE, Inc.; +15. +Registration Statement on Form S-8 (No. 333-104824) of NIKE, Inc.; and +16. +Registration Statement on Form S-8 (No. 333-117059) of NIKE, Inc. +/s/ P RICEWATERHOUSE C OOPERS LLP +Portland, Oregon +July 30, 2004 +F-2 +Table of Contents +SIGNATURES +Pursuant to the +requirements of Section 13 or 15(d) 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. +NIKE, I NC . +By: +/s/ P HILIP H. +K NIGHT +Philip H. Knight +Chairman of the Board, +Chief Executive Officer and President +Date: July 30, 2004 +Pursuant to the requirements of +the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +Principal Executive Officer and Director: +/s/ P HILIP H. +K NIGHT +Philip H. Knight +Chairman of the Board, Chief Executive Officer, and President +July 30, 2004 +Principal Financial and Accounting Officer: +/s/ D ONALD W. B LAIR +Donald W. Blair +Chief Financial Officer +July 30, 2004 +Directors: +/s/ T HOMAS E. +C LARKE +Thomas E. Clarke +Director +July 30, 2004 +/s/ J ILL K. C ONWAY +Jill K. Conway +Director +July 30, 2004 +/s/ R ALPH D. +D ENUNZIO +Ralph D. +DeNunzio +Director +July 30, 2004 +/s/ R ICHARD K. +D ONAHUE +Richard K. +Donahue +Director +July 30, 2004 +/s/ A LAN B. G RAF , +J R . +Alan B. Graf, Jr. +Director +July 30, 2004 +/s/ D ELBERT J. +H AYES +Delbert J. Hayes +Director +July 30, 2004 +S-1 +Table of Contents +Signature +Title +Date +/s/ D OUGLAS G. +H OUSER +Douglas G. Houser +Director +July 30, 2004 +/s/ J EANNE P. +J ACKSON +Jeanne P. Jackson +Director +July 30, 2004 +/s/ J OHN E. J AQUA +John E. Jaqua +Director +July 30, 2004 +/s/ C HARLES W. +R OBINSON +Charles W. +Robinson +Director +July 30, 2004 +/s/ J OHN R. T HOMPSON , +J R . +John R. Thompson, Jr. +Director +July 30, 2004 +S-2 \ No newline at end of file diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/filing_metadata.csv b/raw/filings/0000320187/2003/0001193125-04-128270/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..3bfcbb4b157df99600366894adbfacdf2392a98d --- /dev/null +++ b/raw/filings/0000320187/2003/0001193125-04-128270/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2004-07-30,2004-05-31,2004-07-31T01:04:26.000Z,0001193125-04-128270,d10k.htm,FORM 10-K,1480021,0,0,https://www.sec.gov/Archives/edgar/data/320187/000119312504128270/d10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000119312504128270/,2003,2003,1 diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/item1.txt b/raw/filings/0000320187/2003/0001193125-04-128270/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..98f8c7d3cd64782c13b00b093147a005487ff161 --- /dev/null +++ b/raw/filings/0000320187/2003/0001193125-04-128270/item1.txt @@ -0,0 +1,266 @@ +Item 1. Business +General +NIKE, Inc. was +incorporated in 1968 under the laws of the state of Oregon. As used in this report, the terms “we”, “us”, “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless +the context indicates otherwise. Our Internet address is www.nike.com . On our NIKE Corporate web site, located at www.nikebiz.com , we post the following filings as soon as reasonably practicable after they are electronically filed with +or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of +the Securities and Exchange Act of 1934. All such filings on our NIKE Corporate web site are available free of charge. Also available on the NIKE Corporate web site are the charters of the committees of our board of directors, as well as our +corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and +worldwide marketing of high quality footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic apparel in the world. We sell our products to retail accounts and through a mix of independent +distributors, licensees and subsidiaries in over 120 countries around the world. Virtually all of our products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while +equipment products are produced both in the United States and abroad. +Products +NIKE’s athletic +footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovative design for men, women +and children. Running, basketball, children’s, cross-training and women’s shoes are currently our top-selling product categories and we expect them to continue to lead in product sales in the near future. However, we also market shoes +designed for outdoor activities, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking, and other athletic and recreational uses. +We sell active sports apparel covering most of the above categories, +athletically inspired lifestyle apparel, as well as athletic bags and accessory items. NIKE apparel and accessories are designed to complement our athletic footwear products, feature the same trademarks and are sold through the same marketing and +distribution channels. We often market footwear, apparel and accessories in “collections” of similar design or for specific purposes. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the NIKE ® brand name, including sport balls, eyewear, skates, +bats, gloves, and other equipment designed for sports activities. We also have agreements for licensees to produce and sell NIKE brand swimwear, women’s sports bras, cycling apparel, maternity exercise wear, children’s clothing, school +supplies, timepieces, and electronic media devices. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. and plastic injected and metal products to other manufacturers +through our wholly-owned subsidiary, BAUER Italia S.p.A. +We +sell a line of dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan ® , g Series © , and Bragano © through our wholly-owned subsidiary, Cole Haan Holdings Incorporated, headquartered in Yarmouth, Maine. +2 +Table of Contents +Our wholly-owned subsidiary, Bauer NIKE Hockey Inc., headquartered in Greenland, New Hampshire, +manufactures and distributes ice skates, skate blades, in-line roller skates, protective gear, hockey sticks, hockey jerseys, licensed apparel and accessories under the Bauer ® and NIKE ® brand names. Bauer also offers a full selection of products for street and roller hockey. +Our wholly-owned subsidiary Hurley International LLC, headquartered in Costa Mesa, California, designs and distributes a +line of action sports apparel for surfing, skateboarding, and snowboarding, and youth lifestyle apparel and footwear under the Hurley ® brand name. +On September 4, 2003, the Company purchased Converse Inc., headquartered in North Andover, Massachusetts, which designs and distributes athletic and +casual footwear, apparel, and accessories under the Converse ® , Chuck Taylor ® , All +Star ® , One Star ® , and Jack Purcell ® brand names. +Sales and Marketing +Financial +information about geographic and segment operations appears in Note 17 of the consolidated financial statements on page 57. +We experience moderate fluctuations in aggregate sales volume during the year. However, the mix of product sales may vary considerably from time to time +as a result of changes in seasonal and geographic demand for particular types of footwear, apparel, and equipment. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand +for our products. We must therefore respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories, and influencing sports and fitness preferences through +aggressive marketing. This is a continuing risk. Failure to timely and adequately respond could have a material adverse affect on our sales and profitability. +United States Market +During +fiscal 2004, sales in the United States (including U.S. sales of Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf, and Converse) accounted for approximately 47 percent of total revenues, compared to 49 percent in fiscal 2003 and 53 percent in fiscal +2002. We sell to approximately 28,000 retail accounts in the United States. The NIKE brand domestic retail account base includes a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf +shops, and other retail accounts. During fiscal year 2004, our three largest customers accounted for approximately 26 percent of NIKE brand sales in the United States excluding sales from NIKE Golf and Bauer NIKE Hockey, and 23 percent of total +sales in the United States. +We make substantial use of our +“futures” ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that 90 percent of their orders will be delivered within a set time period at a fixed price. In fiscal year 2004, 90 +percent of our U.S. wholesale footwear shipments (excluding Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf, and Converse) were made under the futures program, compared to 91 percent in fiscal 2003 and 92 percent in fiscal 2002. In fiscal 2004 and +2003, 67 percent of our U.S. wholesale apparel shipments (excluding U.S. licensed team apparel, Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf and Converse) were made under the futures program, compared to 69 percent in 2002. +3 +Table of Contents +We utilize 21 NIKE sales offices to solicit sales in the United States. We also utilize 10 independent +sales representatives to sell specialty products for golf, cycling, water sports and outdoor activities. In addition, we operate the following retail outlets in the United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily B-grade and closeout merchandise) +78 +NIKE stores (including NIKE Women Stores) +5 +NIKETOWNs (designed to showcase NIKE products) +13 +Employee-only stores +4 +Cole Haan stores (including factory and employee stores) +65 +Total +165 +NIKE’s domestic +distribution centers for footwear are located in Wilsonville, Oregon, Memphis, Tennessee, and Greenland, New Hampshire. Apparel and equipment products are shipped from our Memphis, Tennessee, Tigard, Oregon, and Foothill Ranch, California +distribution centers. Cole Haan and Bauer NIKE Hockey products are distributed primarily from Greenland, New Hampshire, Converse products are shipped from Ontario and Fontana, California, and Hurley products are shipped from Costa Mesa, California. +International Markets +We sell our +products in over 120 countries outside of the United States through retail accounts, independent distributors, licensees, subsidiaries and branch offices. Non-U.S. sales (including Non-U.S. sales of Cole Haan, Bauer NIKE Hockey, Hurley, NIKE Golf, +and Converse) accounted for 53 percent of total revenues in fiscal 2004, compared to 51 percent in fiscal 2003 and 47 percent in fiscal 2002. We operate 23 distribution centers in Europe, Asia, Australia, Latin America, Africa and Canada, and also +distribute through independent distributors and licensees. We estimate that we sell to more than 23,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. In many countries and regions, including +Japan, Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United States futures program described above. NIKE’s three largest customers outside of the U.S. accounted for +approximately 13 percent of non-U.S. sales. +We operate the +following retail outlets outside the United States: +Non-U.S. Retail Stores +Number +NIKE factory stores +126 +NIKE stores and employee-only stores +2 +NIKETOWNs +2 +Cole Haan stores (including factory and employee stores) +35 +Total +165 +International branch +offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, Indonesia, India, Ireland, Israel, Italy, Japan, +Korea, Lebanon, Malaysia, Mexico, New Zealand, The Netherlands, Norway, Peoples Republic of China, The Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, +Turkey, the United Kingdom, and Vietnam. +4 +Table of Contents +Orders +Worldwide futures orders +for NIKE brand athletic footwear and apparel, scheduled for delivery from June through November 2004, were $5.6 billion compared to $5.0 billion for the same period last year. Based upon historical data, we expect that approximately 95 percent of +these orders will be filled in that time period, although some orders may be cancelled. Futures orders are not necessarily indicative of future sales trends. This is because the mix of orders can shift between advance/futures and at-once orders. In +addition, exchange rate fluctuations as well as differing levels of order cancellations can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures +orders, including wholesale sales of equipment, U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan, Converse, NIKE Golf, Hurley, and retail sales across all brands. +Product Research and Development +We believe that our research and development efforts are a key factor in our past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce +products that reduce injury, aid athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, exercise physiology, engineering, industrial design and related fields, we also utilize research committees and advisory boards made up +of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials and concepts for product improvement. Employee athletes wear-test and evaluate products during the +design and development process. +Manufacturing +Virtually all of +our footwear is produced outside of the United States. In fiscal 2004, contract suppliers in China, Indonesia, Vietnam, and Thailand manufactured 36 percent, 24 percent, 22 percent, and 16 percent of total NIKE brand footwear, respectively. We also +have manufacturing agreements with independent factories in Argentina, Brazil, India, Mexico, and South Africa to manufacture footwear for sale primarily within those countries. Our largest single footwear supplier accounted for approximately 7 +percent of total fiscal 2004 footwear production. +Almost all +of NIKE brand apparel production for sale to the United States market was manufactured outside of the United States by independent contract manufacturers located in 37 countries. Most of this apparel production occurred in Bangladesh, China, Greece, +Honduras, India, Indonesia, Malaysia, Mexico, Pakistan, The Philippines, Sri Lanka, Taiwan, Thailand, and Turkey. All of our apparel production for sale to the international market was manufactured outside the U.S. Our largest single apparel +supplier accounted for approximately 5 percent of total fiscal 2004 apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas, and polyurethane films used to make AIR-SOLE cushioning +components. NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, is our sole supplier of the AIR-SOLE cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads, plastic +and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture. NIKE and its contractors and suppliers buy raw materials in bulk. Most raw materials are available in the countries +where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”) and its predecessor, Nissho Iwai American Corporation, a subsidiary of Nissho Iwai +Corporation, a large Japanese trading company that recently merged with Nichimen Corporation, have performed significant import-export financing services for us. Currently, Sojitz +5 +Table of Contents +America provides such financing services with respect to at least 80% of the NIKE products sold outside of the United States, Europe and Japan. Approximately +12% of NIKE products are sold outside of the United States, Europe and Japan. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and +to deliver products to our customers outside of the United States, Europe and Japan. Such a disruption could result in cancelled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short +term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2005. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export duties, anti-dumping duties, quotas, safeguard measures, trade restrictions, +restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring. We +believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers outside of the United States. If events prevented us from acquiring products from our +suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe that we could abate any such disruption within a period of no more than 12 months, and that +much of the adverse impact on supply would, therefore, be of a short-term nature. We believe that our principal competitors are subject to similar risks. +As a result of the Trade Act of 2003, the United States has implemented significant new Federal requirements for cargo security, focused on imports of +containerized cargo. We are a significant importer of containerized cargo. Accordingly, we participate actively in appropriate governmental programs, such as the Customs Trade Partnership Against Terrorism (“C-TPAT”), to reduce risks of +possible supply disruptions caused by U.S. and international cargo security mandates and terrorism. +All of our products manufactured overseas and imported into the United States and other countries are subject to customs duties collected by customs +authorities. Customs information submitted by us is routinely subject to review by customs authorities. We are unable to predict whether additional customs duties, anti-dumping duties, quotas, safeguard measures, or other trade restrictions may be +imposed on the importation of our products in the future. Such actions could result in increases in the cost of our products generally and might adversely affect the sales or profitability of NIKE and the imported footwear and apparel industry as a +whole. Accordingly, we are actively monitoring the developments described below. +Imports into the European Union +In 1994, the European Commission (“EU”) imposed quotas on certain types of footwear manufactured in China. These quotas replaced national quotas that had previously been in effect in several European Member States. Footwear +designed for use in sporting activities, meeting certain technical criteria and having a CIF (cost, insurance and freight) price above 9 euros (“Special Technology Athletic Footwear” or “STAF”), has been excluded from the quotas. +As a result of the STAF exclusion, and the amount of quota made available to us, the quotas have not, to date, had a material effect on our business. In addition, the EU has confirmed that footwear quotas will be eliminated globally beginning +January 1, 2005. However, as part of China’s 2001 accession to the World Trade Organization (“WTO”), China entered into an agreement with the EU and other WTO members to abide by a special safeguard arrangement whereby quotas could be +imposed on any product sourced in China, including footwear, if there was a surge in imports from China into another WTO country, and after a legal proceeding it was determined that such imports were injuring a domestic producer. Additionally, under +longstanding WTO rules, all WTO member countries reserve the right to impose (1) safeguard measures +6 +Table of Contents +(temporary quotas) if it can be demonstrated in a legal proceeding that increased imports are injuring another WTO member’s domestic industry; and (2) +anti-dumping measures if it can be demonstrated in a legal proceeding that imports are being sold at an unfair low price in another WTO member’s home market. +Accordingly, with the phase-out of the quotas at the beginning of 2005, and the expiration of a separate EU anti-dumping +case in 2003 against footwear made in China, Indonesia and Thailand, there may be renewed pressure from some sectors within Europe to re-impose some level of trade protection on imported footwear. While it is unlikely that the EU will pursue any +such action, we will monitor the circumstances closely and if action is initiated, we will work to mitigate any significant business risks. We believe that our major competitors stand in much the same position of risk regarding these potential trade +measures. +On May 1, 2004 ten new countries joined the EU and +the EU single market. An agreement was reached to increase the current EU quotas on footwear to account for the enlarged EU market. NIKE and other manufacturers do not expect this expansion of the EU single market to present any significant +challenges to the importation into the EU of sports footwear produced in China, since the EU increased quotas take into account the enlarged consumer and market demand. +If EU trade measures become substantially more restrictive we would consider shifting, to the extent possible, the +production of our sports footwear to other countries in order to maintain competitive pricing and access to these markets. We believe that we are prepared to deal effectively with any such change of circumstances and that any adverse impact would be +of a temporary nature. We continue to closely monitor international restrictions and maintain our multi-country sourcing strategy and contingency plans. We believe that our principal competitors are subject to similar risks regarding these trade +measures. +Imports into the United States +We currently source a portion of our footwear and apparel products from +factories in Vietnam. In 2001, the United States Congress and the Vietnamese National Assembly approved a comprehensive bilateral trade agreement, which, among other things, provides reciprocal, non-discriminatory Normal Trade Relations +(“NTR”) between the U.S. and Vietnam. Following that approval, the U.S. granted an annual extension of NTR to Vietnam. The U.S. President must renew this grant annually with the opportunity for review by Congress. In June 2004, President +Bush renewed NTR for Vietnam for an additional year and we anticipate Congress will support this decision. We currently believe that, absent unforeseen circumstances, the President will continue his annual extensions of NTR to Vietnam and that +Congress will support the President’s decisions. The annual extensions on NTR will remain in place until Vietnam enters the WTO, at which time the U.S. must grant Vietnam permanent NTR. Vietnam’s WTO accession negotiations are ongoing, and +may conclude as early as the end of 2005. Ongoing NTR trading status for Vietnam will allow us to expand our production and marketing opportunities in Vietnam and allow for Vietnamese-sourced product to continue to enter the United States at NTR +tariff rates. +Expiration of the Textile and Apparel +Multi-Fiber Arrangement +Under the WTO, the Multi-Fiber +Arrangement, a four-decade old agreement that allows WTO countries to impose quotas on the import of textile and apparel products, will expire on January 1, 2005. This effectively means that all trade of textile and apparel products between WTO +members will be free from quotas at the end of the 2004 calendar year. Elimination of textile and apparel quotas is significant for NIKE and other textile and apparel companies as it provides these companies greater flexibility in their global +sourcing decisions. At the same time, we are monitoring closely actions by textile and apparel importing countries to ensure that they do not unilaterally attempt to re-impose restrictions through some other legal mechanism, such as safeguards, +anti-dumping measures, or in the case of China (as part of the agreement reached in China’s 2001 WTO accession), through the short-term re-imposition of quotas on certain categories of textile and apparel products in order to +7 +Table of Contents +protect a domestic market from surging Chinese imports. In the event of any significant protectionist trade actions, we will evaluate alternative sourcing +options and will work to mitigate any significant business risks. We believe that our principal competitors are subject to similar risks regarding these potential trade measures. +Competition +The athletic +footwear, apparel and equipment industry is keenly competitive in the United States and on a worldwide basis. We compete internationally with an increasing number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports +equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel and equipment, including Reebok, Adidas and others. The intense competition and the rapid changes in technology and consumer preferences in the +markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear and athletic apparel in the world. Performance and reliability of shoes, apparel, and equipment, new +product development, price, product identity through marketing and promotion, and customer support and service are important aspects of competition in the athletic footwear, apparel and equipment industry. To help market our products, we contract +with prominent and influential athletes, coaches, teams, colleges, and sports leagues to endorse our brands and use our products, and we actively sponsor sporting events and clinics. We believe that we are competitive in all of these areas. +Trademarks and Patents +We +utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the +goods of others. We consider our NIKE ® and Swoosh Design ® +trademarks to be among our most valuable assets and we have registered these trademarks in over 100 countries. In addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks +against infringement. +NIKE has an exclusive, worldwide license +to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR ® +patents have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE AIR patents will not expire for several years. We also have hundreds of U.S. and foreign patents covering components, features, and +designs used in various athletic and leisure shoes, apparel, and equipment. These patents expire at various times, and have a remaining duration of from now to at least 2024, although the duration of patents varies by country. We believe that our +success depends primarily upon skills in design, research and development, production and marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on inventions, +designs and improvements that we deem valuable. +Employees +We had approximately +24,667 employees at May 31, 2004. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, with the exception of Bauer NIKE Hockey Inc. Of Bauer NIKE Hockey’s North American +employees, approximately 47 percent, or approximately 232, are covered by three union collective bargaining agreements with three separate bargaining units, and all of Bauer NIKE Hockey’s approximately 130 non-immigrant employees in Italy are +covered by three collective bargaining agreements. The collective bargaining agreements expire on various dates from 2005 through 2007. There has never been a material interruption of operations due to labor disagreements. +8 +Table of Contents +Executive Officers of the Registrant +The executive officers of NIKE as of July 25, 2004 are as follows: +Philip H. Knight, Chief Executive Officer, Chairman of the Board, and President — Mr. Knight, 66, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September +1984, served as its President from 1968 to 1990, and from June 2000 to present. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at +Portland State University. +Donald W. Blair, Vice +President and Chief Financial Officer — Mr. Blair, 46, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with Pepsico, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice +President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining Pepsico, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Thomas E. Clarke, President of New Ventures — Dr. Clarke, 53, a +director since 1994, joined the Company in 1980. He was appointed divisional Vice President in charge of marketing in 1987, elected corporate Vice President in 1989, appointed General Manager in 1990, and served as President and Chief Operating +Officer from 1994 to 2000. Dr. Clarke previously held various positions with the Company, primarily in research, design, development and marketing. Dr. Clarke holds a doctorate degree in biomechanics. +Wesley A. Coleman , Vice President, Global Human Resources — Mr. +Coleman, 54, has been employed by Nike since 2002 in his current role. Prior to joining NIKE, he held a number of Human Resource positions over a 20-year period with S.C. Johnson and Sons, Inc., including Vice President HR, North America and Vice +President HR, Asia/Pacific. +Charles D. Denson, +President of the NIKE Brand — Mr. Denson, 48, has been employed by NIKE since February 1979. Mr. Denson held several positions within the Company, including his appointments as Director of USA Apparel Sales in 1994, divisional Vice +President, US Sales in 1994, divisional Vice President European Sales in 1997, divisional Vice President and General Manager, NIKE Europe in 1998, Vice President and General Manager of NIKE USA in June 2000, and President of the NIKE Brand in March +2001. +Gary M. DeStefano, President of USA Operations +— Mr. DeStefano, 47, has been employed by NIKE since 1982, with primary responsibilities in sales and regional administration. Mr. DeStefano was appointed Director of Domestic Sales in 1990, divisional Vice President in charge of domestic sales +in 1992, Vice President of Global Sales in 1996, Vice President and General Manager of Asia Pacific in March 1997, and President of USA Operations in March 2001. +Trevor Edwards , Vice President, Global Brand Management — Mr. Edwards, 41, joined the Company in 1992. He was +appointed Marketing Manager, Strategic Accounts, Foot Locker in 1993, Director of Marketing, the Americas in 1995, Director of Marketing, Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999, and Vice President, US +Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in November 2002. +Mindy F. Grossman, Vice President of Global Apparel — Ms. Grossman, 46, joined NIKE in October 2000. Prior to joining NIKE, she was President +and Chief Executive Officer of Polo Jeans Company/Ralph Lauren, a division of Jones Apparel Group, Inc. from 1995 to 2000. Prior to that, Ms. Grossman was Vice President of New Business Development at Polo Ralph Lauren Corp. from 1994 to 1995, +President of The Warnaco Group Inc. Chaps Ralph Lauren division, and Senior Vice President of The Warnaco Group Inc. Menswear division from 1991 to 1994. +9 +Table of Contents +Adam S. Helfant , Vice President, Global Sports Marketing — Mr. Helfant, 39, joined NIKE in +1995 in the Company’s legal department, and was appointed Director of Business Affairs for Global Sports Marketing in 1997, Director of Global Sports Marketing in 1998, Director of US Sports Marketing in 2001, Vice President of US Sports +Marketing in 2003, and corporate Vice President, Global Sports Marketing effective August 2004. Prior to joining NIKE, he was in private practice and an attorney for NHL Enterprises, Inc. +P. Eunan McLaughlin, Vice President, Europe, Middle East & Africa — Mr. McLaughlin, 46, joined NIKE as +Director of Sales, NIKE Europe in February 1999, and was appointed Vice President Commercial Sales and Retail in 2000, Vice President, Asia Pacific in 2001, and Vice President, Europe, Middle East & Africa in May 2004. Prior to joining NIKE, he +was Partner and Vice President of Consumer & Retail Practices Division, Korn/Ferry International from 1996 to 1999. From 1983 to 1996 Mr. McLaughlin held various positions with Mars, Inc. in Finance, Sales, Marketing and General Management. +D. Scott Olivet, Vice President, NIKE Subsidiaries and +New Business Development — Mr. Olivet, 42, joined NIKE in August 2001. Prior to joining NIKE, he was a Senior Vice President of Gap Inc., responsible for real estate, store design, and construction across Gap, Banana Republic, and Old Navy +brands from 1998 to 2001. Prior to that, Mr. Olivet was employed by Bain & Company, an international strategic consulting firm from 1984 to 1998 (a Partner from 1993 to 1998). In addition to direct client work, Mr. Olivet was the leader of the +firm’s worldwide practice in organizational effectiveness and change management. +Mark G. Parker, President of the NIKE Brand — Mr. Parker, 48, has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand +management. Mr. Parker was appointed divisional Vice President in charge of development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in March 2001. +Eric D. Sprunk, Vice President, Global Footwear — +Mr. Sprunk, 40, joined the Company in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director, NIKE Europe in 1995, Regional General Manager, NIKE Europe Footwear in 1998, and Vice President & +General Manager of the Americas in 2000. Mr. Sprunk was appointed corporate Vice President, Global Footwear in June 2001. +Lindsay D. Stewart, Vice President and Chief of Staff, and Secretary — Mr. Stewart, 57, joined NIKE as Assistant Corporate Counsel in 1981. +Mr. Stewart became Corporate Counsel in 1983. He was appointed Vice President and General Counsel in 1991, and Chief of Staff in March 2001. Prior to joining NIKE, Mr. Stewart was in private practice and an attorney for Georgia-Pacific Corporation. +Roland P. Wolfram, Vice President and General Manager, +Asia Pacific — Mr. Wolfram, 44, joined NIKE as Vice President, Strategic Planning in November 1998, and was appointed Vice President, Global Operations & Technology in 2002, and Vice President, Asia Pacific in April 2004. Prior to NIKE, Mr. +Wolfram was Vice President and General Manager at Pacific Bell Video Services. +10 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/item13.txt b/raw/filings/0000320187/2003/0001193125-04-128270/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8e7ab06a368e3c90ab73cb40eb9ccc2a3b8f87d1 --- /dev/null +++ b/raw/filings/0000320187/2003/0001193125-04-128270/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related Transactions +The information required by this Item is included under “Certain Transactions and Business Relationships” in the definitive Proxy Statement for +our 2004 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/item9a.txt b/raw/filings/0000320187/2003/0001193125-04-128270/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..c3162aff0f5ffc2b85d7b7227fb88c0536dac32b --- /dev/null +++ b/raw/filings/0000320187/2003/0001193125-04-128270/item9a.txt @@ -0,0 +1,15 @@ +Item 9A. Controls and Procedures +The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s +Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s +management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes +that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit +relationship of possible controls and procedures. +The Company +carries out a variety of on-going procedures, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the +design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were +effective at the reasonable assurance level as of May 31, 2004. +There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s +internal controls over financial reporting. +60 +Table of Contents +PART III \ No newline at end of file diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/rp_note.txt b/raw/filings/0000320187/2003/0001193125-04-128270/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2003/0001193125-04-128270/rpt_disclosure.txt b/raw/filings/0000320187/2003/0001193125-04-128270/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/filing.txt b/raw/filings/0000320187/2004/0000950124-05-004551/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..00e4b50c7acb0f6894014766eac37cb24798c89e --- /dev/null +++ b/raw/filings/0000320187/2004/0000950124-05-004551/filing.txt @@ -0,0 +1,6888 @@ +10-K +1 +v10583e10vk.htm +FORM 10-K +e10vk +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended May 31, 2005 +or +o +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. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +Oregon +93-0584541 +(State or other jurisdiction +of incorporation) +(IRS Employer +Identification No.) +One Bowerman Drive +Beaverton, Oregon 97005-6453 +(Address of principal executive offices) (Zip Code) +(503) 671-6453 +(Registrant’s Telephone Number, Including Area +Code) +Securities registered pursuant to Section 12(b) of the +Act: +(Title of Each Class) +(Name of Each Exchange on Which Registered) +Class B Common Stock +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the +Act: +None +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 (or for such shorter period that the Registrant +was required to file such reports), and (2) has been +subject to such filing requirements for the past +90 days. Yes þ No o +Indicate by check mark if disclosure of delinquent filers +pursuant to Item 405 of Regulation S-K (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. þ +Indicate by check mark whether the Registrant is an accelerated +filer (as defined in Rule 12b-2 of the Securities Exchange +Act of +1934. Yes þ No o +As of November 30, 2004, the aggregate market value of the +Registrant’s Class A Common Stock held by +nonaffiliates of the Registrant was $471,095,424 and the +aggregate market value of the Registrant’s Class B +Common Stock held by nonaffiliates of the Registrant was +$15,809,818,070. +As of July 25, 2005, the number of shares of the +Registrant’s Class A Common Stock outstanding was +65,676,484 and the number of shares of the Registrant’s +Class B Common Stock outstanding was 195,976,930. +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the annual +meeting of shareholders to be held on September 20, 2005 +are incorporated by reference into Part III of this Report. +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +2 +General +2 +Products +2 +Sales and Marketing +3 +United States Market +3 +International Markets +4 +Significant Customer +4 +Orders +5 +Product Research and Development +5 +Manufacturing +5 +International Operations and Trade +6 +Competition +8 +Trademarks and Patents +8 +Employees +8 +Executive Officers of the Registrant +8 +Item 2. +Properties +10 +Item 3. +Legal Proceedings +11 +Item 4. +Submission of Matters to a Vote of Security +Holders +11 +PART II +Item 5. +Market for Registrant’s Common Equity, +Related Stockholder Matters and Issuer Purchases of Equity +Securities +12 +Item 6. +Selected Financial Data +13 +Item 7. +Management’s Discussion and Analysis +of Financial Condition and Results of Operations +14 +Item 7A. +Quantitative and Qualitative Disclosures +about Market Risk +29 +Item 8. +Financial Statements and Supplemental +Data +33 +Item 9. +Changes in and Disagreements with +Accountants on Accounting and Financial Disclosure +64 +Item 9A. +Controls and Procedures +64 +Item 9B. +Other Information +64 +PART III +(Except for the information set forth under “Executive +Officers of the Registrant” in Item 1 above, +Part III is incorporated by reference from the Proxy +Statement for the NIKE, Inc. 2005 annual meeting of +shareholders.) +Item 10. +Directors and Executive Officers of the +Registrant +64 +Item 11. +Executive Compensation +64 +Item 12. +Security Ownership of Certain Beneficial +Owners and Management and Related Stockholder Matters +65 +Item 13. +Certain Relationships and Related +Transactions +65 +Item 14. +Principal Accountant Fees and Services +65 +PART IV +Item 15. +Exhibits and Financial Statement +Schedules +65 +Signatures +S-1 +EXHIBIT 12.1 +EXHIBIT 21 +EXHIBIT 31 +EXHIBIT 32 +1 +Table of Contents +PART I +Item 1. +Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state +of Oregon. As used in this report, the terms “we”, +“us”, “NIKE” and the “Company” +refer to NIKE, Inc. and its predecessors, subsidiaries and +affiliates, unless the context indicates otherwise. Our Internet +address is www.nike.com. On our NIKE Corporate web site, +located at www.nikebiz.com, we post the following filings +as soon as reasonably practicable after they are electronically +filed with or furnished to the Securities and Exchange +Commission: our annual report on Form 10-K, our quarterly +reports on Form 10-Q, our current reports on Form 8-K +and any amendments to those reports filed or furnished pursuant +to Section 13(a) or 15(d) of the Securities and Exchange +Act of 1934. All such filings on our NIKE Corporate web site are +available free of charge. Also available on the NIKE Corporate +web site are the charters of the committees of our board of +directors, as well as our corporate governance guidelines and +code of ethics; copies of any of these documents will be +provided in print to any shareholder who submits a request in +writing to NIKE Investor Relations, One Bowerman Drive, +Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and +worldwide marketing of high quality footwear, apparel, +equipment, and accessory products. NIKE is the largest seller of +athletic footwear and athletic apparel in the world. We sell our +products to retail accounts, through NIKE-owned retail stores, +and through a mix of independent distributors and licensees, in +over 160 countries around the world. Virtually all of our +products are manufactured by independent contractors. Virtually +all footwear and apparel products are produced outside the +United States, while equipment products are produced both in the +United States and abroad. +Products +NIKE’s athletic footwear products are designed primarily +for specific athletic use, although a large percentage of the +products are worn for casual or leisure purposes. We place +considerable emphasis on high quality construction and +innovation in products designed for men, women and children. +Running, cross-training, basketball, soccer, sport-inspired +urban shoes, and children’s shoes are currently our +top-selling product categories and we expect them to continue to +lead in product sales in the near future. We also market shoes +designed for tennis, golf, baseball, football, bicycling, +volleyball, wrestling, cheerleading, aquatic activities, hiking, +outdoor activities and other athletic and recreational uses. +We sell sports apparel covering most of the above categories, +sports inspired lifestyle apparel, as well as athletic bags and +accessory items. NIKE apparel and accessories are designed to +complement our athletic footwear products, feature the same +trademarks and are sold through the same marketing and +distribution channels. We often market footwear, apparel and +accessories in “collections” of similar design or for +specific purposes. We also market apparel with licensed college +and professional team and league logos. +We sell a line of performance equipment under the NIKE® +brand name, including golf clubs, sport balls, eyewear, +timepieces, electronic media devices, skates, bats, gloves, and +other equipment designed for sports activities. We also have +agreements for licensees to produce and sell NIKE brand +swimwear, cycling apparel, children’s clothing, school +supplies and eyewear. We also sell small amounts of various +plastic products to other manufacturers through our wholly-owned +subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary Converse Inc., headquartered in +North Andover, Massachusetts, designs and distributes athletic +and casual footwear, apparel and accessories under the +Converse®, Chuck Taylor®, All Star®, One +Star® and Jack Purcell® trademarks. +We sell a line of dress and casual footwear, apparel and +accessories for men and women under the brand names Cole +Haan®, g Series© and Bragano© through our +wholly-owned subsidiary, Cole Haan Holdings Incorporated, +headquartered in Yarmouth, Maine. +2 +Table of Contents +Our wholly-owned subsidiary Hurley International LLC, +headquartered in Costa Mesa, California, designs and distributes +a line of action sports apparel for surfing, skateboarding, and +snowboarding, and youth lifestyle apparel and footwear under the +Hurley® brand name. +Our wholly-owned subsidiary, Bauer NIKE Hockey Inc., +headquartered in Greenland, New Hampshire, manufactures and +distributes ice skates, skate blades, protective gear, hockey +sticks, licensed apparel and accessories under the Bauer® +and NIKE® brand names. Bauer also offers a full selection +of products for street and roller hockey. +In the fiscal quarter ended August 31, 2004 the Company +formed Exeter Brands Group LLC, a wholly-owned subsidiary of the +Company, to develop the Company’s athletic footwear and +apparel business in retail channels for value-conscious +consumers, and to market and license athletic footwear and +apparel under the Starter®, Shaq® and Asphalt® +brand names, which we purchased during that quarter. +Sales and Marketing +Financial information about geographic and segment operations +appears in Note 17 of the consolidated financial statements +on page 60. +We experience moderate fluctuations in aggregate sales volume +during the year. Historically, revenues in the first and fourth +fiscal quarters have slightly exceeded those in the second and +third quarters. However, the mix of product sales may vary +considerably from time to time as a result of changes in +seasonal and geographic demand for particular types of footwear, +apparel and equipment. +Because NIKE is a consumer products company, the relative +popularity of various sports and fitness activities and changing +design trends affect the demand for our products. We must +therefore respond to trends and shifts in consumer preferences +by adjusting the mix of existing product offerings, developing +new products, styles and categories, and influencing sports and +fitness preferences through aggressive marketing. This is a +continuing risk. Failure to respond in a timely and adequate +manner could have a material adverse effect on our sales and +profitability. +United States Market +In fiscal 2005, sales in the United States (including +U.S. sales of Bauer NIKE Hockey, Cole Haan, Converse, +Exeter Brands Group, Hurley and NIKE Golf) accounted for +approximately 46 percent of total revenues, compared to +47 percent in fiscal 2004 and 49 percent in fiscal +2003. We sell to approximately 22,000 retail accounts in the +United States. The NIKE brand domestic retail account base +includes a mix of footwear stores, sporting goods stores, +athletic specialty stores, department stores, skate, tennis and +golf shops, and other retail accounts. During fiscal year 2005, +our three largest customers accounted for approximately +31 percent of NIKE brand sales in the United States +excluding sales from NIKE Golf and Bauer NIKE Hockey, and +26 percent of total sales in the United States. +We make substantial use of our “futures” ordering +program, which allows retailers to order five to six months in +advance of delivery with the commitment that 90 percent of +their orders will be delivered within a set time period at a +fixed price. In fiscal year 2005, 91 percent of our +U.S. wholesale footwear shipments (excluding Bauer NIKE +Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley and +NIKE Golf) were made under the futures program, compared to +90 percent in fiscal 2004 and 91 percent in fiscal +2003. In fiscal 2005 and 2004, 71 percent of our +U.S. wholesale apparel shipments (excluding +U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan, +Converse, Exeter Brands Group, Hurley and NIKE Golf) were made +under the futures program, compared to 67 percent in 2004 +and 2003. +3 +Table of Contents +We utilize 22 NIKE sales offices to solicit sales in the United +States. We also utilize 9 independent sales representatives to +sell specialty products for golf and outdoor activities. In +addition, we sell NIKE brand products through our internet +website, www.niketown.com , and we operate the following +retail outlets in the United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily overstock and +closeout merchandise) +77 +NIKE stores (including NIKE Women Stores) +11 +NIKETOWNs (designed to showcase NIKE products) +12 +NIKE employee-only stores +4 +Cole Haan, Converse, and Hurley stores (including factory and +employee stores) +80 +Total +184 +NIKE’s domestic distribution centers for footwear are +located in Wilsonville, Oregon, and Memphis, Tennessee. Apparel +and equipment products are shipped from our Memphis, Tennessee, +Tigard, Oregon, and Foothill Ranch, California distribution +centers. Cole Haan and Bauer NIKE Hockey products are +distributed primarily from Greenland, New Hampshire, Converse +products are shipped from Ontario and Fontana, California, and +Hurley products are shipped from Costa Mesa, California. +International Markets +We sell our products to retail accounts, through NIKE-owned +retail stores, and through a mix of independent distributors and +licensees, in over 160 countries around the world. +Non-U.S. sales (including non-U.S. sales of Bauer NIKE +Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley and +NIKE Golf) accounted for 54 percent of total revenues in +fiscal 2005, compared to 53 percent in fiscal 2004 and +51 percent in fiscal 2003. We estimate that we sell to more +than 37,000 retail accounts outside the United States, excluding +sales by independent distributors and licensees. We operate 21 +distribution centers in Europe, Asia, Australia, Latin America, +Africa and Canada. In many countries and regions, including +Canada, Asia, some Latin American countries, and Europe, we have +a futures ordering program for retailers similar to the United +States futures program described above. NIKE’s three +largest customers outside of the U.S. accounted for +approximately 12 percent of non-U.S. sales. +We operate the following retail outlets outside the United +States: +Non-U.S. Retail Stores +Number +NIKE factory stores +129 +NIKE stores and employee-only stores +8 +NIKETOWNs +2 +Cole Haan stores (including factory and employee stores) +51 +Total +190 +International branch offices and subsidiaries of NIKE are +located in Argentina, Australia, Austria, Belgium, Brazil, +Bulgaria, Canada, Chile, Croatia, Czech Republic, Denmark, +Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, +India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Malaysia, +Mexico, New Zealand, The Netherlands, Norway, People’s +Republic of China, The Philippines, Poland, Portugal, Russia, +Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, +Sweden, Switzerland, Taiwan, Thailand, Turkey, the United +Kingdom and Vietnam. +Significant Customer +Foot Locker Inc., which operates a chain of retail stores +specializing in athletic footwear and apparel, accounted for +approximately 11 percent of global net sales of NIKE, Inc. +during fiscal 2005. No other customer accounted for +10 percent or more of our net sales during fiscal 2005. +4 +Table of Contents +Orders +Worldwide futures orders for NIKE brand athletic footwear and +apparel, scheduled for delivery from June through November 2005, +were $6.3 billion compared to $5.7 billion for the +same period last year. Based upon historical data, we expect +that approximately 95 percent of these orders will be +filled in that time period, although some orders may be +cancelled. Reported futures orders are not necessarily +indicative of our expectation of revenues for this period. This +is because the mix of orders can shift between advance/futures +and at-once orders. In addition, foreign currency exchange rate +fluctuations as well as differing levels of order cancellations +can cause differences in the comparisons between futures orders +and actual revenues. Moreover, a significant portion of our +revenue is not derived from futures orders, including wholesale +sales of equipment, U.S. licensed team apparel, Bauer NIKE +Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE +Golf, and retail sales across all brands. +Product Research and Development +We believe that our research and development efforts are a key +factor in our past and future success. Technical innovation in +the design of footwear, apparel, and athletic equipment receive +continued emphasis as NIKE strives to produce products that help +to reduce injury, aid athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas +of biomechanics, exercise physiology, engineering, industrial +design and related fields, we also utilize research committees +and advisory boards made up of athletes, coaches, trainers, +equipment managers, orthopedists, podiatrists and other experts +who consult with us and review designs, materials and concepts +for product improvement. Employee athletes and other athletes +wear-test and evaluate products during the design and +development process. +Manufacturing +Virtually all of our footwear is produced outside of the United +States. In fiscal 2005, contract suppliers in China, Vietnam, +Indonesia and Thailand manufactured 36 percent, +26 percent, 22 percent and 15 percent of total +NIKE brand footwear, respectively. We also have manufacturing +agreements with independent factories in Argentina, Brazil, +India, Italy, Mexico and South Africa to manufacture footwear +for sale primarily within those countries. Our largest single +footwear supplier accounted for approximately 7 percent of +total fiscal 2005 footwear production. +Almost all of NIKE brand apparel production for sale to the +United States market, and all of our apparel production for sale +to the international market, was manufactured outside of the +United States by independent contract manufacturers located in +38 countries. Most of this apparel production occurred in +Bangladesh, China, Honduras, India, Indonesia, Malaysia, Mexico, +Pakistan, Sri Lanka, Taiwan, Thailand, Turkey and Vietnam. Our +largest single apparel supplier accounted for approximately +5 percent of total fiscal 2005 apparel production. +The principal materials used in our footwear products are +natural and synthetic rubber, plastic compounds, foam cushioning +materials, nylon, leather, canvas and polyurethane films used to +make AIR-SOLE cushioning components. NIKE IHM, Inc., a +wholly-owned subsidiary of NIKE, is our sole supplier of the +AIR-SOLE cushioning components used in footwear. The principal +materials used in our apparel products are natural and synthetic +fabrics and threads, plastic and metal hardware, and specialized +performance fabrics designed to repel rain, retain heat, or +efficiently transport body moisture. NIKE and its contractors +and suppliers buy raw materials in bulk. Most raw materials are +available in the countries where manufacturing takes place. We +have thus far experienced little difficulty in satisfying our +raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz +America”) and its predecessor, Nissho Iwai American +Corporation, a subsidiary of Nissho Iwai Corporation, a large +Japanese trading company, have performed significant +import-export financing services for us. During fiscal 2005, +Sojitz America provided such financing services for nearly all +of the NIKE brand products sold outside of the United States, +Europe, Middle East, Africa and Japan, excluding products +produced and sold in the same country. However, less +5 +Table of Contents +than 11 percent of NIKE brand products, excluding products +produced and sold in the same country, were sold outside of the +United States, Europe, Middle East, Africa and Japan in fiscal +2005. Any failure of Sojitz America to provide these services or +any failure of Sojitz America’s banks could disrupt our +ability to acquire products from our suppliers and to deliver +products to our customers outside of the United States, Europe, +Middle East, Africa and Japan. Such a disruption could result in +cancelled orders that would adversely affect sales and +profitability. However, we believe that any such disruption +would be short term in duration due to the ready availability of +alternative sources of financing at competitive rates. Our +current agreements with Sojitz America expire on May 31, +2008. +International Operations and Trade +Our international operations and sources of supply are subject +to the usual risks of doing business abroad, such as possible +revaluation of currencies, export duties, anti-dumping duties, +quotas, safeguard measures, trade restrictions, restrictions on +the transfer of funds and, in certain parts of the world, +political instability and terrorism. We have not, to date, been +materially affected by any such risk, but cannot predict the +likelihood of such developments occurring. We believe that we +have the ability to develop, over a period of time, adequate +alternative sources of supply for the products obtained from our +present suppliers outside of the United States. If events +prevented us from acquiring products from our suppliers in a +particular country, our operations could be temporarily +disrupted and we could experience an adverse financial impact. +However, we believe that we could abate any such disruption +within a period of no more than 12 months, and that much of +the adverse impact on supply would, therefore, be of a +short-term nature. We believe that our principal competitors are +subject to similar risks. +As a result of the Trade Act of 2003, the United States +implemented significant new Federal requirements for cargo +security, focused on imports of containerized cargo. We are a +significant importer of containerized cargo. Accordingly, we +participate actively in appropriate governmental programs, such +as the Customs Trade Partnership Against Terrorism +(“C-TPAT”), to reduce risks of possible supply +disruptions caused by U.S. and international cargo security +mandates and terrorism. +All of our products manufactured overseas and imported into the +United States, the European Union and other countries are +subject to customs duties collected by customs authorities. +Customs information submitted by us is routinely subject to +review by customs authorities. We are unable to predict whether +additional customs duties, anti-dumping duties, quotas, +safeguard measures, or other trade restrictions may be imposed +on the importation of our products in the future. Such actions +could result in increases in the cost of our products generally +and might adversely affect the sales or profitability of NIKE +and the imported footwear and apparel industry as a whole. +Accordingly, we are actively monitoring the developments +described below. +Footwear Imports into the European Union +From 1994 through January 1, 2005, the European Union +(“EU”) imposed limits (or “quotas”) on the +import of certain types of footwear manufactured in China. +Footwear designed for use in sporting activities, meeting +certain technical criteria and having a CIF (cost, insurance and +freight) price above 9 euros (“Special Technology Athletic +Footwear” or “STAF”), was excluded from the +quotas. As a result of the STAF exclusion, and the amount of +quota made available to us, the quotas did not have a material +effect on our business. However, as part of China’s 2001 +accession to the World Trade Organization (“WTO”), +China entered into an agreement with the EU and other WTO +members to abide by a special safeguard arrangement whereby +quotas could be imposed on any product sourced in China, +including footwear, if there was a surge in imports from China +into another WTO country, and after a legal proceeding it was +determined that such imports were injuring a domestic producer. +Additionally, under longstanding WTO rules, all WTO member +countries reserved the right to impose (1) safeguard +measures (temporary quotas) if it can be demonstrated in a legal +proceeding that increased imports are injuring another WTO +member’s domestic industry; and (2) anti-dumping +measures if it can be demonstrated in a legal proceeding that +imports are being sold at an unfair low price in another WTO +member’s home market, and those imports were causing or +threatening to cause material injury to the domestic industry. +6 +Table of Contents +Accordingly, with the phase-out of the quotas at the beginning +of 2005, and the expiration of a separate EU anti-dumping case +in 2003 against footwear made in China, Indonesia, and Thailand, +there has been renewed pressure from some parts of the EU +footwear manufacturing sector to re-impose some level of trade +protection on imported footwear from China, India, Vietnam, and +other exporting countries. In mid-2005 the European Commission, +at the request of the European domestic footwear industry, +initiated investigations into leather footwear imported from +China and Vietnam. NIKE and all other major athletic footwear +manufacturers are currently participating actively as +respondents in this investigation and are taking the position +that athletic footwear (i) should not be within the product +scope of this investigation and (ii) does not meet the +legal requirements of injury and price in an anti-dumping +investigation. We believe that our major competitors stand in +much the same position of risk regarding these potential trade +measures. +Expiration of the Textile and Apparel Multi-Fiber +Arrangement +Under the WTO, the Multi-Fiber Arrangement, a four-decade old +agreement that allows WTO countries to impose quotas on the +import of textile and apparel products, expired on +January 1, 2005. This effectively meant that absent some +other form of trade restrictions (see China discussion below) +all trade of textile and apparel products between WTO members is +free from quotas as of the end of the 2004 calendar year. +Elimination of textile and apparel quotas is significant for +NIKE and other textile and apparel companies as it provides +these companies greater flexibility in their global sourcing +decisions. At the same time, we are monitoring closely actions +by textile and apparel importing countries to ensure that they +do not unilaterally attempt to re-impose restrictions through +some other legal mechanism, such as safeguards, anti-dumping +measures, or in the case of China (as part of the agreement +reached in China’s 2001 WTO accession), through the +short-term re-imposition of quotas on certain categories of +textile and apparel products in order to protect a domestic +market from rising Chinese imports. +We are currently monitoring potential restrictions by the United +States and the European Union. In early 2005 the EU began +consultations with China over imposition of quotas. However, as +a result of those negotiations, in June of 2005, the EU and +China reached an agreement which voluntarily limits the amount +of apparel product China can export to the EU in particular +categories until January 1, 2008. NIKE monitored these +negotiations closely, adjusted its sourcing and distribution +strategy, and as a result, the agreement has not had a material +effect on our business. +In early 2005 the United States launched provisional safeguard +measures on several categories of apparel products from China. +In May of 2005, the U.S. found that imports from China of +certain apparel categories were causing market disruption to the +U.S. industry and the United States reimposed quota on +certain apparel categories. NIKE monitored these negotiations +closely, adjusted its sourcing and distribution strategy, and as +a result, the actions have not had a material effect on our +business. We believe that our principal competitors face the +same risks regarding these trade measures. +Vietnam Imports into the United States +We currently source a portion of our footwear and apparel +products from factories in Vietnam. In 2001, the United States +Congress and the Vietnamese National Assembly approved a +comprehensive bilateral trade agreement, which, among other +things, provides reciprocal, non-discriminatory Normal Trade +Relations (“NTR”) between the U.S. and Vietnam. +Following that approval, the U.S. granted an annual +extension of NTR to Vietnam. The U.S. President must renew +this grant annually with the opportunity for review by Congress. +In June 2005, President Bush renewed NTR for Vietnam for an +additional year and we anticipate Congress will support this +decision, as it has done for the past four years. We currently +believe that, absent unforeseen circumstances, the President +will continue his annual extensions of NTR to Vietnam and that +Congress will support the President’s decisions. The annual +extensions on NTR will remain in place until Vietnam enters the +WTO, at which time the U.S. must grant Vietnam permanent +NTR. Vietnam’s WTO accession negotiations are ongoing, and +may conclude as early as the end of 2005. Ongoing NTR trading +status for Vietnam will allow us to expand our production and +marketing opportunities in Vietnam and allow for +Vietnamese-sourced product to continue to enter the United +States at NTR tariff rates. +7 +Table of Contents +Competition +The athletic footwear, apparel and equipment industry is keenly +competitive in the United States and on a worldwide basis. We +compete internationally with an increasing number of athletic +and leisure shoe companies, athletic and leisure apparel +companies, sports equipment companies, and large companies +having diversified lines of athletic and leisure shoes, apparel +and equipment, including Reebok, Adidas and others. The intense +competition and the rapid changes in technology and consumer +preferences in the markets for athletic and leisure footwear and +apparel, and athletic equipment, constitute significant risk +factors in our operations. +NIKE is the largest seller of athletic footwear and athletic +apparel in the world. Performance and reliability of shoes, +apparel, and equipment, new product development, price, product +identity through marketing and promotion, and customer support +and service are important aspects of competition in the athletic +footwear, apparel and equipment industry. To help market our +products, we contract with prominent and influential athletes, +coaches, teams, colleges and sports leagues to endorse our +brands and use our products, and we actively sponsor sporting +events and clinics. We believe that we are competitive in all of +these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe +that having distinctive marks that are readily identifiable is +an important factor in creating a market for our goods, in +identifying the Company, and in distinguishing our goods from +the goods of others. We consider our NIKE® and Swoosh +Design® trademarks to be among our most valuable assets and +we have registered these trademarks in over 100 countries. +In addition, we own many other trademarks that we utilize in +marketing our products. We continue to vigorously protect our +trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell +footwear using patented “Air” technology. The process +utilizes pressurized gas encapsulated in polyurethane. Some of +the early NIKE AIR® patents have expired, which may enable +competitors to use certain types of similar technology. +Subsequent NIKE AIR patents will not expire for several years. +We also have hundreds of U.S. and foreign patents covering +components, features, and designs used in various athletic and +leisure shoes, apparel and equipment. These patents expire at +various times, and have a remaining duration of from now to at +least 2025, although the duration of patents varies by country. +We believe that our success depends primarily upon skills in +design, research and development, production and marketing +rather than upon our patent position. However, we have followed +a policy of filing applications for United States and foreign +patents on inventions, designs and improvements that we deem +valuable. +Employees +We had approximately 26,000 employees at May 31, 2005. +Management considers its relationship with employees to be +excellent. None of our employees is represented by a union, with +the exception of Bauer NIKE Hockey Inc. Of Bauer NIKE +Hockey’s employees, approximately 33 percent, or +approximately 157, are covered by two union collective +bargaining agreements with two separate bargaining units. The +collective bargaining agreements expire on various dates from +2005 through 2007. There has never been a material interruption +of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE as of July 25, 2005 are as +follows: +Philip H. Knight, Chairman of the Board — +Mr. Knight, 67, a director since 1968, is a co-founder of +NIKE and, except for the period from June 1983 through September +1984, served as its President from 1968 to 1990, and from June +2000 to December 2004. Prior to 1968, Mr. Knight was a +certified public accountant with Price Waterhouse and +Coopers & Lybrand and was an Assistant Professor of +Business Administration at Portland State University. +8 +Table of Contents +William D. Perez, Chief Executive Officer and +President — Mr. Perez, 57, joined NIKE in +December 2004 as CEO and President. Immediately prior to joining +NIKE, he was President and Chief Executive Officer of S. C. +Johnson & Son, Inc., a household consumer products +company in Racine, Wisconsin, a position he held since 1997. +Mr. Perez joined S. C. Johnson & Son, Inc. in +1970, where he held a number of senior positions in marketing, +regional management, and global management, becoming President +and Chief Operating Officer of Worldwide Consumer Products in +1993. Mr. Perez is also a director of Kellogg Company, +where he serves on the Audit Committee and the Consumer +Marketing Committee. +Donald W. Blair, Vice President and Chief Financial +Officer — Mr. Blair, 47, joined NIKE in November +1999. Prior to joining NIKE, he held a number of financial +management positions with Pepsico, Inc., including Vice +President, Finance of Pepsi-Cola Asia, Vice President, Planning +of PepsiCo’s Pizza Hut Division, and Senior Vice President, +Finance of The Pepsi Bottling Group, Inc. Prior to joining +Pepsico, Mr. Blair was a certified public accountant with +Deloitte, Haskins, and Sells. +Thomas E. Clarke, President of New Ventures — +Dr. Clarke, 54, a director from 1994 to 2004, joined NIKE +in 1980. He was appointed divisional Vice President in charge of +marketing in 1987, elected corporate Vice President in 1989, +appointed General Manager in 1990, and served as President and +Chief Operating Officer from 1994 to 2000. Dr. Clarke +previously held various positions with the Company, primarily in +research, design, development and marketing. Dr. Clarke +holds a doctorate degree in biomechanics. +Wesley A. Coleman, Vice President, Global Human +Resources — Mr. Coleman, 55, has been employed by +NIKE since 2002 in his current role. Prior to joining NIKE, he +held a number of Human Resource positions over a 20-year period +with S. C. Johnson & Son, Inc., including Vice +President HR, North America and Vice President HR, Asia/ Pacific. +Charles D. Denson, President of the NIKE +Brand — Mr. Denson, 49, has been employed by NIKE +since 1979. Mr. Denson held several positions within the +Company, including his appointments as Director of USA Apparel +Sales in 1994, divisional Vice President, US Sales in 1994, +divisional Vice President European Sales in 1997, divisional +Vice President and General Manager, NIKE Europe in 1998, Vice +President and General Manager of NIKE USA in 2000, and President +of the NIKE Brand in 2001. +Gary M. DeStefano, President of USA +Operations — Mr. DeStefano, 48, has been employed +by NIKE since 1982, with primary responsibilities in sales and +regional administration. Mr. DeStefano was appointed +Director of Domestic Sales in 1990, divisional Vice President in +charge of domestic sales in 1992, Vice President of Global Sales +in 1996, Vice President and General Manager of Asia Pacific in +1997, and President of USA Operations in 2001. +Trevor Edwards, Vice President, Global Brand +Management — Mr. Edwards, 42, joined NIKE in +1992. He was appointed Marketing Manager, Strategic Accounts, +Foot Locker in 1993, Director of Marketing, the Americas in +1995, Director of Marketing, Europe in 1997, Vice President, +Marketing for Europe, Middle East and Africa in 1999, and Vice +President, US Brand Marketing in 2000. Mr. Edwards was +appointed corporate Vice President, Global Brand Management in +2002. +Mindy F. Grossman, Vice President of Global +Apparel — Ms. Grossman, 47, joined NIKE in 2000. +Prior to joining NIKE, she was President and Chief Executive +Officer of Polo Jeans Company/ Ralph Lauren, a division of Jones +Apparel Group, Inc. from 1995 to 2000. Prior to that, +Ms. Grossman was Vice President of New Business Development +at Polo Ralph Lauren Corp. from 1994 to 1995, President of The +Warnaco Group Inc. Chaps Ralph Lauren division, and Senior Vice +President of The Warnaco Group Inc. Menswear division from 1991 +to 1994. +Adam S. Helfant, Vice President, Global Sports +Marketing — Mr. Helfant, 40, joined NIKE in 1995 +in the Company’s legal department, and was appointed +Director of Business Affairs for Global Sports Marketing in +1997, Director of Global Sports Marketing in 1998, Director of +US Sports Marketing in 2001, Vice President of US Sports +Marketing in 2003, and corporate Vice President, Global Sports +Marketing in August 2004. Prior to joining NIKE, he was in +private practice and an attorney for NHL Enterprises, Inc. +9 +Table of Contents +P. Eunan McLaughlin, Vice President, Europe, Middle +East & Africa — Mr. McLaughlin, 47, joined +NIKE as Director of Sales, NIKE Europe in 1999, and was +appointed Vice President Commercial Sales and Retail in 2000, +Vice President, Asia Pacific in 2001, and Vice President, +Europe, Middle East & Africa in May 2004. Prior to +joining NIKE, he was Partner and Vice President of +Consumer & Retail Practices Division, Korn/ Ferry +International from 1996 to 1999. From 1983 to 1996 +Mr. McLaughlin held various positions with Mars, Inc. in +finance, sales, marketing and general management. +D. Scott Olivet, Vice President, NIKE Subsidiaries +and New Business Development — Mr. Olivet, 43, +joined NIKE in 2001. Prior to joining NIKE, he was a Senior Vice +President of Gap Inc., responsible for real estate, store +design, and construction across Gap, Banana Republic, and Old +Navy brands from 1998 to 2001. Prior to that, Mr. Olivet +was employed by Bain & Company, an international +strategic consulting firm from 1984 to 1998 (a Partner from 1993 +to 1998). +Mark G. Parker, President of the NIKE Brand — +Mr. Parker, 49, has been employed by NIKE since 1979 with +primary responsibilities in product research, design and +development, marketing, and brand management. Mr. Parker +was appointed divisional Vice President in charge of development +in 1987, corporate Vice President in 1989, General Manager in +1993, Vice President of Global Footwear in 1998, and President +of the NIKE Brand in 2001. +Eric D. Sprunk, Vice President, Global +Footwear — Mr. Sprunk, 41, joined NIKE in 1993. +He was appointed Finance Director and General Manager of the +Americas in 1994, Finance Director, NIKE Europe in 1995, +Regional General Manager, NIKE Europe Footwear in 1998, and Vice +President & General Manager of the Americas in 2000. +Mr. Sprunk was appointed corporate Vice President, Global +Footwear in 2001. Prior to joining NIKE, Mr. Sprunk was a +certified public accountant with Pricewaterhouse from 1987 to +1993. +Lindsay D. Stewart, Vice President and Chief of Staff, +and Secretary — Mr. Stewart, 58, joined NIKE as +Assistant Corporate Counsel in 1981. Mr. Stewart became +Corporate Counsel in 1983. He was appointed Vice President and +General Counsel in 1991, and Chief of Staff in 2001. Prior to +joining NIKE, Mr. Stewart was in private practice and an +attorney for Georgia-Pacific Corporation. +Roland P. Wolfram, Vice President and General Manager, +Asia Pacific — Mr. Wolfram, 45, joined NIKE as Vice +President, Strategic Planning in 1998, and was appointed Vice +President, Global Operations & Technology in 2002, and +Corporate Vice President, Asia Pacific in April 2004. Prior to +NIKE, Mr. Wolfram was Vice President and General Manager at +Pacific Bell Video Services. +Item 2. +Properties +Following is a summary of principal properties owned or leased +by NIKE. +The NIKE World Campus, owned by NIKE and located in Beaverton, +Oregon, USA, is a 176 acre facility of 16 buildings which +functions as our world headquarters and is occupied by almost +6,000 employees engaged in management, research, design, +development, marketing, finance, and other administrative +functions from nearly all divisions of the Company. We also +lease various office facilities in the surrounding metropolitan +area. We lease a similar, but smaller, administrative facility +in Hilversum, The Netherlands, which serves as the headquarters +for the Europe, Middle East and Africa Region. +There are three significant distribution and customer service +facilities for NIKE brand products in the United States. Two of +them are located in Memphis, Tennessee, one of which is leased, +and one is located in Wilsonville, Oregon, which is owned by us. +Cole Haan and Bauer NIKE Hockey also operate a distribution +facility in Greenland, New Hampshire, which is owned by us. +Smaller leased distribution facilities for other brands and +subsidiaries are located in various parts of the country. We +also own or lease distribution and customer service facilities +in many parts of the world, the most significant of which are +the Japan distribution facility located in Tomisatomachi, Japan, +and the Europe distribution facility located in Laakdal, +Belgium, both of which we own. +10 +Table of Contents +We manufacture NIKE AIR-SOLE cushioning materials and components +at NIKE IHM, Inc. manufacturing facilities located in Beaverton, +Oregon and St. Charles, Missouri, which are owned by us. +Aside from the principal properties described above, we lease +approximately 21 production offices outside the United States, +approximately 100 sales offices and showrooms worldwide, and +approximately 75 administrative offices worldwide. We lease +approximately 377 retail stores worldwide, which consist +primarily of factory outlet stores. See “United States +Market” and “International Markets” on +pages 3 and 4 of this report. Our leases expire at +various dates through the year 2034. +Item 3. +Legal Proceedings +There are no material pending legal proceedings, other than +ordinary routine litigation incidental to our business, to which +we are a party or of which any of our property is the subject. +Item 4. +Submission of Matters to a Vote of Security Holders +No matter was submitted during the fourth quarter of the 2005 +fiscal year to a vote of security holders, through the +solicitation of proxies or otherwise. +11 +Table of Contents +PART II +Item 5. +Market for Registrant’s Common Equity, Related +Stockholder Matters and Issuer Purchases of Equity +Securities +NIKE’s Class B Common Stock is listed on the New York +Stock Exchange and trades under the symbol NKE. At July 25, +2005, there were 19,054 holders of record of our Class B +Common Stock and 20 holders of record of our Class A Common +Stock. These figures do not include beneficial owners who hold +shares in nominee name. The Class A Common Stock is not +publicly traded but each share is convertible upon request of +the holder into one share of Class B Common Stock. +We refer to the table entitled “Selected Quarterly +Financial Data” in Item 6, which lists, for the +periods indicated, the range of high and low closing sales +prices on the New York Stock Exchange. That table also describes +the amount and frequency of all cash dividends declared on our +common stock for the 2005 and 2004 fiscal years. +The following table presents a summary of share repurchases made +by NIKE during the quarter ended May 31, 2005 under the +four-year $1.5 billion share repurchase program authorized +by our Board of Directors and announced in June 2004. +Total Number of Shares +Maximum Dollar Value +Average Price +Purchased as Part of +of Shares that May Yet +Total Number of +Paid per +Publicly Announced +Be Purchased Under +Period +Shares Purchased +Share +Plans or Programs +the Plans or Programs +(In millions) +March 1 – March 31, 2005 +1,128,700 +$ +85.48 +1,128,700 +$ +1,000.0 +April 1 – April 30, 2005 +448,500 +$ +77.36 +448,500 +965.3 +May 1 – May 31, 2005 +276,300 +$ +77.70 +276,300 +943.8 +Total +1,853,500 +$ +82.36 +1,853,500 +12 +Table of Contents +Item 6. +Selected Financial Data +Financial History +2005 +2004 +2003 +2002 +2001 +(In millions, except per share data and financial ratios) +Year Ended May 31, +Revenues +$ +13,739.7 +$ +12,253.1 +$ +10,697.0 +$ +9,893.0 +$ +9,488.8 +Gross margin +6,115.4 +5,251.7 +4,383.4 +3,888.3 +3,703.9 +Gross margin % +44.5 +% +42.9 +% +41.0 +% +39.3 +% +39.0 +% +Restructuring charge, net +— +— +— +— +0.1 +Income before cumulative effect of accounting change +1,211.6 +945.6 +740.1 +668.3 +589.7 +Cumulative effect of accounting change +— +— +266.1 +5.0 +— +Net income +1,211.6 +945.6 +474.0 +663.3 +589.7 +Basic earnings per common share: +Income before accounting change +4.61 +3.59 +2.80 +2.50 +2.18 +Cumulative effect of change in accounting principle +— +— +1.01 +0.02 +— +Net income +4.61 +3.59 +1.79 +2.48 +2.18 +Diluted earnings per common share: +Income before accounting change +4.48 +3.51 +2.77 +2.46 +2.16 +Cumulative effect of change in accounting principle +— +— +1.00 +0.02 +— +Net income +4.48 +3.51 +1.77 +2.44 +2.16 +Average common shares outstanding +262.6 +263.2 +264.5 +267.7 +270.0 +Diluted average common shares outstanding +270.3 +269.7 +267.6 +272.2 +273.3 +Cash dividends declared per common share +0.95 +0.74 +0.54 +0.48 +0.48 +Cash flow from operations +1,570.7 +1,518.5 +922.0 +1,082.2 +656.5 +Price range of common stock +High +92.43 +78.56 +57.85 +63.99 +59.438 +Low +68.61 +49.60 +38.53 +40.81 +35.188 +At May 31, +Cash and equivalents +$ +1,388.1 +$ +828.0 +$ +634.0 +$ +575.5 +$ +304.0 +Short-term investments +436.6 +400.8 +— +— +— +Inventories +1,811.1 +1,650.2 +1,514.9 +1,373.8 +1,424.1 +Working capital +4,351.9 +3,498.1 +2,766.5 +2,321.5 +1,838.6 +Total assets +8,793.6 +7,908.7 +6,821.1 +6,440.0 +5,819.6 +Long-term debt +687.3 +682.4 +551.6 +625.9 +435.9 +Redeemable Preferred Stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +5,644.2 +4,781.7 +3,990.7 +3,839.0 +3,494.5 +Year-end stock price +82.20 +71.15 +55.99 +53.75 +41.100 +Market capitalization +21,462.3 +18,724.2 +14,758.8 +14,302.5 +11,039.5 +Financial Ratios: +Return on equity +23.2 +% +21.6 +% +18.9 +% +18.2 +% +17.8 +% +Return on assets +14.5 +% +12.8 +% +11.2 +% +10.9 +% +10.1 +% +Inventory turns +4.4 +4.4 +4.4 +4.3 +4.0 +Current ratio at May 31 +3.2 +2.7 +2.4 +2.3 +2.0 +Price/ Earnings ratio at May 31 (Diluted before accounting +change) +18.3 +20.3 +20.2 +21.8 +19.0 +13 +Table of Contents +The Company’s Class B Common Stock is listed on the +New York Stock Exchange and trades under the symbol NKE. At +May 31, 2005, there were approximately +200,300 shareholders of Class A and Class B +common stock, including beneficial owners who hold shares in +nominee name. +Selected Quarterly Financial Data +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2005 +2004 +2005 +2004 +2005 +2004 +2005 +2004 +(Unaudited) +(In millions, except per share data and financial ratios) +Revenues +$ +3,561.8 +$ +3,024.9 +$ +3,148.3 +$ +2,837.1 +$ +3,308.2 +$ +2,904.0 +$ +3,721.4 +$ +3,487.1 +Gross margin +1,585.8 +1,301.5 +1,388.1 +1,199.6 +1,458.8 +1,221.9 +1,682.7 +1,528.7 +Gross margin % +44.5 +% +43.0 +% +44.1 +% +42.3 +% +44.1 +% +42.1 +% +45.2 +% +43.8 +% +Net income +326.8 +261.2 +261.9 +179.1 +273.4 +200.3 +349.5 +305.0 +Basic earnings per common share +1.24 +0.99 +0.99 +0.68 +1.04 +0.76 +1.34 +1.16 +Diluted earnings per common share +1.21 +0.98 +0.97 +0.66 +1.01 +0.74 +1.30 +1.13 +Average common shares outstanding +262.7 +262.9 +263.3 +263.3 +263.3 +263.5 +261.1 +263.2 +Diluted average common shares outstanding +269.8 +267.2 +271.1 +269.5 +271.7 +271.1 +268.5 +270.8 +Cash dividends declared per common share +0.20 +0.14 +0.25 +0.20 +0.25 +0.20 +0.25 +0.20 +Price range of common stock +High +77.34 +57.50 +87.80 +67.48 +92.43 +74.60 +88.52 +78.56 +Low +68.61 +49.60 +74.52 +55.07 +82.60 +63.22 +75.10 +65.81 +Item 7. +Management’s Discussion and Analysis of Financial +Condition and Results of Operations +Overview +NIKE designs, develops and markets high quality footwear, +apparel, equipment and accessory products worldwide. We are the +largest seller of athletic footwear and athletic apparel in the +world and sell our products primarily through a combination of +retail accounts, NIKE-owned retail stores, independent +distributors and licensees, in the United States and over 160 +countries worldwide. Our goal is to deliver value to our +shareholders by building a profitable portfolio of global +footwear, apparel, equipment and accessories brands. Our +strategy for building this portfolio is focused in four key +areas: +• +Deepening our relationship with consumers; +• +Delivering superior, innovative products to the marketplace; +• +Making our supply chain a competitive advantage, through +operational discipline and excellence; and +• +Accelerating growth through focused execution. +By executing this strategy, we aim to deliver the following +long-term financial goals: +• +High single digit revenue growth; +• +Mid-teens earnings per share growth; +• +Increased return on invested capital and accelerated cash +flows; and +• +Consistent results through effective management of our +diversified portfolio of businesses. +14 +Table of Contents +In fiscal 2005 we met or surpassed these financial goals. Our +revenues grew 12% to $13.7 billion, net income grew 28% to +$1.2 billion, and we delivered diluted earnings per share +of $4.48, a 28% increase versus fiscal 2004. The impact of +foreign currency changes has had a favorable impact on this +year’s consolidated results of operations, primarily as a +contributor to the growth in our gross margin percentage. For +fiscal 2005, our consolidated gross margin percentage increased +160 basis points to 44.5%. Additionally, we have improved +our return on invested capital, increased free cash flow from +operations and continued to return cash to shareholders through +dividends and share repurchases. Although in any particular +quarter or fiscal year we may not meet all of the financial +goals outlined above, we continue to believe these are +appropriate long-term goals. +Results of Operations +2005 +2004 +% Change +2003 +% Change +Revenues +$ +13,739.7 +$ +12,253.1 +12% +$ +10,697.0 +15% +Cost of sales +7,624.3 +7,001.4 +9% +6,313.6 +11% +Gross margin +6,115.4 +5,251.7 +16% +4,383.4 +20% +Gross margin % +44.5 +% +42.9 +% +41.0 +% +Selling and administrative +4,221.7 +3,702.0 +14% +3,154.1 +17% +% of Revenues +30.7 +% +30.2 +% +29.5 +% +Income before income taxes and cumulative effect of accounting +change +1,859.8 +1,450.0 +28% +1,123.0 +29% +Income before cumulative effect of accounting change +1,211.6 +945.6 +28% +740.1 +28% +Net income +1,211.6 +945.6 +28% +474.0 +99% +Diluted earnings per share — before accounting change +4.48 +3.51 +28% +2.77 +27% +Diluted earnings per share +4.48 +3.51 +28% +1.77 +98% +Fiscal 2005 Compared to Fiscal 2004 +Consolidated Operating Results +In fiscal 2005, consolidated revenues grew 12% versus fiscal +2004; three percentage points of this growth is attributed to +changes in currency exchange rates, primarily the stronger euro. +Excluding the impact of changes in foreign currency, revenue +growth in our international regions contributed +4 percentage points to the consolidated revenue growth, as +all three of our international regions posted higher revenues. +The U.S. Region contributed 3 percentage points of the +consolidated revenue growth for fiscal 2005. Sales in our Other +businesses operating segment drove the remainder of the +improvement of consolidated revenue growth for fiscal 2005. +Converse, a component of the Other businesses, was acquired at +the beginning of the second quarter of fiscal 2004. The +comparison of a full year of results in fiscal 2005 versus a +partial year in fiscal 2004 contributed 1 percentage point +to the consolidated revenue growth. See the accompanying +Notes to Consolidated Financial Statements +(Note 15 — Acquisitions) for additional +information related to the acquisition . +During fiscal 2005, our consolidated gross margin percentage +improved 160 basis points versus the prior year, from 42.9% +to 44.5%. The primary factors contributing to the improved gross +margin percentage for fiscal 2005 were as follows: +(1) +Higher gross margins in our international regions, driven +primarily by our Europe, Middle East and Africa (EMEA) Region, +accounted for 90 basis points of the overall margin +improvement in fiscal 2005. This improvement was driven by +changes in currency hedge rates, primarily the euro, partially +offset by lower in-line pricing margins (net revenue for current +product offerings minus product costs) and a higher percentage +of less profitable closeout sales (non-current +15 +Table of Contents +product offerings), the result of higher footwear and apparel +closeout inventories in our EMEA and Asia Pacific regions (as +discussed below): +(a) +Year-over-year hedge rate improvements contributed approximately +170 basis points to the fiscal 2005 consolidated gross +margin percentage improvement. +We have hedged the majority of product purchases for fiscal 2006 +and a significant portion of those are at more favorable rates +than product purchases in fiscal 2005. Based on these hedge +rates, we expect hedge rates to have a positive impact on our +gross margin percentage during fiscal 2006 as compared to fiscal +2005, with the greater impact occurring during the first half of +the year. See the accompanying Notes to Consolidated +Financial Statements (Note 16 — Risk Management +and Derivatives) for additional information on hedges. +(b) +Lower in-line pricing margins in EMEA and Asia Pacific were due +to strategies to improve product value in these regions. In +addition, increased levels of closeout sales and lower closeout +pricing, the result of the liquidation of higher footwear and +apparel closeout inventories this year, reduced the overall +gross margin percentage improvement in those regions. Together, +these factors resulted in a reduction in the consolidated gross +margin percentage of about 60 basis points for fiscal 2005. +(2) +Higher gross margins in the U.S. Region contributed +approximately 30 basis points to the improvement in the +consolidated gross margin percentage for fiscal 2005. Fewer, +more profitable closeouts in footwear drove the improvement +partially offset by increased sales discounts (the result of +increased sales to high volume accounts) and higher product +costs and air freight incurred to meet strong footwear demand. +(3) +Improved gross margin percentages in our Other businesses +represented 30 basis points of improvement for fiscal 2005. +The addition of Converse (acquired in the second quarter of +fiscal 2004) and Exeter Brands Group (formed in the first +quarter of fiscal 2005) drove the gross margin percentage +improvement. Both Exeter Brands Group and the international +portion of Converse’s business operate on a licensing +model, which carries higher gross margins and lower operating +expenses than the remainder of our Other businesses. +Fiscal 2005 selling and administrative expense, comprised of +demand creation and operating overhead, grew 14% versus fiscal +2004. Three percentage points of the increase for fiscal 2005 +were due to changes in currency exchange rates. The impact of a +full fiscal year for Converse and the formation of Exeter Brands +Group added one percentage point of growth. +Demand creation (advertising and promotion) expense grew 16% to +$1,600.7 million in fiscal 2005. Three percentage points of +the increase in demand creation were due to changes in currency +exchange rates. Excluding the impact of changes in foreign +currency rates, the increase in demand creation spending for the +fiscal year was attributable to higher spending on sports +marketing endorsement contracts and events primarily in the +U.S., EMEA and Asia Pacific regions (5 percentage points), +higher advertising spending primarily in the EMEA Region +(3 percentage points), and incremental investment in retail +marketing in the U.S., EMEA and Asia Pacific regions +(2 percentage points). The addition of Converse and +formation of Exeter Brands Group contributed 2 percentage +points of the demand creation increase for the year. +Operating overhead for fiscal 2005 was $2,621.0 million, a +13% increase over fiscal 2004. Changes in currency exchange +rates contributed 3 percentage points of the increase. +Excluding the effects of foreign currency, operating overhead +increases for fiscal 2005 were mainly attributable to higher +personnel costs due to increased headcount, higher wages and +benefits and increased incentive-based compensation for +employees (4 percentage points), investments in emerging +markets (such as China, India and our Central Europe, Middle +East and Africa unit) and our Other businesses +(3 percentage points), increased costs due to sales and +leadership events (2 percentage points) and investments in +NIKE-owned retail stores (1 percentage point). +16 +Table of Contents +The most significant component of other expense, net, of +$29.1 million for fiscal 2005 was foreign currency hedge +losses. These losses are reflected in the Corporate line in our +segment presentation of pre-tax income in the accompanying +Notes to Consolidated Financial Statements +(Note 17 — Operating Segments and Related +Information). The hedge losses reflect that the euro has +strengthened since we entered into these hedge contracts. In +fiscal 2004, foreign currency hedge losses were also the most +significant component of other expense, net, of +$74.7 million. The year-over-year improvement in other +expense, net, for fiscal 2005 was mainly due to lower foreign +currency hedge losses and lower net losses on asset disposals +compared to those recorded in fiscal 2004. +In 2005, net foreign currency losses in other expense, net, were +more than offset by favorable translation of foreign currency +denominated profits, most significantly in EMEA. Our estimate of +the combined impact of lower foreign currency conversion losses +and the favorable translation of foreign-currency denominated +profits is a $95 million addition to consolidated income +before income taxes compared to the prior year. If current +exchange rates remain constant, we do not expect a significant +impact on our consolidated income before income taxes related to +foreign currency gains or losses and the offsetting translation +for fiscal 2006 as compared to fiscal 2005. +Our effective tax rate for fiscal 2005 was 34.9%, which is +slightly higher than the fiscal 2004 rate of 34.8% primarily due +to decreases in tax credits partially offset by lower taxes on +foreign earnings in fiscal 2005. +During the fourth quarter of fiscal 2005 we decided to +repatriate $500 million of foreign earnings during fiscal +2006 under the American Jobs Creation Act (the “Act), which +was signed into law by the President on October 22, 2004. +The Act creates a temporary incentive for +U.S. multinational corporations to repatriate accumulated +income earned outside the U.S. by providing an 85% dividend +received deduction for certain dividends from controlled foreign +corporations. We elected to repatriate a combination of foreign +earnings for which U.S. taxes had previously been provided +and foreign earnings that had been designated as permanently +reinvested. Accordingly, the provisions made did not have a +material impact on our income tax expense or our effective tax +rate for the year. +Worldwide futures and advance orders for footwear and apparel +scheduled for delivery from June through November 2005 were 9.5% +higher than such orders reported for the comparable period of +fiscal 2004. Approximately 1 point of this reported increase was +due to changes in currency exchange rates versus the same period +last year. Excluding this currency impact, slightly higher +average selling prices for both footwear and apparel contributed +1 point of the growth in overall futures and advance orders. The +remaining increase was due to volume increases for both footwear +and apparel. As always, the reported futures orders growth is +not necessarily indicative of our expectation of revenue growth +during this period. This is because the mix of orders can shift +between advance/futures and at-once orders. In addition, foreign +currency exchange rate fluctuations as well as differing levels +of order cancellations can cause differences in the comparisons +between futures orders and actual revenues. Moreover, a +significant portion of our revenue is not derived from futures +orders, including wholesale sales of equipment, +U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan, +Converse, Exeter Brands Group, Hurley, NIKE Golf and retail +sales across all brands. +17 +Table of Contents +Operating Segments +The breakdown of revenues follows: +FY05 vs. +FY04 vs. +FY04 +FY03 +Fiscal 2005 +Fiscal 2004* +% CHG +Fiscal 2003* +% CHG +(Dollars in millions) +U.S. Region +Footwear +$ +3,358.2 +$ +3,070.4 +9 +% +$ +3,019.5 +2 +% +Apparel +1,457.7 +1,433.5 +2 +% +1,351.0 +6 +% +Equipment +313.4 +277.9 +13 +% +266.9 +4 +% +Total U.S. +5,129.3 +4,781.8 +7 +% +4,637.4 +3 +% +EMEA Region +Footwear +2,500.0 +2,232.2 +12 +% +1,896.0 +18 +% +Apparel +1,497.1 +1,333.8 +12 +% +1,133.1 +18 +% +Equipment +284.5 +261.7 +9 +% +192.4 +36 +% +Total EMEA +4,281.6 +3,827.7 +12 +% +3,221.5 +19 +% +Asia Pacific Region +Footwear +962.9 +855.3 +13 +% +730.6 +17 +% +Apparel +755.5 +612.3 +23 +% +497.8 +23 +% +Equipment +178.9 +143.2 +25 +% +112.2 +28 +% +Total Asia Pacific +1,897.3 +1,610.8 +18 +% +1,340.6 +20 +% +Americas Region +Footwear +478.6 +408.2 +17 +% +334.8 +22 +% +Apparel +169.1 +159.5 +6 +% +143.2 +11 +% +Equipment +48.1 +36.8 +31 +% +31.1 +18 +% +Total Americas +695.8 +604.5 +15 +% +509.1 +19 +% +12,004.0 +10,824.8 +11 +% +9,708.6 +11 +% +Other +1,735.7 +1,428.3 +22 +% +988.4 +45 +% +Total Revenues +$ +13,739.7 +$ +12,253.1 +12 +% +$ +10,697.0 +15 +% +* +Certain prior year amounts have been reclassified to conform to +fiscal year 2005 presentation. +The discussion following includes disclosure of “pre-tax +income” for our operating segments. We have reported +pre-tax income for each of our operating segments in accordance +with Statement of Financial Accounting Standard No. 131, +“Disclosures about Segments of an Enterprise and Related +Information.” As discussed in Note 17 — +Operating Segments and Related Information in the +accompanying Notes to Consolidated Financial Statements, +certain corporate costs are not included in pre-tax income of +our operating segments. +For EMEA, changes in foreign currency exchange rates accounted +for 7 percentage points of the reported revenue growth in +fiscal 2005. Excluding the effects of foreign currency, EMEA +Region revenues grew 5 percent as each product business +unit (footwear, apparel and equipment) experienced growth. The +following analysis excludes the impact of changes in foreign +currency. The increase over the prior year was primarily driven +by increased unit sales of footwear, apparel and equipment +partially offset by declines in the average prices in each of +the business units. Although apparel and equipment business +units experienced growth for fiscal 2005, revenues fell slightly +in the fourth quarter primarily due to comparisons to very +strong sales in the prior year’s fourth quarter related to +the 2004 European Football Championships. For fiscal 2005, sales +increases in the emerging markets in our Central Europe, Middle +East and Africa unit, along with sales increases in the UK and +Italy, drove the growth. These increases were partially offset +by lower sales in France, Germany and Northern Europe. +18 +Table of Contents +For the EMEA Region, futures orders scheduled for delivery from +June through November 2005 were 7 percentage points higher +than such orders received for the comparable period of fiscal +2004. Changes in currency exchange rates contributed +2 percentage points of this growth. Excluding the changes +in currency exchange rates, the growth was driven by an increase +in the region’s footwear and apparel unit orders and +increases in apparel’s average price. These increases were +partially offset by a decrease in the region’s footwear +average price per pair, partially due to strategies to improve +the product value. +EMEA pre-tax income for fiscal 2005 was $917.5 million, up +23% versus the prior year. Higher revenues and gross margin +improvements drove the increase, more than offsetting increased +selling and administrative costs. The improved gross margins, +which contributed 90 basis points of growth to the +consolidated gross margin percentage, were primarily the result +of improved year-over-year hedge rates partially offset by +reduced in-line pricing margins and higher, less profitable +closeout sales. +In the Asia Pacific Region, 4 percentage points of reported +revenue growth for the fiscal year were due to changes in +currency exchange rates. The following analysis excludes the +impact of changes in foreign currency. Sales in each Asia +Pacific product business unit grew versus fiscal 2004 with the +growth primarily due to unit volume; average price per unit +increased slightly. Significant revenue increases in China +(driven by expansion of retail distribution and strong consumer +demand) and increases in every other country in the region +except Australia and New Zealand were the key growth drivers for +fiscal 2005. +For the Asia Pacific Region, futures orders scheduled for +delivery from June through November 2005 were 11 percentage +points higher than such orders received for the comparable +period of fiscal 2004. Changes in currency exchange rates +contributed 2 percentage points of this growth. Excluding +the changes in currency exchange rates, the growth was driven by +an increase in the region’s footwear and apparel unit +orders. These increases were partially offset by a decrease in +the region’s average selling price per unit for footwear +and apparel. +Pre-tax income for the Asia Pacific Region increased 13% versus +fiscal 2004 to $399.8 million. Higher revenues were +partially offset by a lower gross margin percentage and +increased selling and administrative costs. The reduced gross +margin percentage, which had a minimal negative impact on the +net overall consolidated gross margin percentage change, was +primarily attributable to less profitable closeout sales and +reduced in-line pricing margins due to strategies to improve the +product value, partially offset by better year-over-year +currency hedge rates. +In the Americas Region, 1 percentage point of the revenue +growth for fiscal 2005 was due to changes in currency exchange +rates. Excluding the effects of changes in foreign currency, +sales in each Americas product business unit grew in fiscal +2005. The revenue growth was driven primarily by higher sales in +Central and South America, partially offset by lower sales in +Canada. +In fiscal 2005, pre-tax income for the Americas Region increased +21% from the prior year, to $117.6 million. The increase in +pre-tax income was attributable to higher revenues and an +improved gross margin percentage, partially offset by higher +selling and administrative costs. The improved gross margin +percentage had a minimal impact on the consolidated gross margin +percentage improvement. +In the U.S. Region, revenues for fiscal 2005 grew 7% versus +fiscal 2004, as revenues increased in each product business +unit. The increase in footwear revenue was due to a +5 percentage point increase in unit sales and a +4 percentage point increase in the average price per pair. +The increases in unit sales and the average price per pair are +due to increased consumer demand for performance products, +especially those with a suggested retail price over $100. +The increase in apparel sales for fiscal 2005 was driven by +volume increases in branded apparel, partially offset by a +decline in revenue from sales of licensed apparel. The decline +in revenue from licensed apparel was due to the expiration of +our license agreement with the NBA, in the second quarter of +fiscal 2005, and a shift in consumer preference towards branded +apparel. For the first quarter and into the second quarter of +fiscal 2006, we expect revenues generated by licensed apparel to +be below the prior year levels due to the expiration of the +agreement with the NBA. +19 +Table of Contents +For the U.S. Region, futures orders scheduled for delivery +from June through November 2005 increased 9 percentage +points versus the same period of the prior year. Futures orders +increased due to unit growth for both footwear and apparel and +higher average price per pair for footwear. As discussed above, +these reported futures do not cover all components of our +overall revenues, such as U.S. licensed apparel (expected +to decrease as noted above), equipment, closeouts, at-once +orders and retail sales. As a result, revenue growth for the +U.S. Region for the first quarter of fiscal 2006 is +expected to be below the reported futures growth. +For fiscal 2005, pre-tax income for the U.S. Region was +$1,125.8 million, a 12% increase versus fiscal 2004. Higher +revenues and improved gross margin percentage drove the +increase, more than offsetting higher selling and administrative +costs. The improved gross margin percentage contributed +30 basis points of growth to the consolidated gross margin +percentage growth and was primarily the result of fewer, more +profitable closeouts partially offset by increased discounts and +higher product costs and air freight incurred to meet strong +footwear demand. +Revenues and pre-tax income for our Other businesses in fiscal +2005 include results from Bauer NIKE Hockey Inc., Cole Haan +Holdings Incorporated, Converse Inc., Hurley International LLC, +NIKE Golf and Exeter Brands Group LLC. Exeter Brands Group LLC +is a wholly owned subsidiary of NIKE, Inc., formed in the first +quarter of fiscal 2005 to develop the Company’s business in +retail channels serving value-conscious consumers and to operate +the business obtained in the acquisition of Official Starter +Properties LLC and Official Starter LLC (collectively +“Official Starter”). For fiscal 2005, the addition of +Converse, acquired in the second quarter of fiscal 2004, and the +formation of Exeter Brands Group together drove +12 percentage points of the Other business revenue increase +of 22% over fiscal 2004. The remainder of the increase was +driven by revenue growth at Cole Haan, NIKE Golf and Hurley. +Pre-tax income from the Other businesses improved to +$153.9 million in fiscal 2005, versus income of +$75.3 million in fiscal 2004. The year-over-year +improvement was driven by the addition of Converse, improved +results from Cole Haan and Bauer and the formation of the Exeter +Brands Group. +Fiscal 2004 Compared to Fiscal 2003 +Consolidated Operating Results +In fiscal 2004, consolidated revenues grew 15% versus fiscal +2003; seven percentage points of this growth were due to changes +in currency exchange rates, primarily the stronger euro. +Excluding the impact of changes in foreign currency, revenue +growth in our international regions contributed +3 percentage points to the consolidated revenue growth and +all three of our international regions posted higher revenues, +with our Asia Pacific Region making the largest contribution. +Converse, which was acquired at the beginning of the second +quarter of fiscal 2004, contributed 2 percentage points of +consolidated revenue growth. Improved sales in the +U.S. Region and increases in our Other businesses drove the +balance of the consolidated revenue growth. +During fiscal 2004, our consolidated gross margin percentage +improved 190 basis points versus the prior year, from 41.0% +to 42.9%. The primary factors contributing to the improved gross +margin percentage for fiscal 2004 were as follows: +(1) +Changes in hedge rates, primarily the euro, represented +70 basis points of improvement for fiscal 2004. The +positive impact of hedge rates on the fiscal 2004 gross margin +percentage was most significant in the fourth quarter, +contributing 140 basis points of the year-over-year +quarterly improvement. +(2) +Higher in-line pricing margins drove approximately 70 basis +points of the improvement in the consolidated gross margin +percentage for fiscal 2004. This was primarily attributable to +improved footwear margins as a result of lower product costs due +to manufacturing efficiencies, reduced materials costs and lower +air freight. +(3) +Improved profitability on wholesale closeout sales, primarily in +the U.S. and EMEA regions due to improved closeout pricing +margins, partially offset by increased obsolescence reserves due +to a less favorable mix of product remaining in closeout +inventory. These factors +20 +Table of Contents +represented approximately 10 basis points of the +improvement in the consolidated gross margin percentage for +fiscal 2004. +(4) +Most of the remaining increase was due to improved gross margin +percentages for NIKE-owned retail stores in the U.S. and EMEA +regions, which contributed approximately 30 basis points of +the improvement in consolidated gross margins for fiscal 2004. +Fiscal 2004 selling and administrative expense grew 17% versus +fiscal 2003. Demand creation expense grew 18% to +$1,377.9 million in fiscal 2004. Seven percentage points of +the increase in demand creation were due to changes in currency +exchange rates. Excluding the impact of changes in foreign +currency rates, the increase in demand creation spending for the +fiscal year was attributable to higher spending on endorsement +contracts in the U.S., primarily basketball (3 percentage +point impact), incremental investment in retail marketing in the +U.S., EMEA and Asia Pacific regions (3 percentage point +impact), and higher advertising spending in the Asia Pacific +region (1 percentage point impact). The addition of +Converse contributed 2 percentage points of the demand +creation increase for the year. +Operating overhead for fiscal 2004 was $2,324.1 million, a +17% increase over fiscal 2003. Currency exchange rates +contributed 5 percentage points of the increase. The +addition of Converse accounted for 2 percentage points of +growth. Other key factors driving the increase in operating +overhead for the fiscal year were: (a) increased +incentive-based compensation for employees (3 percentage +points); and (b) increased costs to support the growth of +our NIKE Golf, Cole Haan, Bauer NIKE Hockey and Hurley +businesses (2 percentage points). The remaining increase, +about 5 percentage points, is primarily attributable to +normal wage increases and some added infrastructure necessary to +support global business growth, including costs related to our +worldwide supply chain initiative and additional factory outlet +stores in the EMEA Region. +Other expense, net, was $74.7 million for fiscal 2004 +compared to $77.5 million in fiscal 2003. In both years, +the most significant component of other expense, net, was +foreign currency hedge losses. The hedge losses reflect that the +euro strengthened considerably since we entered into these hedge +contracts. Also included in other expense, net, for fiscal 2004 +was an increase in net losses on asset disposals, including a +loss of $5.3 million on land gifted to the NIKE Foundation +in the first quarter. +In 2004, net foreign currency losses in other expense, net, were +more than offset by favorable translation of foreign currency +denominated profits, most significantly in EMEA. Our estimate of +the net impact of these losses and the favorable translation is +a $157 million addition to consolidated income before +income taxes compared to the prior year. +Our effective tax rate for fiscal 2004 was 34.8%, which is +higher than the fiscal 2003 rate of 34.1% as a result of a +higher tax provision on foreign earnings in fiscal 2004. +Included in net income for fiscal 2003 was a $266.1 million +charge for the cumulative effect of implementing Statement of +Financial Accounting Standard (SFAS) No. 142, +“Goodwill and Other Intangible Assets,” +(FAS 142). This charge related to the impairment of +goodwill and trademarks associated with Bauer NIKE Hockey and +the goodwill of Cole Haan, reflecting that the fair values we +estimated for these assets were less than the carrying values. +See the accompanying Notes to Consolidated Financial +Statements (Note 4 — Identifiable Intangible +Assets and Goodwill) for further information. +Operating Segments +For EMEA, changes in foreign currency exchange rates accounted +for 17 percentage points of the reported increase in +revenues in fiscal 2004. The remaining increase over the prior +year was primarily driven by NIKE-owned retail (due to the +addition of new stores in fiscal 2004) and increased footwear +volume (led by soccer products). Excluding the impact of +currency exchange movements, sales in each EMEA business unit +grew versus fiscal 2003. +EMEA pre-tax income for fiscal 2004 was $744.0 million, up +43% versus the prior year. Higher revenues and gross margin +improvements drove the increase, more than offsetting +incremental selling and +21 +Table of Contents +administrative costs. The improved gross margins were primarily +the result of improved year-over-year hedge rates and higher +in-line and closeout pricing margins. +In the Asia Pacific Region, fiscal 2004 revenues increased 20% +year-over-year. Eight percentage points of growth for the fiscal +year were due to changes in currency exchange rates. Excluding +the impact of currency exchange movements, sales in each Asia +Pacific business unit grew versus fiscal 2003. The region’s +revenue growth was primarily due to unit volume increases, with +significant revenue growth in China (driven by expansion of +retail distribution and strong consumer demand) and Japan +(driven by strong consumer demand). +Pre-tax income for the Asia Pacific Region increased to +$352.3 million in fiscal 2004, up 22% versus fiscal 2003. +Higher revenues and gross margin improvements drove the +increase, more than offsetting incremental selling and +administrative costs. The higher gross margins were primarily +attributable to higher in-line pricing margins and the benefit +of better hedge rates on product purchases, partially offset by +lower profitability of closeouts. +In the Americas Region, revenues increased 19% compared to +fiscal 2003, with 8 percentage points of the growth due to +changes in currency exchange rates. Excluding the currency +effects, the revenue growth was driven primarily by stronger +consumer demand in South America and sales in each Americas +business unit grew versus fiscal 2003. +In fiscal 2004, pre-tax income for the Americas Region increased +6% from the prior year, to $97.4 million. The increase in +pre-tax income was attributable to changes in currency exchange +rates slightly offset by reduced gross margins and higher +selling and administrative costs. Gross margins fell due to +lower in-line pricing margins as well as weaker currency +exchange rates in Mexico. +In the U.S. Region, revenues for fiscal 2004 grew 3% versus +fiscal 2003, as revenues increased in each business unit. The +increase in apparel sales was primarily driven by growth in +sport performance product and increased consumer demand for team +licensed apparel primarily in the first half of fiscal 2004. +The increase in footwear revenue was due to an increase in +average wholesale selling price per pair and increased sales in +NIKE-owned retail stores, partially offset by a slight decline +in wholesale unit sales. The increase in average wholesale +selling price per pair was partially due to a larger percentage +of sales of products with a suggested retail price over $100. +The slight decline in U.S. footwear wholesale unit sales +was largely due to changes in distribution to several retail +customers. For the first half of the year, sales to our largest +customer, Foot Locker, were lower as a result of changes to our +distribution strategy implemented in fiscal 2002 and 2003; while +the decline in first half sales resulted in slightly lower sales +for the full year, our year-over-year sales to Foot Locker grew +in the second half of fiscal 2004. In addition, fiscal 2004 +sales declined for another large customer, Footstar, which +declared bankruptcy in March 2004. The sales declines for Foot +Locker and Footstar were partially offset by increased sales to +other accounts. +For fiscal 2004, pre-tax income for the U.S. Region was +$1,007.3 million, a 6% increase versus fiscal 2003. +Higher revenues and gross margins drove the increase, more than +offsetting higher selling and administrative costs. The improved +gross margins were primarily the result of higher in-line and +closeout pricing margins and expanded retail margins. +Revenues for Other businesses grew 45% in fiscal 2004 compared +to fiscal 2003; the addition of Converse contributed +23 percentage points of the increase. The remainder of the +increase was due to revenue growth at NIKE Golf, Cole Haan, +Hurley and Bauer NIKE Hockey. +Pre-tax income for Other businesses improved to +$75.3 million in fiscal 2004, versus income of +$7.9 million in fiscal 2003. The addition of Converse, +combined with improved results from NIKE Golf and Cole Haan, +drove the year-over-year improvement. +22 +Table of Contents +Liquidity and Capital Resources +Fiscal 2005 Cash Flow Activity +Cash provided by operations was $1.6 billion in fiscal +2005, compared to $1.5 billion in fiscal 2004. Our primary +source of operating cash flow was net income of +$1.2 billion. In fiscal 2005, cash provided by operations +was not significantly affected by the net change in working +capital. In fiscal 2004, a net decrease in working capital +provided $193.2 million in cash flow primarily due to +improved cash management of our accounts receivable and timing +of inventory receipts and vendor payments. +Cash used by investing activities during fiscal 2005 was +$360.4 million, compared to $950.6 million invested +during fiscal 2004. The most significant uses of cash for +investing activities in fiscal 2005 were net additions to +property, plant and equipment of $250 million, and a net +increase in short-term investments (purchases partially offset +by the maturities). The additions to property, plant and +equipment reflect capital expenditures on computer equipment and +software (to support both normal business operations and our +supply chain systems upgrade), and continued investment in +NIKE-owned retail stores. The improvement over the prior year +was primarily due to lower net purchases of short-term +investments and lower costs associated with the acquisition of +subsidiaries. +In fiscal 2005 and since inception of our current share +repurchase program, we purchased approximately 6.9 million +shares of NIKE’s Class B common stock for +$556.2 million. The share repurchases were part of a +four-year $1.5 billion share repurchase program that was +approved by the Board of Directors in June 2004. We expect to +continue to fund this program from operating cash flow. The +timing and the ultimate amount of shares purchased under the +program will be dictated by our capital needs and stock market +conditions. +Dividends declared per share of common stock for fiscal 2005 +were $0.95, compared to $0.74 in fiscal 2004. We have paid a +dividend every quarter since February 1984. Our current dividend +policy is to provide an annual dividend equal to 20% to 30% of +the trailing twelve-months’ earnings per share paid out on +a quarterly basis. We review our dividend policy from time to +time, and based upon current projected earnings and cash flow +requirements we anticipate continuing to pay a quarterly +dividend in the foreseeable future. +Contractual Obligations +Our long-term contractual obligations as of May 31, 2005 +are as follows: +Cash Payments Due During the Year Ended May 31, +Description of Commitment +2006 +2007 +2008 +2009 +2010 +Thereafter +Total +(In millions) +Operating Leases +$ +186.7 +$ +157.6 +$ +135.3 +$ +112.9 +$ +97.8 +$ +556.3 +$ +1,246.6 +Long-term Debt +6.2 +256.2 +31.2 +6.2 +31.2 +353.5 +684.5 +Endorsement Contracts(1) +400.3 +405.0 +276.9 +182.3 +102.9 +317.6 +1,685.0 +Product Purchase Obligations(2) +1,858.2 +2.8 +— +— +— +— +1,861.0 +Other(3) +250.5 +75.9 +26.1 +25.5 +2.1 +1.3 +381.4 +Total +$ +2,701.9 +$ +897.5 +$ +469.5 +$ +326.9 +$ +234.0 +$ +1,228.7 +$ +5,858.5 +(1) +The amounts listed for endorsement contracts represent +approximate amounts of base compensation and minimum guaranteed +royalty fees we are obligated to pay athlete and sport team +endorsers of our products. Actual payments under some contracts +may be higher than the amounts listed as these contracts provide +for bonuses to be paid to the endorsers based upon athletic +achievements and/or royalties on product sales in future +periods. Actual payments under some contracts may also be lower +as these contracts include provisions for reduced payments if +athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish +the endorsers with NIKE products for their use. It is not +possible to determine how much we will spend on this product on +an annual basis as the contracts do not stipulate a specific +amount of cash to be spent on the product. The amount of product +23 +Table of Contents +provided to the endorsers will depend on many factors including +general playing conditions, the number of sporting events in +which they participate, and our own decisions regarding product +and marketing initiatives. In addition, the costs to design, +develop, source, and purchase the products furnished to the +endorsers are incurred over a period of time and are not +necessarily tracked separately from similar costs incurred for +products sold to customers. +(2) +We generally order product four to five months in advance of +sale based primarily on advanced futures orders received from +customers. The amounts listed for product purchase obligations +represent agreements (including open purchase orders) to +purchase products in the ordinary course of business, that are +enforceable and legally binding and that specify all significant +terms. In some cases, prices are subject to change throughout +the production process. The reported amounts exclude product +purchase liabilities included in accounts payable on the +Consolidated Balance Sheet. +(3) +Other amounts primarily include service and marketing +commitments made in the ordinary course of business. The amounts +represent the minimum payments required by legally binding +contracts and agreements, including open purchase orders for +non-product purchases. The reported amounts exclude those +liabilities included in accounts payable or accrued liabilities +on the Consolidated Balance Sheet. +Excluded from the table above is a commitment to an outsourcing +contractor that provides us with information technology +operations management services through fiscal 2006. The amount +of the payments in future years depends on our level of monthly +use of the different elements of the contractor’s services. +If we were to terminate the entire contract as of May 31, +2005, we would be required to provide the contractor with four +months’ notice and pay a termination fee of +$13.4 million. Our monthly payments to the contractor +currently approximate $7 million. Subsequent to +May 31, 2005, we extended this contract through fiscal 2008 +with substantially the same terms as noted above; however, the +termination fee increased to approximately $19 million upon +execution of the renewed contract and our estimated monthly +payments decreased to approximately $6 million. +We also have the following outstanding short-term debt +obligations as of May 31, 2005. Please refer to the +accompanying Notes to Consolidated Financial Statements +(Note 6 — Short-term Borrowings and Credit +Lines) for further description and interest rates related to +the short-term debt obligations listed below. +Outstanding as of +May 31, 2005 +(In millions) +Notes payable, due at mutually agreed-upon dates, generally +ninety days from issuance or on demand +$ +69.8 +Payable to Sojitz Corporation of America (Sojitz America) for +the purchase of inventories, generally due sixty days after +shipment of goods from a foreign port +$ +53.1 +As of May 31, 2005, letters of credit of +$555.0 million were outstanding, primarily for the purchase +of inventory. All letters of credit generally expire within one +year. +Capital Resources +In October 2001, we filed a shelf registration statement with +the Securities and Exchange Commission (“SEC”) under +which $1 billion in debt securities may be issued. In May +2002, we commenced a medium-term note program under the shelf +registration that allows us to issue up to $500 million in +medium-term notes, as our capital needs dictate. We entered into +this program to provide additional liquidity to meet our working +capital and general corporate cash requirements. During fiscal +2005, there were no medium-term notes issued under the program. +In previous years $240.0 million in medium-term notes were +issued under the program. Currently, $760 million remains +available to be issued under the shelf registration. We may +issue additional notes under the shelf registration in fiscal +2006 depending on general corporate needs. +As of May 31, 2005, we had a multi-year $750 million +revolving credit facility in place with a group of banks, and we +currently have no amounts outstanding under the facility. The +maturity date is November 20, +24 +Table of Contents +2008 and the facility can be extended for one additional year on +the anniversary date. Based on our current long-term senior +unsecured debt ratings of A+ and A2 from Standard and +Poor’s Corporation and Moody’s Investor Services, +respectively, the interest rate charged on any outstanding +borrowings would be the prevailing LIBOR plus 0.18%. The +facility fee is 0.07% of the total commitment. +If our long-term debt rating were to decline, the facility fee +and interest rate under our committed credit facility would +increase. Conversely, if our long-term debt rating were to +improve, the facility fee and interest rate would decrease. +Changes in our long-term debt rating would not trigger +acceleration of maturity of any then outstanding borrowings or +any future borrowings under the committed credit facilities. +Under this committed credit facility, we have agreed to various +covenants. These covenants include limits on our disposal of +fixed assets and the amount of debt secured by liens we may +incur, and set a minimum capitalization ratio. In the event we +were to have any borrowings outstanding under this facility, +failed to meet any covenant, and were unable to obtain a waiver +from a majority of the banks, any borrowings would become +immediately due and payable. As of May 31, 2005, we were in +full compliance with each of these covenants and believe it is +unlikely we will fail to meet any of these covenants in the +foreseeable future. +Liquidity is also provided by our commercial paper program, +under which there was no amount outstanding at May 31, 2005 +or May 31, 2004. We currently have short-term debt ratings +of A1 and P1 from Standard and Poor’s Corporation and +Moody’s Investor Services, respectively. +We currently believe that cash generated by operations, together +with access to external sources of funds as described above, +will be sufficient to meet our operating and capital needs in +the foreseeable future. +Recently Issued Accounting Standards +In November 2004, the Financial Accounting Standards Board +(FASB) issued Statement of Financial Accounting Standards +(SFAS) No. 151, “Inventory Costs, an amendment of +ARB No. 43, Chapter 4” (FAS 151). +FAS 151 clarifies that abnormal inventory costs such as +costs of idle facilities, excess freight and handling costs, and +wasted materials (spoilage) are required to be recognized +as current period charges. The provisions of +SFAS No. 151 are effective for our fiscal year +beginning June 1, 2006. We are currently evaluating the +provisions of FAS 151 and do not expect that the adoption +will have a material impact on our consolidated financial +position or results of operations. +On December 16, 2004, the FASB finalized +SFAS No. 123R “Share Based Payment,” +(FAS 123R) which, after the Securities and Exchange +Commission (SEC) amended the compliance dates on +April 15, 2005, will be effective for our fiscal year +beginning June 1, 2006. The new standard will require us to +record compensation expense for stock options using a fair value +method. On March 29, 2005, the SEC issued Staff Accounting +Bulletin No. 107 (SAB 107), which provides the +Staff’s views regarding interactions between FAS 123R +and certain SEC rules and regulations and provides +interpretations of the valuation of share-based payments for +public companies. +We are currently evaluating FAS 123R and SAB 107 to +determine the fair value method to measure compensation expense, +the appropriate assumptions to include in the fair value model +and the transition method to use upon adoption. The impact of +the adoption of FAS 123R is not known at this time due to +these factors as well as the unknown level of share-based +payments granted in future years. The effect on our results of +operations of expensing stock options using the Black-Scholes +model is presented in the accompanying Notes to Consolidated +Financial Statements (Note 1 — Significant +Accounting Policies). +Under certain conditions, stock options granted by the Company +are eligible for accelerated vesting upon the retirement of the +employee. The FASB clarified in FAS 123R that the fair +value of such stock options should be expensed based on an +accelerated vesting schedule or immediately, rather than ratably +over the vesting period stated in the grant. Our pro forma +disclosure currently reflects the expense of such options +ratably over the stated vesting period, expensing all unvested +shares upon actual retirement. The SEC has recently clarified +that companies should continue to follow the vesting method they +have been using until adoption of FAS 123R, then apply the +accelerated vesting schedule to all subsequent grants to those +employees eligible for accelerated vesting upon retirement. Had +we been accounting for such stock options +25 +Table of Contents +using the accelerated vesting schedule for those employees +eligible for accelerated vesting upon retirement, we would have +recognized additional stock-based compensation expense in our +pro forma disclosure of the effect of expensing stock options +presented in the accompanying Notes to Consolidated Financial +Statements (Note 1 — Significant Accounting +Policies) of $0.05 per diluted share in fiscal 2005, +2004 and 2003. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition +and results of operations are based upon our consolidated +financial statements, which have been prepared in accordance +with accounting principles generally accepted in the United +States of America. The preparation of these financial statements +requires us to make estimates and judgments that affect the +reported amounts of assets, liabilities, revenues and expenses, +and related disclosure of contingent assets and liabilities. +We believe that the estimates, assumptions and judgments +involved in the accounting policies described below have the +greatest potential impact on our financial statements, so we +consider these to be our critical accounting policies. Because +of the uncertainty inherent in these matters, actual results +could differ from the estimates we use in applying the critical +accounting policies. Certain of these critical accounting +policies affect working capital account balances, including the +policies for revenue recognition, the reserve for uncollectible +accounts receivable, inventory reserves, and contingent payments +under endorsement contracts. These policies require that we make +estimates in the preparation of our financial statements as of a +given date. However, since our business cycle is relatively +short, actual results related to these estimates are generally +known within the six-month period following the financial +statement date. Thus, these policies generally affect only the +timing of reported amounts across two to three quarters. +Within the context of these critical accounting policies, we are +not currently aware of any reasonably likely events or +circumstances that would result in materially different amounts +being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and +rewards of ownership have passed to the customer, based on the +terms of sale. Title passes generally upon shipment or upon +receipt by the customer depending on the country of the sale and +the agreement with the customer. Retail store revenues are +recorded at the time of sale. +In some instances, we ship product directly from our supplier to +the customer and recognize revenue when the product is delivered +to and accepted by the customer. Our revenues may fluctuate in +cases when our customers delay accepting shipment of product for +periods up to several weeks. +In certain countries outside of the U.S., precise information +regarding the date of receipt by the customer is not readily +available. In these cases, we estimate the date of receipt by +the customer based upon historical delivery times by geographic +location. On the basis of our tests of actual transactions, we +have no indication that these estimates have been materially +inaccurate historically. +As part of our revenue recognition policy, we record estimated +sales returns and miscellaneous claims from customers as +reductions to revenues at the time revenues are recorded. We +base our estimates on historical rates of product returns and +claims, and specific identification of outstanding claims and +outstanding returns not yet received from customers. Actual +returns and claims in any future period are inherently uncertain +and thus may differ from our estimates. If actual or expected +future returns and claims were significantly greater or lower +than the reserves we had established, we would record a +reduction or increase to net revenues in the period in which we +made such determination. +Reserve for Uncollectible Accounts Receivable +We make ongoing estimates relating to the collectibility of our +accounts receivable and maintain a reserve for estimated losses +resulting from the inability of our customers to make required +payments. In determining the amount of the reserve, we consider +our historical level of credit losses and make judgments about +the creditworthiness of significant customers based on ongoing +credit evaluations. Since we cannot predict future +26 +Table of Contents +changes in the financial stability of our customers, actual +future losses from uncollectible accounts may differ from our +estimates. If the financial condition of our customers were to +deteriorate, resulting in their inability to make payments, a +larger reserve might be required. In the event we determined +that a smaller or larger reserve was appropriate, we would +record a credit or a charge to selling and administrative +expense in the period in which we made such a determination. +Inventory Reserves +We also make ongoing estimates relating to the net realizable +value of inventories, based upon our assumptions about future +demand and market conditions. If we estimate that the net +realizable value of our inventory is less than the cost of the +inventory recorded on our books, we record a reserve equal to +the difference between the cost of the inventory and the +estimated net realizable value. This reserve is recorded as a +charge to cost of sales. If changes in market conditions result +in reductions in the estimated net realizable value of our +inventory below our previous estimate, we would increase our +reserve in the period in which we made such a determination and +record a charge to cost of sales. +Contingent Payments under Endorsement Contracts +A significant portion of our demand creation expense relates to +payments under endorsement contracts. In general, endorsement +payments are expensed uniformly over the term of the contract. +However, certain contract elements may be accounted for +differently, based upon the facts and circumstances of each +individual contract. +Some of the contracts provide for contingent payments to +endorsers based upon specific achievements in their sports +(e.g., winning a championship). We record selling and +administrative expense for these amounts when the endorser +achieves the specific goal. +Some of the contracts provide for payments based upon endorsers +maintaining a level of performance in their sport over an +extended period of time (e.g., maintaining a top ranking in a +sport for a year). These amounts are reported in selling and +administrative expense when we determine that it is probable +that the specified level of performance will be maintained +throughout the period. In these instances, to the extent that +actual payments to the endorser differ from our estimate due to +changes in the endorser’s athletic performance, increased +or decreased selling and administrative expense may be reported +in a future period. +Some of the contracts provide for royalty payments to endorsers +based upon a predetermined percentage of sales of particular +products. We expense these payments in cost of sales as the +related sales are made. In certain contracts, we offer minimum +guaranteed royalty payments. For contractual obligations for +which we estimate that we will not meet the minimum guaranteed +amount of royalty fees through sales of product, we record the +amount of the guaranteed payment in excess of that earned +through sales of product in selling and administrative expense +uniformly over the remaining guarantee period. +Property, Plant and Equipment +Property, plant and equipment, including buildings, equipment, +and computer hardware and software is recorded at cost +(including, in some cases, the cost of internal labor) and is +depreciated over its estimated useful life. Changes in +circumstances (such as technological advances or changes to our +business operations) can result in differences between the +actual and estimated useful lives. In those cases where we +determine that the useful life of a long-lived asset should be +shortened, we increase depreciation expense over the remaining +useful life to depreciate the asset’s net book value to its +salvage value. +When events or circumstances indicate that the carrying value of +property, plant and equipment may be impaired, we estimate the +future undiscounted cash flows to be derived from the asset to +determine whether or not a potential impairment exists. If the +carrying value exceeds our estimate of future undiscounted cash +flows, we then calculate the impairment as the excess of the +carrying value of the asset over our estimate of its fair market +value. Any impairment charges are recorded as other expense, +net. We estimate future undiscounted cash flows using +assumptions about our expected future operating performance. Our +estimates of undiscounted +27 +Table of Contents +cash flows may change in future periods due to, among other +things, technological changes, economic conditions, changes to +our business operations or inability to meet business plans. +Such changes may result in impairment charges in the period in +which such changes in estimates are made. +Goodwill and Other Intangible Assets +We adopted FAS 142 effective for the first quarter of +fiscal 2003. In accordance with FAS 142, goodwill and +intangible assets with indefinite lives are no longer amortized +but instead measured for impairment at least annually in the +fourth quarter, or when events indicate that an impairment +exists. As required by FAS 142, in our impairment tests for +goodwill and other indefinite-lived intangible assets, we +compare the estimated fair value of goodwill and other +intangible assets to the carrying value. If the carrying value +exceeds our estimate of fair value, we calculate impairment as +the excess of the carrying value over our estimate of fair +value. Our estimates of fair value utilized in goodwill and +other indefinite-lived intangible asset tests may be based upon +a number of factors, including our assumptions about the +expected future operating performance of our reporting units. +Our estimates may change in future periods due to, among other +things, technological change, economic conditions, changes to +our business operations or inability to meet business plans. +Such changes may result in impairment charges recorded in future +periods. +As discussed further above, upon adoption of FAS 142 in +fiscal 2003, we recorded an impairment charge related to +goodwill and other indefinite-lived intangible assets of +$266.1 million. This charge is shown on our consolidated +statement of income as the cumulative effect of accounting +change. Subsequent to adoption, any goodwill impairment charges +would be classified as a separate line item on our consolidated +statement of income as part of income before income taxes and +cumulative effect of accounting change. Other indefinite-lived +intangible asset impairment charges would be classified as other +expense, net. +Intangible assets that are determined to have definite lives are +amortized over their useful lives and are measured for +impairment only when events or circumstances indicate the +carrying value may be impaired. In these cases, we estimate the +future undiscounted cash flows to be derived from the asset to +determine whether or not a potential impairment exists. If the +carrying value exceeds our estimate of future undiscounted cash +flows, we then calculate the impairment as the excess of the +carrying value of the asset over our estimate of its fair value. +Any impairment charges would be classified as other expense, net. +Hedge Accounting for Derivatives +We use forward exchange contracts and option contracts to hedge +certain anticipated foreign currency exchange transactions, as +well as any resulting receivable or payable balance. When +specific criteria required by SFAS No. 133, +“Accounting for Derivative and Hedging Activities,” as +amended and interpreted (FAS 133) have been met, changes in +fair values of hedge contracts relating to anticipated +transactions are recorded in other comprehensive income rather +than net income until the underlying hedged transaction affects +net income. In most cases, this results in gains and losses on +hedge derivatives being released from other comprehensive income +into net income some time after the maturity of the derivative. +One of the criteria for this accounting treatment is that the +forward exchange contract amount should not be in excess of +specifically identified anticipated transactions. By their very +nature, our estimates of anticipated transactions may fluctuate +over time and may ultimately vary from actual transactions. When +anticipated transaction estimates or actual transaction amounts +decrease below hedged levels, or when the timing of transactions +changes significantly, we are required to reclassify at least a +portion of the cumulative changes in fair values of the related +hedge contracts from other comprehensive income to other +expense, net during the quarter in which such changes occur. +Once an anticipated transaction estimate or actual transaction +amount decreases below hedged levels, we make adjustments to the +related hedge contract in order to reduce the amount of the +hedge contract to that of the revised anticipated transaction. +Taxes +We record valuation allowances against our deferred tax assets, +when necessary, in accordance with SFAS No. 109, +“Accounting for Income Taxes.” Realization of deferred +tax assets (such as net operating loss +28 +Table of Contents +carryforwards) is dependent on future taxable earnings and is +therefore uncertain. At least quarterly, we assess the +likelihood that our deferred tax asset balance will be recovered +from future taxable income. To the extent we believe that +recovery is not likely, we establish a valuation allowance +against our deferred tax asset, increasing our income tax +expense in the period such determination is made. +In addition, we have not recorded U.S. income tax expense +for foreign earnings that we have determined to be indefinitely +reinvested offshore, thus reducing our overall income tax +expense. The amount of earnings designated as indefinitely +reinvested offshore is based upon the actual deployment of such +earnings in our offshore assets and our expectations of the +future cash needs of our U.S. and foreign entities. Income tax +considerations are also a factor in determining the amount of +foreign earnings to be indefinitely reinvested offshore. +We carefully review all factors that drive the ultimate +disposition of foreign earnings determined to be reinvested +offshore, and apply stringent standards to overcoming the +presumption of repatriation. Despite this approach, because the +determination involves our future plans and expectations of +future events, the possibility exists that amounts declared as +indefinitely reinvested offshore may ultimately be repatriated. +For instance, the actual cash needs of our U.S. entities +may exceed our current expectations, or the actual cash needs of +our foreign entities may be less than our current expectations. +This would result in additional income tax expense in the year +we determined that amounts were no longer indefinitely +reinvested offshore. Conversely, our approach may also result in +a determination that accumulated foreign earnings (for which +U.S. income taxes have been provided) will be indefinitely +reinvested offshore. In this case, our income tax expense would +be reduced in the year of such determination. +On an interim basis, we estimate what our effective tax rate +will be for the full fiscal year. The estimated annual effective +tax rate is then applied to the year-to-date pre-tax income +excluding significant or infrequently occurring items, to +determine the year-to-date tax expense. The income tax effects +of infrequent or unusual items are recognized in the interim +period in which they occur. As the fiscal year progresses, we +continually refine our estimate based upon actual events and +earnings by jurisdiction during the year. This continual +estimation process periodically results in a change to our +expected effective tax rate for the fiscal year. When this +occurs, we adjust the income tax provision during the quarter in +which the change in estimate occurs so that the year-to-date +provision equals the expected annual rate. +Other Contingencies +In the ordinary course of business, we are involved in legal +proceedings regarding contractual and employment relationships, +product liability claims, trademark rights, and a variety of +other matters. We record contingent liabilities resulting from +claims against us, including related legal costs, when it is +probable that a liability has been incurred and the amount of +the loss is reasonably estimable. We disclose contingent +liabilities when there is a reasonable possibility that the +ultimate loss will materially exceed the recorded liability. +Estimating probable losses requires analysis of multiple +factors, in some cases including judgments about the potential +actions of third party claimants and courts. Therefore, actual +losses in any future period are inherently uncertain. Currently, +we do not believe that any of our pending legal proceedings or +claims will have a material impact on our financial position or +results of operations. However, if actual or estimated probable +future losses exceed our recorded liability for such claims, we +would record additional charges as other expense, net during the +period in which the actual loss or change in estimate occurred. +Item 7A. +Quantitative and Qualitative Disclosures about Market +Risk +In the normal course of business and consistent with established +policies and procedures, we employ a variety of financial +instruments to manage exposure to fluctuations in the value of +foreign currencies and interest rates. It is our policy to +utilize these financial instruments only where necessary to +finance our business and manage such exposures; we do not enter +into these transactions for speculative purposes. +We are exposed to foreign currency fluctuation as a result of +our international sales, product sourcing and funding +activities. Our foreign currency risk management objective is to +reduce the variability of local entity cash flows as a result of +exchange rate movements. We use forward exchange contracts and +options to hedge +29 +Table of Contents +certain anticipated but not yet firmly committed transactions as +well as certain firm commitments and the related receivables and +payables, including third party or intercompany transactions. +When we begin hedging exposures depends on the nature of the +exposure and market conditions. Generally, all anticipated and +firmly committed transactions that are hedged are to be +recognized within twelve months, although at May 31, 2005 +we had forward contracts hedging anticipated transactions that +will be recognized in as many as 24 months. The majority of +the contracts expiring in more than twelve months relate to the +anticipated purchase of inventory by our European and Japanese +subsidiaries. We use forward contracts to hedge non-functional +currency denominated payments under intercompany loan +agreements. When intercompany loans are hedged, it is typically +for their expected duration. Hedged transactions are principally +denominated in euros, Japanese yen, Canadian dollars, Korean +won, Australian dollars, and Mexican pesos. +Our earnings are also exposed to movements in short and +long-term market interest rates. Our objective in managing this +interest rate exposure is to limit the impact of interest rate +changes on earnings and cash flows, and to reduce overall +borrowing costs. To achieve these objectives, we maintain a mix +of medium and long-term fixed rate debt, commercial paper, and +bank loans and have entered into interest rate swaps. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related +derivatives using a variety of techniques including a review of +market value, sensitivity analysis, and Value-at-Risk (VaR). Our +market-sensitive derivative and other financial instruments, as +defined by the SEC, are foreign currency forward contracts, +foreign currency option contracts, interest rate swaps, +intercompany loans denominated in non-functional currencies, +fixed interest rate U.S. dollar denominated debt, and fixed +interest rate Japanese yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign +currency forward and foreign currency option derivative +instruments only. The VaR determines the maximum potential +one-day loss in the fair value of these foreign exchange +rate-sensitive financial instruments. The VaR model estimates +assume normal market conditions and a 95% confidence level. +There are various modeling techniques that can be used in the +VaR computation. Our computations are based on +interrelationships between currencies and interest rates (a +“variance/ co-variance” technique). These +interrelationships are a function of foreign exchange currency +market changes and interest rate changes over the preceding one +year. The value of foreign currency options does not change on a +one-to-one basis with changes in the underlying currency rate. +We adjusted the potential loss in option value for the estimated +sensitivity (the “delta” and “gamma”) to +changes in the underlying currency rate. This calculation +reflects the impact of foreign currency rate fluctuations on the +derivative instruments only, and does not include the impact of +such rate fluctuations on non-functional currency transactions +(such as anticipated transactions, firm commitments, cash +balances, and accounts and loans receivable and payable), +including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to +represent actual losses in fair value that we will incur, nor +does it consider the potential effect of favorable changes in +market rates. It also does not represent the full extent of the +possible loss that may occur. Actual future gains and losses +will differ from those estimated because of changes or +differences in market rates and interrelationships, hedging +instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign +currency sensitive financial instruments, derived using the VaR +model, was $25.7 and $24.9 million at May 31, +2005 and May 31, 2004, respectively. The increase in VaR as +of May 31, 2005 occurred due to a larger portfolio of +foreign currency derivative instruments which was largely offset +by the effect of lower currency volatility on existing trades on +the May 31, 2005 VaR computation versus the May 31, +2004 VaR computation. Such a hypothetical loss in fair value of +our derivatives would be offset by increases in the value of the +underlying transactions being hedged. The average monthly change +in the fair values of foreign currency forward and foreign +currency option derivative instruments was $37.2 million +and $50.0 million for fiscal 2005 and fiscal 2004, +respectively. +30 +Table of Contents +Details of other market-sensitive financial instruments and +derivative financial instruments not included in the VaR +calculation above are provided in the table below, except the +interest rate swaps which are described below. These instruments +include intercompany loans denominated in non-functional +currencies, fixed interest rate Japanese yen denominated debt, +fixed interest rate U.S. dollar denominated debt and +interest rate swaps. For debt obligations, the table presents +principal cash flows and related weighted average interest rates +by expected maturity dates. +Expected Maturity Date +Year Ended May 31, +2006 +2007 +2008 +2009 +2010 +Thereafter +Total +Fair Value +(In millions, except interest rates) +Foreign Exchange Risk +Euro Functional Currency +Intercompany loan — U.S. dollar +denominated — Fixed rate +Principal payments +$ +— +— +— +— +— +270.4 +$ +270.4 +$ +270.4 +Average interest rate +— +— +— +— +— +4.1 +% +4.1 +% +Intercompany loan — British pound +denominated — Fixed rate +Principal payments +$ +67.8 +— +— +— +— +— +$ +67.8 +$ +67.8 +Average interest rate +5.0 +% +— +— +— +— +— +5.0 +% +U.S. Dollar Functional Currency +Intercompany loan — Japanese yen +denominated — Variable rate +Principal payments +$ +202.7 +— +— +— +— +— +$ +202.7 +$ +202.7 +Average interest rate +0.4 +% +— +— +— +— +— +0.4 +% +Intercompany loan — Canadian dollar +denominated — Fixed rate +Principal payments +$ +41.2 +— +— +— +— +— +$ +41.2 +$ +41.2 +Average interest rate +2.9 +% +— +— +— +— +— +2.9 +% +Korean Won Functional Currency +Intercompany loan — U.S. Dollar +denominated — Fixed rate +Principal payments +$ +40.8 +— +— +— +— +— +$ +40.8 +$ +40.8 +Average interest rate +3.3 +% +— +— +— +— +— +3.3 +% +Japanese Yen Functional Currency +Long-term Japanese yen debt — Fixed rate +Principal payments +$ +6.2 +6.2 +6.2 +6.2 +6.2 +161.9 +192.9 +$ +218.1 +Average interest rate +3.4 +% +3.4 +% +3.4 +% +3.5 +% +3.5 +% +2.6 +% +2.9 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese yen debt — Fixed rate +Principal payments +$ +6.2 +6.2 +6.2 +6.2 +6.2 +161.9 +192.9 +$ +218.1 +Average interest rate +3.4 +% +3.4 +% +3.4 +% +3.5 +% +3.5 +% +2.6 +% +2.9 +% +U.S. Dollar Functional Currency +Long-term U.S. dollar debt — Fixed rate +Principal payments +$ +— +250.0 +25.0 +— +25.0 +190.0 +$ +490.0 +$ +502.9 +Average interest rate +5.3 +% +5.2 +% +5.1 +% +5.1 +% +5.1 +% +5.1 +% +5.1 +% +31 +Table of Contents +Intercompany loans and related interest amounts eliminate in +consolidation. Intercompany loans are generally hedged against +foreign exchange risk through the use of forward contracts with +third parties, as discussed above. +The fixed interest rate Japanese yen denominated debts were +issued by and are accounted for by two of our Japanese +subsidiaries. Accordingly, the monthly remeasurement of these +instruments due to changes in foreign exchange rates is +recognized in accumulated other comprehensive income upon the +consolidation of these subsidiaries. +There were no significant changes in debt market risks during +fiscal 2005. We did not issue any long-term fixed-rate corporate +bonds during fiscal 2005; however, during fiscal 2002, 2003 and +fiscal 2004 we issued a total of $490 million in long-term +fixed-rate corporate bonds that mature between August 2006 and +October 2015. Fixed interest rates on these bonds range from +4.7% to 5.66%. For each of the bonds issued in fiscal 2002, 2003 +and fiscal 2004, we have entered into interest rate swap +agreements whereby we receive fixed interest payments at the +same rate as the bonds and pay variable interest payments based +on the three-month or six-month LIBOR plus a spread. As a result +of the interest rate swap agreements the average effective +interest rate payable on these bonds was 4.17% at May 31, +2005 and 2.4% at May 31, 2004. Each swap has the same +notional amount and maturity date as the corresponding bond, +except for one swap for a $50 million bond issued in fiscal +2004. The $50 million bond issued in fiscal 2004 matures in +October 2013 whereas the associated interest rate swap expires +in October 2006. These interest rate swaps are accounted for as +fair value hedges, so changes in the recorded fair values of the +swaps are offset by changes in the recorded fair value of the +related debt, except for the $50 million swap expiring in +October 2006 which is not accounted for as a hedge. Accordingly, +changes in the fair value of this swap are recorded to net +income each period. The recorded fair value of the interest rate +swaps accounted for as fair value hedges was a net +$9.0 million gain at May 31, 2005 and a +$3.3 million gain at May 31, 2004. The recorded fair +value of the $50 million interest rate swap expiring +October 2006 was not material for the years ended May 31, +2005 and 2004. +In fiscal 2003 we also entered into an interest rate swap +agreement related to a Japanese yen denominated intercompany +loan with one of our Japanese subsidiaries. The Japanese +subsidiary pays variable interest on the intercompany loan based +on 3-month LIBOR plus a spread. Under the interest rate swap +agreement, the subsidiary pays fixed interest payments at 0.8% +and receives variable interest payments based on 3-month LIBOR +plus a spread based on a notional amount of 8 billion +Japanese yen. This interest rate swap is not accounted for as a +hedge, accordingly changes in the fair value of the swap are +recorded to net income each period. The recorded fair value of +the swap was not material for the years ended May 31, 2005, +2004 and 2003. +Special Note Regarding Forward-Looking Statements and Analyst +Reports +Certain written and oral statements, other than purely +historical information, including estimates, projections, +statements relating to NIKE’s business plans, objectives +and expected operating results, and the assumptions upon which +those statements are based, made or incorporated by reference +from time to time by NIKE or its representatives in this report, +other reports, filings with the Securities and Exchange +Commission, press releases, conferences, or otherwise, are +“forward-looking statements” within the meaning of the +Private Securities Litigation Reform Act of 1995 and +Section 21E of the Securities Exchange Act of 1934. +Forward-looking statements include, without limitation, any +statement that may predict, forecast, indicate, or imply future +results, performance, or achievements, and may contain the words +“believe,” “anticipate,” “expect,” +“estimate,” “project,” “will be,” +“will continue,” “will likely result,” or +words or phrases of similar meaning. Forward-looking statements +involve risks and uncertainties which may cause actual results +to differ materially from the forward-looking statements. The +risks and uncertainties are detailed from time to time in +reports filed by NIKE with the SEC, including Forms 8-K, +10-Q, and 10-K, and include, among others, the following: +international, national and local general economic and market +conditions; the size and growth of the overall athletic +footwear, apparel, and equipment markets; intense competition +among designers, marketers, distributors and sellers of athletic +footwear, apparel, and equipment for consumers and endorsers; +demographic changes; changes in consumer preferences; popularity +of particular designs, categories of products, and sports; +seasonal and geographic demand for NIKE products; difficulties +in anticipating or forecasting changes in +32 +Table of Contents +consumer preferences, consumer demand for NIKE products, and the +various market factors described above; difficulties in +implementing, operating, and maintaining NIKE’s +increasingly complex information systems and controls, +including, without limitation, the systems related to demand and +supply planning, and inventory control; interruptions in data +and communications systems; fluctuations and difficulty in +forecasting operating results, including, without limitation, +the fact that advance “futures” orders may not be +indicative of future revenues due to the changing mix of futures +and at-once orders, currency exchange rate fluctuations, order +cancellations, and the fact that a significant portion of our +revenue is not derived from futures orders; the ability of NIKE +to sustain, manage or forecast its growth and inventories; the +size, timing and mix of purchases of NIKE’s products; new +product development and introduction; the ability to secure and +protect trademarks, patents, and other intellectual property; +performance and reliability of products; customer service; +adverse publicity; the loss of significant customers or +suppliers; dependence on distributors; business disruptions; +increased costs of freight and transportation to meet delivery +deadlines; increases in borrowing costs due to any decline in +our debt ratings; changes in business strategy or development +plans; general risks associated with doing business outside the +United States, including without limitation, import duties, +tariffs, quotas, political and economic instability, and +terrorism; changes in government regulations; liability and +other claims asserted against NIKE; the ability to attract and +retain qualified personnel; and other factors referenced or +incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of +this report may include additional factors which could adversely +affect NIKE’s business and financial performance. Moreover, +NIKE operates in a very competitive and rapidly changing +environment. New risk factors emerge from time to time and it is +not possible for management to predict all such risk factors, +nor can it assess the impact of all such risk factors on +NIKE’s business or the extent to which any factor, or +combination of factors, may cause actual results to differ +materially from those contained in any forward-looking +statements. Given these risks and uncertainties, investors +should not place undue reliance on forward-looking statements as +a prediction of actual results. +Item 8. +Financial Statements and Supplemental Data +Management of NIKE, Inc. is responsible for the information and +representations contained in this report. The financial +statements have been prepared in conformity with the generally +accepted accounting principles we considered appropriate in the +circumstances and include some amounts based on our best +estimates and judgments. Other financial information in this +report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably +assure that assets are safeguarded from unauthorized use or +disposition and which provide for the preparation of financial +statements in conformity with generally accepted accounting +principles. These systems are supplemented by the selection and +training of qualified financial personnel and an organizational +structure providing for appropriate segregation of duties. +An Internal Audit department reviews the results of its work +with the Audit Committee of the Board of Directors, presently +consisting of four outside directors. The Audit Committee is +responsible for the appointment of the independent registered +public accounting firm and reviews with the independent +registered public accounting firm, management and the internal +audit staff, the scope and the results of the annual +examination, the effectiveness of the accounting control system +and other matters relating to the financial affairs of NIKE as +they deem appropriate. The independent registered public +accounting firm and the internal +33 +Table of Contents +auditors have full access to the Committee, with and without the +presence of management, to discuss any appropriate matters. +Management’s Report on Internal Control Over Financial +Reporting +Management is responsible for establishing and maintaining +adequate internal control over financial reporting, as such term +is defined in Exchange Act rule 13a-15(f). Under the +supervision and with the participation of our Chief Executive +Officer and Chief Financial Officer, our management conducted an +evaluation of the effectiveness of our internal control over +financial reporting based upon the framework in Internal +Control — Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway +Commission. Based on that evaluation, our management concluded +that our internal control over financial reporting is effective +as of May 31, 2005. +Internal control over financial reporting cannot provide +absolute assurance of achieving financial reporting objectives +because of its inherent limitations. Internal control over +financial reporting is a process that involves human diligence +and compliance and is subject to lapses in judgment and +breakdowns resulting from human failures. Internal control over +financial reporting also can be circumvented by collusion or +improper management override. Because of such limitations, there +is a risk that material misstatements may not be prevented or +detected on a timely basis by internal control over financial +reporting. However, these inherent limitations are known +features of the financial reporting process. Therefore, it is +possible to design into the process safeguards to reduce, though +not eliminate, this risk. +PricewaterhouseCoopers LLP, an independent registered public +accounting firm, has audited (1) the consolidated financial +statements, (2) management’s assessment of the +effectiveness of our internal control over financial reporting +as of May 31, 2005 and (3) the effectiveness of our +internal control over financial reporting as of May 31, +2005, as stated in their report herein. +William D. Perez +Chief Executive Officer +and President +Donald W. Blair +Chief Financial Officer +34 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and Shareholders of NIKE, Inc.: +We have completed an integrated audit of NIKE, Inc.’s 2005 +consolidated financial statements and of its internal control +over financial reporting as of May 31, 2005 and audits of +its 2004 and 2003 consolidated financial statements in +accordance with the standards of the Public Company Accounting +Oversight Board (United States). Our opinions, based on our +audits, are presented below. +Consolidated financial statements and financial statement +schedule +In our opinion, the consolidated financial statements listed in +the index appearing under Item 15(A)(1) present fairly, in +all material respects, the financial position of NIKE, Inc. and +its subsidiaries at May 31, 2005 and 2004, and the results +of their operations and their cash flows for each of the three +years in the period ended May 31, 2005 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 index appearing under Item 15(A)(2) +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 and financial statement +schedule based on our audits. We conducted our audits of these +statements in accordance with the standards of the Public +Company Accounting Oversight Board (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 of financial statements +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 audits provide a reasonable +basis for our opinion. +As discussed in Note 4 to the consolidated financial +statements, effective June 1, 2002, the Company changed its +method of accounting for goodwill and intangible assets in +accordance with the Statement of Financial Accounting Standards +No. 142, “Goodwill and Other Intangible Assets.” +Internal control over financial reporting +Also, in our opinion, management’s assessment, included in +Management’s Report on Internal Control Over Financial +Reporting appearing under Item 8, that the Company +maintained effective internal control over financial reporting +as of May 31, 2005 based on criteria established in +Internal Control — Integrated Framework issued +by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO), is fairly stated, in all material respects, +based on those criteria. Furthermore, in our opinion, the +Company maintained, in all material respects, effective internal +control over financial reporting as of May 31, 2005, based +on criteria established in Internal Control — +Integrated Framework issued by the COSO. The Company’s +management is responsible for maintaining effective internal +control over financial reporting and for its assessment of the +effectiveness of internal control over financial reporting. Our +responsibility is to express opinions on management’s +assessment and on the effectiveness of the Company’s +internal control over financial reporting based on our audit. We +conducted our audit of internal control over financial reporting +in accordance with the standards of the Public Company +Accounting Oversight Board (United States). Those standards +require that we plan and perform the audit to obtain reasonable +assurance about whether effective internal control over +financial reporting was maintained in all material respects. An +audit of internal control over financial reporting includes +obtaining an understanding of internal control over financial +reporting, evaluating management’s assessment, testing and +evaluating the design and operating effectiveness of internal +control, and performing such other procedures as we consider +necessary in the circumstances. We believe that our audit +provides a reasonable basis for our opinions. +A company’s internal control over financial reporting is a +process designed to provide reasonable assurance regarding the +reliability of financial reporting and the preparation of +financial statements for +35 +Table of Contents +external purposes in accordance with generally accepted +accounting principles. A company’s internal control over +financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in +reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; +(ii) provide reasonable assurance that transactions are +recorded as necessary to permit preparation of financial +statements in accordance with generally accepted accounting +principles, and that receipts and expenditures of the company +are being made only in accordance with authorizations of +management and directors of the company; and (iii) provide +reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the +company’s assets that could have a material effect on the +financial statements. +Because of its inherent limitations, internal control over +financial reporting may not prevent or detect misstatements. +Also, projections of any evaluation of effectiveness to future +periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree +of compliance with the policies or procedures may deteriorate. +/s/ PricewaterhouseCoopers +LLP +PricewaterhouseCoopers LLP +Portland, Oregon +July 27, 2005 +36 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +Year Ended May 31, +2005 +2004 +2003 +(In millions, except per share data) +Revenues +$ +13,739.7 +$ +12,253.1 +$ +10,697.0 +Cost of sales +7,624.3 +7,001.4 +6,313.6 +Gross Margin +6,115.4 +5,251.7 +4,383.4 +Selling and administrative +4,221.7 +3,702.0 +3,154.1 +Interest expense, net (Notes 1, 6 and 7) +4.8 +25.0 +28.8 +Other expense, net (Note 16) +29.1 +74.7 +77.5 +Income before income taxes and cumulative effect of accounting +change +1,859.8 +1,450.0 +1,123.0 +Income taxes (Note 8) +648.2 +504.4 +382.9 +Income before cumulative effect of accounting change +1,211.6 +945.6 +740.1 +Cumulative effect of accounting change, net of income taxes of +($-, $- and $-) (Note 4) +— +— +266.1 +Net income +$ +1,211.6 +$ +945.6 +$ +474.0 +Basic earnings per common share — before accounting +change (Notes 1 and 11) +$ +4.61 +$ +3.59 +$ +2.80 +Cumulative effect of accounting change +— +— +1.01 +$ +4.61 +$ +3.59 +$ +1.79 +Diluted earnings per common share — before accounting +change (Notes 1 and 11) +$ +4.48 +$ +3.51 +$ +2.77 +Cumulative effect of accounting change +— +— +1.00 +$ +4.48 +$ +3.51 +$ +1.77 +Dividends declared per common share +$ +0.95 +$ +0.74 +$ +0.54 +The accompanying notes to consolidated financial statements are +an integral part of this statement. +37 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +May 31, +2005 +2004 +(In millions) +ASSETS +Current Assets: +Cash and equivalents +$ +1,388.1 +$ +828.0 +Short-term investments +436.6 +400.8 +Accounts receivable, less allowance for doubtful accounts of +$80.4 and $95.3 +2,262.1 +2,120.2 +Inventories (Note 2) +1,811.1 +1,650.2 +Deferred income taxes (Note 8) +110.2 +165.0 +Prepaid expenses and other current assets +343.0 +364.4 +Total current assets +6,351.1 +5,528.6 +Property, plant and equipment, net (Note 3) +1,605.8 +1,611.8 +Identifiable intangible assets, net (Note 4) +406.1 +366.3 +Goodwill (Note 4) +135.4 +135.4 +Deferred income taxes and other assets (Note 8) +295.2 +266.6 +Total assets +$ +8,793.6 +$ +7,908.7 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current Liabilities: +Current portion of long-term debt (Note 7) +$ +6.2 +$ +6.6 +Notes payable (Note 6) +69.8 +146.0 +Accounts payable (Note 6) +843.9 +780.4 +Accrued liabilities (Notes 5 and 16) +984.3 +979.3 +Income taxes payable +95.0 +118.2 +Total current liabilities +1,999.2 +2,030.5 +Long-term debt (Note 7) +687.3 +682.4 +Deferred income taxes and other liabilities (Note 8) +462.6 +413.8 +Commitments and contingencies (Notes 14 and 16) +— +— +Redeemable Preferred Stock (Note 9) +0.3 +0.3 +Shareholders’ Equity: +Common Stock at stated value (Note 10): +Class A convertible — 71.9 and 77.6 shares +outstanding +0.1 +0.1 +Class B — 189.2 and 185.5 shares outstanding +2.7 +2.7 +Capital in excess of stated value +1,182.9 +887.8 +Unearned stock compensation +(11.4 +) +(5.5 +) +Accumulated other comprehensive income (loss) (Note 13) +73.4 +(86.3 +) +Retained earnings +4,396.5 +3,982.9 +Total shareholders’ equity +5,644.2 +4,781.7 +Total liabilities and shareholders’ equity +$ +8,793.6 +$ +7,908.7 +The accompanying notes to consolidated financial statements are +an integral part of this statement. +38 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Cash provided (used) by operations: +Net income +$ +1,211.6 +$ +945.6 +$ +474.0 +Income charges not affecting cash: +Cumulative effect of accounting change +— +— +266.1 +Depreciation +257.2 +255.2 +239.3 +Deferred income taxes +21.3 +19.0 +55.0 +Amortization and other +30.5 +58.3 +23.2 +Income tax benefit from exercise of stock options +63.1 +47.2 +12.5 +Changes in certain working capital components: +(Increase) decrease in accounts receivable +(93.5 +) +97.1 +(136.3 +) +Increase in inventories +(103.3 +) +(55.9 +) +(102.8 +) +Decrease (increase) in prepaids and other current assets +71.4 +(103.6 +) +60.9 +Increase in accounts payable, accrued liabilities and income +taxes payable +112.4 +255.6 +30.1 +Cash provided by operations +1,570.7 +1,518.5 +922.0 +Cash provided (used) by investing activities: +Purchases of short-term investments +(1,527.2 +) +(400.8 +) +— +Maturities of short-term investments +1,491.9 +— +— +Additions to property, plant and equipment +(257.1 +) +(214.8 +) +(185.9 +) +Disposals of property, plant and equipment +7.2 +11.6 +14.8 +Increase in other assets +(39.1 +) +(53.4 +) +(46.3 +) +Increase (decrease) in other liabilities +11.1 +(4.1 +) +1.8 +Acquisition of subsidiary, net of cash acquired +(47.2 +) +(289.1 +) +— +Cash used by investing activities +(360.4 +) +(950.6 +) +(215.6 +) +Cash provided (used) by financing activities: +Proceeds from long-term debt issuance +— +153.8 +90.4 +Reductions in long-term debt including current portion +(9.2 +) +(206.6 +) +(55.9 +) +Decrease in notes payable +(81.7 +) +(0.3 +) +(351.1 +) +Proceeds from exercise of stock options and other stock issuances +226.8 +253.6 +44.2 +Repurchase of stock +(556.2 +) +(419.8 +) +(196.3 +) +Dividends — common and preferred +(236.7 +) +(179.2 +) +(137.8 +) +Cash used by financing activities +(657.0 +) +(398.5 +) +(606.5 +) +Effect of exchange rate changes +6.8 +24.6 +(41.4 +) +Net increase in cash and equivalents +560.1 +194.0 +58.5 +Cash and equivalents, beginning of year +828.0 +634.0 +575.5 +Cash and equivalents, end of year +$ +1,388.1 +$ +828.0 +$ +634.0 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +33.9 +$ +37.8 +$ +38.9 +Income taxes +585.3 +418.6 +330.2 +The accompanying notes to consolidated financial statements are +an integral part of this statement. +39 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +Common Stock +Accumulated +Capital in +Other +Class A +Class B +Excess of +Unearned +Comprehensive +Stated +Stock +Income +Retained +Shares +Amount +Shares +Amount +Value +Compensation +(Loss) +Earnings +Total +(In millions, except per share data) +Balance at May 31, 2002 +98.1 +$ +0.2 +168.0 +$ +2.6 +$ +538.7 +$ +(5.1 +) +$ +(192.4 +) +$ +3,495.0 +$ +3,839.0 +Stock options exercised +1.3 +48.2 +48.2 +Conversion to Class B Common Stock +(0.3 +) +0.3 +— +Repurchase of Class B Common Stock +(4.0 +) +(4.8 +) +(186.2 +) +(191.0 +) +Dividends on Common stock ($.54 per share) +(142.7 +) +(142.7 +) +Issuance of shares to employees +0.3 +9.6 +(0.2 +) +9.4 +Amortization of unearned compensation +3.7 +3.7 +Forfeiture of shares from employees +(0.1 +) +(2.7 +) +1.0 +(0.9 +) +(2.6 +) +Comprehensive income (Note 13): +Net income +474.0 +474.0 +Other comprehensive income (net of tax benefit of $72.8): +Foreign currency translation +127.4 +127.4 +Adjustment for fair value of hedge derivatives +(174.7 +) +(174.7 +) +Comprehensive income +(47.3 +) +474.0 +426.7 +Balance at May 31, 2003 +97.8 +$ +0.2 +165.8 +$ +2.6 +$ +589.0 +$ +(0.6 +) +$ +(239.7 +) +$ +3,639.2 +$ +3,990.7 +Stock options exercised +5.5 +284.9 +284.9 +Conversion to Class B Common Stock +(20.2 +) +(0.1 +) +20.2 +0.1 +— +Repurchase of Class B Common Stock +(6.4 +) +(7.6 +) +(406.7 +) +(414.3 +) +Dividends on Common stock ($.74 per share) +(194.9 +) +(194.9 +) +Issuance of shares to employees +0.4 +23.2 +(7.5 +) +15.7 +Amortization of unearned compensation +2.6 +2.6 +Forfeiture of shares from employees +(1.7 +) +(0.3 +) +(2.0 +) +Comprehensive income (Note 13): +Net income +945.6 +945.6 +Other comprehensive income (net of tax expense of $69.0): +Foreign currency translation +27.5 +27.5 +Adjustment for fair value of hedge derivatives +125.9 +125.9 +Comprehensive income +153.4 +945.6 +1,099.0 +Balance at May 31, 2004 +77.6 +$ +0.1 +185.5 +$ +2.7 +$ +887.8 +$ +(5.5 +) +$ +(86.3 +) +$ +3,982.9 +$ +4,781.7 +Stock options exercised +4.4 +273.2 +273.2 +Conversion to Class B Common Stock +(5.7 +) +5.7 +— +Repurchase of Class B Common Stock +(6.9 +) +(8.3 +) +(547.9 +) +(556.2 +) +Dividends on Common stock ($.95 per share) +(249.4 +) +(249.4 +) +Issuance of shares to employees +0.5 +32.1 +(10.2 +) +21.9 +Amortization of unearned compensation +3.9 +3.9 +Forfeiture of shares from employees +(1.9 +) +0.4 +(0.7 +) +(2.2 +) +Comprehensive income (Note 13): +Net income +1,211.6 +1,211.6 +Other comprehensive income (net of tax expense of $40.2): +Foreign currency translation +70.1 +70.1 +Adjustment for fair value of hedge derivatives +89.6 +89.6 +Comprehensive income +159.7 +1,211.6 +1,371.3 +Balance at May 31, 2005 +71.9 +$ +0.1 +189.2 +$ +2.7 +$ +1,182.9 +$ +(11.4 +) +$ +73.4 +$ +4,396.5 +$ +5,644.2 +The accompanying notes to consolidated financial statements are +an integral part of this statement. +40 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 — +Summary of Significant Accounting Policies +Basis of Consolidation +The consolidated financial statements include the accounts of +NIKE, Inc. and its subsidiaries (the “Company”). All +significant intercompany transactions and balances have been +eliminated. +Recognition of Revenues +Wholesale revenues are recognized when the risks and rewards of +ownership have passed to the customer, based on the terms of +sale. This occurs upon shipment or upon receipt by the customer +depending on the country of the sale and the agreement with the +customer. Retail store revenues are recorded at the time of +sale. Provisions for sales discounts, returns and miscellaneous +claims from customers are made at the time of sale. +Shipping and Handling Costs +Shipping and handling costs are expensed as incurred and +included in cost of sales. +Advertising and Promotion +Advertising production costs are expensed the first time the +advertisement is run. Media (TV and print) placement costs +are expensed in the month the advertising appears. A significant +amount of the Company’s promotional expenses result from +payments under endorsement contracts. Accounting for endorsement +payments is based upon specific contract provisions. Generally, +endorsement payments are expensed uniformly over the term of the +contract after giving recognition to periodic performance +compliance provisions of the contracts. Prepayments made under +contracts are included in prepaid expenses and other current +assets or other assets depending on the length of the contract. +Through cooperative advertising programs, the Company reimburses +its retail customers for certain of their costs of advertising +the Company’s products. The Company records these costs in +selling and administrative expense at the point in time when it +is obligated to its customers for the costs, which is when the +related revenues are recognized. This obligation may arise prior +to the related advertisement being run. Total advertising and +promotion expenses were $1,600.7 million, +$1,377.9 million, and $1,166.8 million for the years +ended May 31, 2005, 2004 and 2003, respectively. Prepaid +advertising and promotion expenses recorded as appropriate in +prepaid expenses and other current assets and other assets +totaled $126.1 million and $154.6 million at +May 31, 2005 and 2004, respectively. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly +liquid investments with original maturities of three months or +less at date of purchase. The carrying amounts reflected in the +consolidated balance sheet for cash and cash equivalents +approximate fair value due to the short maturities. +Short-term Investments +Short-term investments consist primarily of U.S. Treasury +debt securities with maturities of six months or less at the +date of purchase. Debt securities which the Company has the +ability and positive intent to hold to maturity are carried at +amortized cost. Available-for-sale debt securities are recorded +at fair value with any net unrealized gains and losses reported, +net of tax, in other comprehensive income. Realized gains or +losses are determined based on the specific identification +method. The Company holds no investments considered to be +trading securities. Amortized cost of both available-for-sale +and held-to-maturity debt securities approximates fair market +value due to their short maturities. Substantially all +investments held at May 31, 2005 have remaining maturities +of 120 days or less. Included in interest expense, net for +the years ended May 31, 2005, +41 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +2004, and 2003, was interest income of $34.9 million, +$15.3 million and $14.1 million, respectively, related +to short-term investments and cash and cash equivalents. +Inventory Valuation +Inventories are stated at the lower of cost or market. +Inventories are valued on a first-in, first-out (FIFO) or +moving-average cost basis. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation +for financial reporting purposes is determined on a +straight-line basis for buildings and leasehold improvements +over 2 to 40 years and principally on a double declining +balance basis for machinery and equipment over 2 to +15 years. Computer software (including, in some cases, the +cost of internal labor) is depreciated on a straight-line basis +over 3 to 10 years. +Impairment of Long-Lived Assets +In accordance with Statement of Financial Accounting Standards +(SFAS) No. 144 “Accounting for the Impairment or +Disposal of Long-Lived Assets” (FAS 144), the Company +estimates the future undiscounted cash flows to be derived from +an asset to assess whether or not a potential impairment exists +when events or circumstances indicate the carrying value of a +long-lived asset may be impaired. If the carrying value exceeds +the Company’s estimate of future undiscounted cash flows, +the Company then calculates the impairment as the excess of the +carrying value of the asset over the Company’s estimate of +its fair market value. +Identifiable Intangible Assets and Goodwill +In accordance with SFAS No. 142 “Goodwill and +Other Intangible Assets” (FAS 142), goodwill and +intangible assets with indefinite lives are not amortized but +instead are measured for impairment at least annually in the +fourth quarter, or when events indicate that an impairment +exists. As required by FAS 142, in the Company’s +impairment test of goodwill, the Company compares the fair value +of the applicable reporting unit to its carrying value. If the +carrying value of the reporting unit exceeds the estimate of +fair value, the Company calculates the impairment as the excess +of the carrying value of goodwill over its implied fair value. +In the impairment tests for indefinite-lived intangible assets, +the Company compares the estimated fair value of the +indefinite-lived intangible assets to the carrying value. If the +carrying value exceeds the estimate of fair value, the Company +calculates impairment as the excess of the carrying value over +the estimate of fair value. See Note 4 for discussion of +the Company’s adoption of FAS 142 in the year ended +May 31, 2003. +Intangible assets that are determined to have definite lives are +amortized over their useful lives and are measured for +impairment only when events or circumstances indicate the +carrying value may be impaired in accordance with FAS 144 +discussed above. +Foreign Currency Translation and Foreign Currency +Transactions +Adjustments resulting from translating foreign functional +currency financial statements into U.S. dollars are +included in the foreign currency translation adjustment, a +component of accumulated other comprehensive income (loss) in +shareholders’ equity. +Transaction gains and losses generated by the effect of foreign +exchange on recorded assets and liabilities denominated in a +currency different from the functional currency of the +applicable Company entity are recorded in other expense, net, in +the period in which they occur. +42 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to limit +exposure to changes in foreign currency exchange rates and +interest rates. The Company accounts for derivatives pursuant to +SFAS No. 133, “Accounting for Derivative +Instruments and Hedging Activities,” as amended and +interpreted (FAS 133). FAS 133 establishes accounting +and reporting standards for derivative instruments and requires +that all derivatives be recorded at fair value on the balance +sheet. Changes in the fair value of derivative financial +instruments are either recognized in other comprehensive income +(a component of shareholders’ equity) or net income +depending on whether the derivative is being used to hedge +changes in cash flows or fair value. +See Note 16 for more information on the Company’s Risk +Management program and derivatives. +Stock-Based Compensation +The Company uses the intrinsic value method to account for +stock-based compensation in accordance with Accounting +Principles Board (“APB”) Opinion No. 25, +“Accounting for Stock Issued to Employees” as +permitted by SFAS No. 123 “Accounting for +Stock-Based Compensation” (FAS 123). The +Company’s policy is to grant stock options with an exercise +price equal to the market value at the date of grant, and +accordingly, no compensation expense is recognized. +As required by FAS 123 and amended by +SFAS No. 148 “Accounting for Stock-Based +Compensation — Transition and Disclosure” +(FAS 148), the Company has computed, for pro forma +disclosure purposes, the fair value of options granted and +employees’ purchase rights under the Employee Stock +Purchase Plan (ESPP) during the years ended May 31, +2005, 2004 and 2003 using the Black-Scholes option pricing +model. The weighted average assumptions used for the majority of +stock option grants for each of these years were a dividend +yield of 1%, expected volatility of the market price of the +Company’s common stock of 42%, 44%, and 38% for the years +ended May 31, 2005, 2004 and 2003, respectively; a +weighted-average expected life of the options of approximately +five years; and interest rates of 3.7%, 2.9%, and 3.8% for the +years ended May 31, 2005, 2004 and 2003, respectively. +Options were assumed to be exercised over the five year expected +life for purposes of this valuation. Adjustments for forfeitures +are made as they occur. For the years ended May 31, 2005, +2004 and 2003, the total value of the options granted, for which +no previous expense has been recognized, was computed as +approximately $150.2 million, $102.3 million, and +$89.8 million, respectively, which would be amortized on a +straight line basis over the vesting period of the options. The +weighted average fair value per share of the options granted in +the years ended May 31, 2005, 2004 and 2003 are $27.90, +$20.36, and $17.45, respectively. +43 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +If the Company had accounted for these stock options and ESPP +purchase rights issued to employees in accordance with +FAS 123, the Company’s pro forma net income and pro +forma earnings per share (EPS) would have been reported as +follows: +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Net income as reported +$ +1,211.6 +$ +945.6 +$ +474.0 +Add: Stock-based compensation expense included in reported net +income, net of tax +0.6 +— +— +Deduct: Total stock-based employee compensation expense under +fair value based method for all awards, net of tax +(64.1 +) +(48.7 +) +(42.2 +) +Pro forma net income +$ +1,148.1 +$ +896.9 +$ +431.8 +Earnings per Share: +Basic — as reported +$ +4.61 +$ +3.59 +$ +1.79 +Basic — pro forma +$ +4.37 +$ +3.41 +$ +1.63 +Diluted — as reported +$ +4.48 +$ +3.51 +$ +1.77 +Diluted — pro forma +$ +4.28 +$ +3.35 +$ +1.62 +The pro forma effects of applying FAS 123 may not be +representative of the effects on reported net income and +earnings per share for future years since options vest over +several years and additional awards are made each year. +On December 16, 2004, the Financial Accounting Standards +Board (FASB) finalized SFAS No. 123R +“Share-Based Payment” (FAS 123R) which, after the +Securities and Exchange Commission (SEC) amended the +compliance dates on April 15, 2005, will be effective for +the Company’s fiscal year beginning June 1, 2006. The +new standard will require the Company to record compensation +expense for stock options using a fair value method. On +March 29, 2005, the SEC issued Staff Accounting +Bulletin No. 107 (SAB 107), which provides the +Staff’s views regarding interactions between FAS 123R +and certain SEC rules and regulations and provides +interpretations of the valuation of share-based payments for +public companies. +The Company is currently evaluating FAS 123R and +SAB 107 to determine the fair value method to measure +compensation expense, the appropriate assumptions to include in +the fair value model and the transition method to use upon +adoption. The impact of the adoption of FAS 123R is not +known at this time due to these factors as well as the unknown +level of share-based payments granted in future years. The +effect on the Company’s results of operations of expensing +stock options using the Black-Scholes model is presented in the +table above. +Under certain conditions, stock options granted by the Company +are eligible for accelerated vesting upon the retirement of the +employee. The FASB clarified in FAS 123R that the fair +value of such stock options should be expensed based on an +accelerated vesting schedule or immediately, rather than ratably +over the vesting period stated in the grant. The Company’s +pro forma disclosure above currently reflects the expense of +such options ratably over the stated vesting period, expensing +all unvested shares upon actual retirement. The SEC has recently +clarified that companies should continue to follow the vesting +method they have been using until adoption of FAS 123R, +then apply the accelerated vesting schedule to all subsequent +grants to those employees eligible for accelerated vesting upon +retirement. Had the Company been accounting for such stock +options using the accelerated vesting schedule for those +employees eligible for accelerated vesting upon retirement, the +Company would have recognized additional stock-based +compensation expense in the above pro forma of $0.05 per +diluted share for the years ended May 31, 2005, 2004 and +2003. +44 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Income Taxes +The Company accounts for income taxes using the asset and +liability method. This approach requires the recognition of +deferred tax assets and liabilities for the expected future tax +consequences of temporary differences between the carrying +amounts and the tax bases of other assets and liabilities. +United States income taxes are provided currently on financial +statement earnings of non-U.S. subsidiaries that are +expected to be repatriated. The Company determines annually the +amount of undistributed non-U.S. earnings to invest +indefinitely in its non-U.S. operations. See Note 8 +for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by dividing net +income by the weighted average number of common shares +outstanding during the year. Diluted earnings per common share +is calculated by adjusting weighted average outstanding shares, +assuming conversion of all potentially dilutive stock options +and awards. See Note 11 for further discussion. +Management Estimates +The preparation of financial statements in conformity with +generally accepted accounting principles requires management to +make estimates, including estimates relating to assumptions that +affect the reported amounts of assets and liabilities and +disclosure of contingent assets and liabilities at the date of +financial statements and the reported amounts of revenues and +expenses during the reporting period. Actual results could +differ from these estimates. +Reclassifications +Certain prior year amounts have been reclassified to conform to +fiscal year 2005 presentation. These changes had no impact on +previously reported results of operations or shareholders’ +equity. +Recently Issued Accounting Standards +In November 2004, the FASB issued SFAS No. 151, +“Inventory Costs, an amendment of ARB No. 43, +Chapter 4” (FAS 151). FAS 151 clarifies that +abnormal inventory costs such as costs of idle facilities, +excess freight and handling costs, and wasted materials +(spoilage) are required to be recognized as current period +charges. The provisions of FAS 151 are effective for the +fiscal year beginning June 1, 2006. The Company is +currently evaluating the provisions of FAS 151 and does not +expect that the adoption will have a material impact on the +Company’s consolidated financial position or results of +operations. +In December 2004, the FASB issued FAS 123R. In March 2005, +the SEC issued SAB 107 regarding the SEC Staff’s +interpretation of FAS 123R. See the Stock-Based +Compensation section within Note 1 above for further +discussion. +45 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Note 2 — +Inventories +Inventories by major classification are as follows: +May 31, +2005 +2004 +(In millions) +Finished goods +$ +1,807.1 +$ +1,626.3 +Work-in-progress +1.5 +10.6 +Raw materials +2.5 +13.3 +$ +1,811.1 +$ +1,650.2 +Note 3 — +Property, Plant and Equipment +Property, plant and equipment includes the following: +May 31, +2005 +2004 +(In millions) +Land +$ +185.4 +$ +179.5 +Buildings +823.9 +813.6 +Machinery and equipment +1,528.4 +1,608.6 +Leasehold improvements +568.4 +521.3 +Construction in process +73.1 +60.4 +3,179.2 +3,183.4 +Less accumulated depreciation +1,573.4 +1,571.6 +$ +1,605.8 +$ +1,611.8 +Capitalized interest was not material for the years ended +May 31, 2005, 2004 and 2003. +Note 4 — +Identifiable Intangible Assets and Goodwill: +Adoption of FAS 142 +The Company adopted FAS 142 effective June 1, 2002. In +accordance with FAS 142, goodwill and intangible assets +with indefinite lives are not amortized but instead are measured +for impairment at least annually in the fourth quarter, or when +events indicate that an impairment exists. Intangible assets +that are determined to have definite lives are amortized over +their useful lives. +As required by FAS 142, the Company performed impairment +tests on goodwill and other intangible assets with indefinite +lives, which consisted only of certain trademarks, as of +June 1, 2002. As a result of the impairment tests, the +Company recorded a $266.1 million cumulative effect of +accounting change for the year ended May 31, 2003. Under +FAS 142, goodwill impairment exists if the net book value +of a reporting unit exceeds its estimated fair value. The +Company estimated the fair value of its reporting units by using +a combination of discounted cash flow analyses and comparisons +with the market values of similar publicly-traded companies. +Included in the Company’s $266.1 million impairment +charge was a $178.5 million charge related to the +impairment of the goodwill associated with the Bauer NIKE Hockey +(“Bauer”) and Cole Haan reporting units. These +reporting units are reflected in the Company’s Other +operating segment. Since the Company’s purchase of Bauer in +1995, the hockey equipment and apparel markets have not grown as +fast as expected and +46 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +the in-line skate market has contracted significantly. As a +result, the Company determined that the goodwill acquired at +Bauer had been impaired. The goodwill impairment at Cole Haan +reflected the significantly lower fair value calculated on the +basis of reduced operating income in the year following the +September 11, 2001 terrorist attacks. +The remaining $87.6 million of the impairment charge +relates to trademarks associated with Bauer. Under FAS 142, +impairment of an indefinite-lived asset exists if the net book +value of the asset exceeds its fair value. The Company estimated +the fair value of trademarks using the relief-from-royalty +approach, which is a standard form of discounted cash flow +analysis typically used for the valuation of trademarks. The +impairment of the Bauer trademarks reflects the same +circumstances as described above related to the Bauer goodwill +impairment. +The following table summarizes the Company’s identifiable +intangible assets and goodwill balances as of May 31, 2005 +and May 31, 2004: +May 31, 2005 +May 31, 2004 +Gross +Net +Gross +Net +Carrying +Accumulated +Carrying +Carrying +Accumulated +Carrying +Amount +Amortization +Amount +Amount +Amortization +Amount +(In millions) +Amortized intangible assets: +Patents +$ +29.2 +$ +(10.9 +) +$ +18.3 +$ +27.9 +$ +(11.9 +) +$ +16.0 +Trademarks +54.8 +(16.4 +) +38.4 +14.1 +(11.5 +) +2.6 +Other +21.4 +(13.5 +) +7.9 +17.0 +(10.8 +) +6.2 +Total +$ +105.4 +$ +(40.8 +) +$ +64.6 +$ +59.0 +$ +(34.2 +) +$ +24.8 +Unamortized intangible assets — Trademarks +$ +341.5 +$ +341.5 +Total +$ +406.1 +$ +366.3 +Goodwill +$ +135.4 +$ +135.4 +Amortization expense of identifiable assets with definite lives, +which is included in selling and administrative expense, was +$9.3 million, $12.0 million and $3.6 million for +the years ended May 31, 2005, 2004, and 2003, respectively. +The estimated amortization expense for intangible assets subject +to amortization for each of the succeeding years ending +May 31, 2006 through May 31, 2010 is as follows: 2006: +$9.4 million; 2007: $8.5 million; 2008: +$8.0 million; 2009: $6.7 million; 2010: +$5.9 million. +On August 11, 2004, the Company acquired Official Starter +LLC and Official Starter Properties LLC (collectively +“Official Starter”). As a result of the acquisition, +$39.0 million was allocated to amortized trademarks and +$4.6 million was allocated to other amortized intangible +assets. The weighted average amortization period is nine years +in total and approximately 10 years and three years for +amortized trademarks and other amortized intangible assets, +respectively. See Note 15 for additional information +related to the acquisition. +47 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Note 5 — +Accrued Liabilities +Accrued liabilities include the following: +May 31, +2005 +2004 +(In millions) +Compensation and benefits +$ +394.2 +$ +339.0 +Fair value of derivatives +61.8 +141.3 +Tax +96.8 +87.5 +Endorser compensation +93.0 +86.9 +Dividends payable +65.3 +52.6 +Advertising and marketing +57.4 +44.8 +Other(1) +215.8 +227.2 +$ +984.3 +$ +979.3 +(1) +Other consists of various accrued expenses and no individual +item accounted for more than $50 million of the balance at +May 31, 2005 or 2004. +Note 6 — +Short-Term Borrowings and Credit Lines +Notes payable to banks and interest-bearing accounts payable to +Sojitz Corporation of America (“Sojitz America”) as of +May 31, 2005 and 2004, are summarized below: +May 31, +2005 +2004 +Interest +Interest +Borrowings +Rate +Borrowings +Rate +(In millions) +(In millions) +Notes payable: +U.S. operations +$ +37.0 +0.12% +(1) +$ +28.3 +0.67% +(1) +Non-U.S. operations +32.8 +6.68% +117.7 +3.18% +$ +69.8 +$ +146.0 +Sojitz America +53.1 +3.90% +43.9 +1.88% +(1) +Weighted average interest rate includes non-interest bearing +overdrafts. +The carrying amounts reflected in the consolidated balance sheet +for notes payable approximate fair value due to the short +maturities. +The Company purchases through Sojitz America certain athletic +footwear, apparel and equipment it acquires from +non-U.S. suppliers. These purchases are for the +Company’s operations outside of the U.S., Europe, Middle +East, Africa and Japan. Accounts payable to Sojitz America are +generally due up to 60 days after shipment of goods from +the foreign port. The interest rate on such accounts payable is +the 60 day London Interbank Offered Rate +(“LIBOR”) as of the beginning of the month of the +invoice date, plus 0.75%. +The Company had no borrowings outstanding under its commercial +paper program at May 31, 2005 and 2004. +The Company has a multi-year $750 million revolving credit +facility in place with a group of banks under which no amounts +were outstanding as of May 31, 2005 and 2004. The facility +matures on November 20, 2008 +48 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +and can be extended for one additional year on the anniversary +date. Based on the Company’s current long-term senior +unsecured debt ratings the interest rate charged on any +outstanding borrowings would be the prevailing LIBOR plus 0.18%. +The facility fee is 0.07% of the total commitment. Under this +agreement, the Company must maintain, among other things, +certain minimum specified financial ratios with which the +Company was in compliance at May 31, 2005. +Note 7 — +Long-Term Debt +Long-term debt includes the following: +May 31, +2005 +2004 +(In millions) +5.5% Corporate Bond, payable August 15, 2006 +$ +250.6 +$ +254.9 +4.8% Corporate Bond, payable July 9, 2007 +25.2 +25.4 +5.375% Corporate Bond, payable July 8, 2009 +25.7 +25.5 +5.66% Corporate Bond, payable July 23, 2012 +26.4 +25.5 +5.4% Corporate Bond, payable August 7, 2012 +15.5 +14.9 +4.7% Corporate Bond, payable October 1, 2013 +50.0 +50.0 +5.15% Corporate Bonds, payable October 15, 2015 +107.2 +98.7 +4.3% Japanese yen note, payable June 26, 2011 +97.2 +93.2 +2.6% Japanese yen note, maturing August 20, 2001 through +November 20, 2020 +66.1 +67.5 +2.0% Japanese yen note, maturing August 20, 2001 through +November 20, 2020 +29.5 +30.1 +Other +0.1 +3.3 +Total +693.5 +689.0 +Less current maturities +6.2 +6.6 +$ +687.3 +$ +682.4 +The fair value of long-term debt is estimated using discounted +cash flow analyses, based on the Company’s incremental +borrowing rates for similar types of borrowing arrangements. The +fair value of the Company’s long-term debt, including +current portion, is approximately $721.2 million at +May 31, 2005 and $721.4 million at May 31, 2004. +The Company has interest rate swap agreements with the same +notional amount and maturity dates as the $250.0 million +corporate bond maturing August 15, 2006, whereby the +Company receives fixed interest payments at the same rate as the +bond and pays variable interest payments based on the +three-month LIBOR plus a spread. The interest rates payable on +these swap agreements were approximately 4.7% and 2.7% at +May 31, 2005 and 2004, respectively. +The Company has an effective shelf registration statement with +the Securities and Exchange Commission for $1 billion of +debt securities. The Company has a medium-term note program +under the shelf registration that allows the Company to issue up +to $500 million in medium-term notes. During the year ended +May 31, 2005 there were no notes issued under the +medium-term note program of the shelf registration. During the +year ended May 31, 2004, the Company issued a total of +$150 million in notes under the medium-term note program of +the shelf registration. The notes have coupon rates that range +from 4.70% to 5.15%. The maturities range from October 1, +2013 to October 15, 2015. For each of these notes, the +Company has entered into interest rate swap agreements whereby +the Company receives fixed interest payments at the same rate as +the +49 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +notes and pays variable interest payments based on the +three-month or six-month LIBOR plus a spread. Each swap has the +same notional amount and maturity date as the corresponding +note, except for the swap for the $50 million note maturing +October 1, 2013, which expires October 2, 2006. At +May 31, 2005, the interest rates payable on these swap +agreements range from approximately 3.3% to 5.3%. Currently, +$760 million remains available to be issued under the shelf +registration. +In June 1996, one of the Company’s Japanese subsidiaries +borrowed 10,500 million Japanese yen in a private placement +with a maturity of June 26, 2011. Interest is paid +semi-annually. The agreement provides for early retirement after +year ten. +In July 1999, another of the Company’s Japanese +subsidiaries assumed 13,000 million in Japanese yen loans +as part of its agreement to purchase a distribution center in +Japan, which serves as collateral for the loans. These loans +mature in equal quarterly installments during the period +August 20, 2001 through November 20, 2020. Interest is +also paid quarterly. +Amounts of long-term debt maturities in each of the years ending +May 31, 2006 through 2010 are $6.2 million, +$256.2 million, $31.2 million, $6.2 million and +$31.2 million, respectively. +Note 8 — +Income Taxes +Income before income taxes and cumulative effect of accounting +change is as follows: +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Income before income taxes and cumulative effect of accounting +change: +United States +$ +755.5 +$ +607.7 +$ +444.8 +Foreign +1,104.3 +842.3 +678.2 +$ +1,859.8 +$ +1,450.0 +$ +1,123.0 +The provision for income taxes is as follows: +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Current: +United States +Federal +$ +279.6 +$ +185.3 +$ +125.6 +State +50.7 +43.3 +33.6 +Foreign +292.5 +266.8 +190.0 +622.8 +495.4 +349.2 +Deferred: +United States +Federal +21.9 +3.9 +11.3 +State +(5.3 +) +2.4 +8.6 +Foreign +8.8 +2.7 +13.8 +25.4 +9.0 +33.7 +$ +648.2 +$ +504.4 +$ +382.9 +50 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Deferred tax (assets) and liabilities are comprised of the +following: +May 31, +2005 +2004 +(In millions) +Deferred tax assets: +Allowance for doubtful accounts +$ +(15.7 +) +$ +(13.8 +) +Inventories +(29.7 +) +(28.4 +) +Sales return reserves +(31.5 +) +(30.7 +) +Deferred compensation +(89.2 +) +(82.2 +) +Reserves and accrued liabilities +(20.2 +) +(27.4 +) +Property, plant, and equipment +(26.4 +) +(20.3 +) +Foreign loss carryforwards +(28.9 +) +(29.1 +) +Foreign tax credit carryforwards +(34.4 +) +(24.4 +) +Hedges +(3.7 +) +(49.7 +) +Other +(22.7 +) +(17.2 +) +Total deferred tax assets +(302.4 +) +(323.2 +) +Valuation allowance +29.1 +27.1 +Total deferred tax assets after valuation allowance +(273.3 +) +(296.1 +) +Deferred tax liabilities: +Undistributed earnings of foreign subsidiaries +130.0 +95.5 +Property, plant and equipment +94.9 +93.6 +Intangibles +101.6 +101.6 +Hedges +4.0 +5.9 +Other +13.1 +8.8 +Total deferred tax liabilities +343.6 +305.4 +Net deferred tax liability +$ +70.3 +$ +9.3 +A reconciliation from the U.S. statutory federal income tax +rate to the effective income tax rate follows: +Year Ended May 31, +2005 +2004 +2003 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +1.8 +2.1 +2.5 +Foreign earnings +(2.8 +) +(0.6 +) +(2.7 +) +Other, net +0.9 +(1.7 +) +(0.7 +) +Effective income tax rate +34.9 +% +34.8 +% +34.1 +% +The Company has indefinitely reinvested approximately +$535.0 million of the cumulative undistributed earnings of +certain foreign subsidiaries. Such earnings would be subject to +U.S. taxation if repatriated to the U.S. The amount of +unrecognized deferred tax liability associated with the +permanently reinvested cumulative undistributed earnings was +approximately $110.1 million. +51 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +During the quarter ending May 31, 2005 the Company decided +to repatriate $500 million of foreign earnings during the +year ending May 31, 2006 under the American Jobs Creation +Act (the “Act”), which was signed into law by the +President on October 22, 2004. The Act creates a temporary +incentive for U.S. multinational corporations to repatriate +accumulated income earned outside the U.S. by providing an +85% dividend received deduction for certain dividends from +controlled foreign corporations. The Company elected to +repatriate a combination of foreign earnings for which +U.S. taxes has previously been provided and foreign +earnings that had been designated as permanently reinvested. +Accordingly, the provisions made did not have a material impact +on the Company’s income tax expense or effective tax rate +for the year. +Deferred tax assets at May 31, 2005 and 2004 were reduced +by a valuation allowance relating to tax benefits of certain +foreign subsidiaries with operating losses where it is more +likely than not that the deferred tax assets will not be +realized. +A benefit was recognized for foreign loss carryforwards of +$13.0 million and foreign tax credit carryforwards of +$34.4 million at May 31, 2005. Such losses and foreign +tax credits expire as follows (millions): +Year Ended May 31, +2008 +2009 +2010 +2011 +2012 +2013 +2014 +2015 +Indefinite +Net Operating Losses +3.5 +— +— +— +— +— +— +— +9.5 +Tax Credits +— +— +— +— +— +0.6 +18.8 +15.0 +— +During the years ended May 31, 2005, 2004, and 2003 income +tax benefits attributable to employee stock option transactions +of $63.1 million, $47.2 million, and +$12.5 million, respectively, were allocated to +shareholders’ equity. +Note 9 — +Redeemable Preferred Stock +Sojitz America is the sole owner of the Company’s +authorized Redeemable Preferred Stock, $1 par value, which +is redeemable at the option of Sojitz America or the Company at +par value aggregating $0.3 million. A cumulative dividend +of $0.10 per share is payable annually on May 31 and +no dividends may be declared or paid on the common stock of the +Company unless dividends on the Redeemable Preferred Stock have +been declared and paid in full. There have been no changes in +the Redeemable Preferred Stock in the three years ended +May 31, 2005. As the holder of the Redeemable Preferred +Stock, Sojitz America does not have general voting rights but +does have the right to vote as a separate class on the sale of +all or substantially all of the assets of the Company and its +subsidiaries, on merger, consolidation, liquidation or +dissolution of the Company or on the sale or assignment of the +NIKE trademark for athletic footwear sold in the United States. +Note 10 — +Common Stock +The authorized number of shares of Class A Common Stock, no +par value, and Class B Common Stock, no par value, are +110 million and 350 million, respectively. Each share +of Class A Common Stock is convertible into one share of +Class B Common Stock. Voting rights of Class B Common +Stock are limited in certain circumstances with respect to the +election of directors. +In 1990, the Board of Directors adopted, and the shareholders +approved, the NIKE, Inc. 1990 Stock Incentive Plan (the +“1990 Plan”). The 1990 Plan provides for the issuance +of up to 50 million shares of Class B Common Stock in +connection with stock options and other awards granted under +such plan. The 1990 Plan authorizes the grant of incentive stock +options, non-statutory stock options, stock appreciation rights, +stock bonuses and the sale of restricted stock. The exercise +price for incentive stock options may not be less than the fair +market value of the underlying shares on the date of grant and +substantially all grants vest ratably over four years and expire +10 years from the date of grant. The exercise price for +non-statutory stock options, stock appreciation rights and the +purchase price of restricted stock may not be less than 75% of +the fair market +52 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +value of the underlying shares on the date of grant. No +consideration will be paid for stock bonuses awarded under the +1990 Plan. A committee of the Board of Directors administers the +1990 Plan. The committee has the authority to determine the +employees to whom awards will be made, the amount of the awards, +and the other terms and conditions of the awards. As of +May 31, 2005 the committee has granted substantially all +non-statutory stock options at 100% of fair market value on the +date of grant under the 1990 Plan. +From time to time, the Company grants restricted stock and +unrestricted stock to key employees under the 1990 Plan. The +number of shares granted to employees during the years ended +May 31, 2005, 2004 and 2003 were 114,000, 148,000 and +9,000, respectively. Recipients of restricted shares are +entitled to cash dividends and to vote their respective shares +throughout the period of restriction. The value of all of the +granted shares was established by the market price on the date +of grant. Unearned compensation was charged for the market value +of the restricted shares. The unearned compensation is shown as +a reduction of shareholders’ equity and is being amortized +ratably over the vesting period. During the years ended +May 31, 2005, 2004, and 2003, respectively, the Company +recognized $3.9 million, $2.4 million and +$2.7 million in selling and administrative expense related +to the grants, net of forfeitures. +During the years ended May 31, 2005, 2004 and 2003, the +Company also granted shares of stock under the Long-Term +Incentive Plan (“LTIP”), adopted by the Board of +Directors and approved by shareholders in September 1997. The +LTIP provides for the issuance of up to +1.0 million shares of Class B Common Stock. Under +the LTIP, awards are made to certain executives in their choice +of either cash or stock, based on performance targets +established over varying time periods. Once performance targets +are achieved, cash or shares of stock are issued. The shares are +immediately vested upon grant. The value of the shares is +established by the market price on the date of issuance. Under +the LTIP 4,000 and 8,000 shares with a price of $69.69 and +$54.80, respectively, were issued during the years ended +May 31, 2005 and May 31, 2004 for the plan years ended +May 31, 2004 and May 31, 2003, respectively. No shares +were issued during the year ended May 31, 2003 as +performance targets for the plan period ended May 31, 2002 +were not met. Related to the LTIP the Company recognized +$22.2 million, $18.9 million and $9.9 million of +selling and administrative expense in the years ending +May 31, 2005, 2004 and 2003, respectively, net of +forfeitures. +The following summarizes the stock option transactions under +plans discussed above: +Weighted Average +Shares +Option Price +(In thousands) +Options outstanding May 31, 2002 +16,441 +$ +42.31 +Exercised +(1,307 +) +29.56 +Forfeited +(713 +) +45.23 +Granted +5,278 +48.83 +Options outstanding May 31, 2003 +19,699 +44.82 +Exercised +(5,526 +) +42.67 +Forfeited +(579 +) +47.14 +Granted +5,215 +52.14 +Options outstanding May 31, 2004 +18,809 +47.42 +Exercised +(4,438 +) +46.34 +Forfeited +(435 +) +52.65 +Granted +5,424 +73.92 +53 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Weighted Average +Shares +Option Price +(In thousands) +Options outstanding May 31, 2005 +19,360 +$ +54.98 +Options exercisable at May 31, +2003 +9,730 +$ +44.18 +2004 +8,177 +45.00 +2005 +7,339 +46.02 +The following table sets forth the exercise prices, the number +of options outstanding and exercisable and the remaining +contractual lives of the Company’s stock options at +May 31, 2005: +Options Outstanding +Options Exercisable +Weighted +Number of +Weighted +Average +Number of +Weighted +Options +Average +Contractual Life +Options +Average +Exercise Price +Outstanding +Exercise Price +Remaining +Exercisable +Exercise Price +(In thousands) +(Years) +(In thousands) +$21.00-$48.25 +3,944 +$ +38.36 +5.36 +2,982 +$ +37.05 +48.44- 48.98 +4,117 +48.90 +6.54 +1,860 +48.80 +49.01- 52.24 +4,304 +52.19 +8.06 +838 +52.03 +52.44- 71.92 +1,752 +56.49 +4.11 +1,645 +55.82 +73.21- 90.85 +5,243 +74.03 +9.15 +14 +73.44 +In September 2001, the Company’s shareholders approved the +establishment of an Employee Stock Purchase Plan +(“ESPP”) under which 3.0 million shares of +Class B Stock are reserved for issuance to employees. The +plan qualifies as a noncompensatory employee stock purchase plan +under Section 423 of the Internal Revenue Code. In February +2003, the Company’s Board of Directors approved a Foreign +Subsidiary ESPP under which 1.0 million shares of +Class B Stock are reserved for issuance to employees. +Employees are eligible to participate through payroll deductions +in amounts ranging from 1% to 10% of their compensation not to +exceed limitations set out under Section 423. At the end of +each six-month offering period, shares are purchased by the +participants at 85% of the lower of the fair market value at the +beginning or the end of the offering period. Under the ESPPs +0.3 million, 0.3 million, and 0.2 million shares +were issued during the years ended May 31, 2005, 2004, and +2003, respectively. +54 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Note 11 — +Earnings Per Share +The following represents a reconciliation from basic earnings +per share to diluted earnings per share. Options to purchase +0.2 million shares of common stock were outstanding at +May 31, 2005, but were not included in the computation of +diluted earnings per share because the options’ exercise +prices were greater than the average market price of the common +shares and, therefore, the effect would be antidilutive. There +were no such antidilutive options outstanding at May 31, +2004 and there were 11.7 million antidilutive shares +outstanding at May 31, 2003. +Year Ended May 31, +2005 +2004 +2003 +(In millions, except per share data) +Determination of shares: +Average common shares outstanding +262.6 +263.2 +264.5 +Assumed conversion of dilutive stock options and awards +7.7 +6.5 +3.1 +Diluted average common shares outstanding +270.3 +269.7 +267.6 +Basic earnings per common share — before cumulative +effect of accounting change +$ +4.61 +$ +3.59 +$ +2.80 +Cumulative effect of accounting change +— +— +1.01 +$ +4.61 +$ +3.59 +$ +1.79 +Diluted earnings per common share — before cumulative +effect of accounting change +$ +4.48 +$ +3.51 +$ +2.77 +Cumulative effect of accounting change +— +— +1.00 +$ +4.48 +$ +3.51 +$ +1.77 +Note 12 — +Benefit Plans +The Company has a profit sharing plan available to most +U.S.-based employees. The terms of the plan call for annual +contributions by the Company as determined by the Board of +Directors. A subsidiary of the Company also has a profit sharing +plan available to its U.S.-based employees. The terms of the +plan call for annual contributions as determined by the +subsidiary’s executive management. Contributions of +$29.1 million, $23.0 million, and $17.4 million +to the plans are included in selling and administrative expenses +in the consolidated financial statements for the years ended +May 31, 2005, 2004 and 2003, respectively. The Company has +various 401(k) employee savings plans available to U.S.-based +employees. The Company matches a portion of employee +contributions with common stock or cash. Company contributions +to the savings plans were $20.3 million, +$17.0 million, and $15.6 million for the years ended +May 31, 2005, 2004 and 2003, respectively, and are included +in selling and administrative expenses. +55 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Note 13 — +Comprehensive Income +Comprehensive income is as follows: +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Net income +$ +1,211.6 +$ +945.6 +$ +474.0 +Other comprehensive income (loss): +Change in cumulative translation adjustment and other (net of +tax benefit (expense) of $3.9 in 2005, ($4.7) in 2004, and +($22.4) in 2003) +70.1 +27.5 +127.4 +Changes due to cash flow hedging instruments (Note 16): +Net (loss) gain on hedge derivatives (net of tax benefit of +$28.7 in 2005, $33.5 in 2004 and $160.8 in 2003) +(54.0 +) +(72.9 +) +(311.9 +) +Reclassification to net income of previously deferred +(gains) and losses related to hedge derivatives (net of tax +(benefit) of ($72.8) in 2005, ($97.8) in 2004 and ($65.6) in +2003) +143.6 +198.8 +137.2 +Other comprehensive income (loss) +159.7 +153.4 +(47.3 +) +Total comprehensive income +$ +1,371.3 +$ +1,099.0 +$ +426.7 +The components of accumulated other comprehensive income (loss) +are as follows: +May 31, +2005 +2004 +(In millions) +Cumulative translation adjustment and other +$ +74.8 +$ +4.7 +Net deferred loss on hedge derivatives +(1.4 +) +(91.0 +) +$ +73.4 +$ +(86.3 +) +Note 14 — +Commitments and Contingencies +The Company leases space for certain of its offices, warehouses +and retail stores under leases expiring from one to twenty-nine +years after May 31, 2005. Rent expense was +$232.6 million, $206.7 million and $183.2 million +for the years ended May 31, 2005, 2004 and 2003, +respectively. Amounts of minimum future annual rental +commitments under non-cancelable operating leases in each of the +five years ending May 31, 2006 through 2010 are +$186.7 million, $157.6 million, $135.3 million, +$112.9 million, $97.8 million, respectively, and +$556.3 million in later years. +As of May 31, 2005 and 2004, the Company had letters of +credit outstanding totaling $555.0 million and +$551.6 million, respectively. These letters of credit were +issued primarily for the purchase of inventory. +In connection with various contracts and agreements, the Company +provides routine indemnifications relating to the enforceability +of intellectual property rights, coverage for legal issues that +arise and other items that fall under the scope of FASB +Interpretation No. 45, “Guarantor’s Accounting +and Disclosure Requirements for Guarantees, Including Indirect +Guarantees of Indebtedness of Others”. Currently, the +Company has several such agreements in place. However, based on +the Company’s historical experience and the estimated +probability of future loss, the Company has determined that the +fair value of such indemnifications is not material to the +Company’s financial position or results of operations. +56 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +In the ordinary course of its business, the Company is involved +in legal proceedings involving contractual and employment +relationships, product liability claims, trademark rights, and a +variety of other matters. The Company does not believe there are +any pending legal proceedings that will have a material impact +on the Company’s financial position or results of +operations. +Note 15 — +Acquisitions +In September 2003, the Company acquired 100 percent of the +equity shares of Converse. Converse designs, distributes, and +markets high performance and casual athletic footwear and +apparel. The acquisition was accounted for under the purchase +method of accounting in accordance with SFAS No. 141, +“Business Combinations” (FAS 141). The cash +purchase price, including acquisition costs, was approximately +$310 million. The results of Converse’s operations +have been included in the consolidated financial statements +since the date of the acquisition as part of the Company’s +Other operating segment. +All assets and liabilities of Converse were initially recorded +in the Company’s Consolidated Balance Sheet based on their +estimated fair values at the date of acquisition. Identifiable +intangible assets and goodwill relating to the purchase +approximated $254.8 million and $69.1 million, +respectively. Identifiable intangible assets include +$246.2 million for trademarks that have an indefinite life, +and $8.6 million of other intangible assets that were +amortized over nine months. The purchase accounting included a +deferred tax liability of $105.1 million recorded for the +book-tax difference in future tax consequences for the acquired +identifiable indefinite-lived intangible assets, which is the +primary reason that goodwill was also recorded in the +transaction. The pro forma effect of the acquisition on the +combined results of operations was not significant. +In August 2004, the Company acquired 100 percent of the +equity interests in Official Starter. The Exeter Brands Group +LLC, a wholly-owned subsidiary of the Company, was formed soon +thereafter to develop the Company’s business in retail +channels serving value-conscious consumers and to operate the +Official Starter business. The acquisition was accounted for +under the purchase method of accounting in accordance with +FAS 141. The cash purchase price, including acquisition +costs net of cash acquired, was $47.2 million. All assets +and liabilities of Exeter Brands Group were initially recorded +in the Company’s Consolidated Balance Sheet based on their +estimated fair values at the date of acquisition. Identifiable +intangible assets related to the purchase approximated +$43.6 million and include $39.0 million allocated to +amortized trademarks and $4.6 million allocated to other +amortized intangible assets. The results of Exeter Brands +Group’s operations have been included in the consolidated +financial statements since the date of acquisition as part of +the Company’s Other operating segment. The pro forma effect +of the acquisition on the combined results of operations was not +significant. +Note 16 — +Risk Management and Derivatives +The Company is exposed to global market risks, including the +effect of changes in foreign currency exchange rates and +interest rates. The Company uses derivatives to manage financial +exposures that occur in the normal course of business. The +Company does not hold or issue derivatives for trading purposes. +The Company formally documents all relationships between hedging +instruments and hedged items, as well as its risk-management +objective and strategy for undertaking hedge transactions. This +process includes linking all derivatives to either specific +assets and liabilities on the balance sheet or specific firm +commitments or forecasted transactions. +Substantially all derivatives entered into by the Company are +designated as either cash flow or fair value hedges. All +derivatives are recognized on the balance sheet at their fair +value. Unrealized gain positions are recorded as other current +assets or other non-current assets, depending on the +instrument’s maturity date. Unrealized loss positions are +recorded as accrued liabilities or other non-current +liabilities. Changes in fair values of outstanding cash flow +hedge derivatives that are highly effective are recorded in +other comprehensive +57 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +income, until net income is affected by the variability of cash +flows of the hedged transaction. Fair value hedges are recorded +in net income and are offset by the change in fair value of the +underlying asset or liability being hedged. +Cash Flow Hedges +The purpose of the Company’s foreign currency hedging +activities is to protect the Company from the risk that the +eventual cash flows resulting from transactions in foreign +currencies, including revenues, product costs, selling and +administrative expenses, investments in +U.S. dollar-denominated available-for-sale debt securities +and intercompany transactions, including intercompany +borrowings, will be adversely affected by changes in exchange +rates. It is the Company’s policy to utilize derivatives to +reduce foreign exchange risks where internal netting strategies +cannot be effectively employed. +Derivatives used by the Company to hedge foreign currency +exchange risks are forward exchange contracts, options and +cross-currency swaps. The cross-currency swaps are used to hedge +foreign currency denominated payments related to intercompany +loan agreements. There are currently no cross-currency swaps +outstanding. Hedged transactions are denominated primarily in +euros, Japanese yen, Canadian dollars, Korean won, Australian +dollars, and Mexican pesos. The Company hedges up to 100% of +anticipated exposures typically twelve months in advance but has +hedged as much as 32 months in advance. When intercompany +loans are hedged, it is typically for their expected duration. +Substantially all foreign currency derivatives entered into by +the Company qualify for and are designated as foreign-currency +cash flow hedges, including those hedging foreign currency +denominated firm commitments. +Changes in fair values of outstanding cash flow hedge +derivatives that are highly effective are recorded in other +comprehensive income, until net income is affected by the +variability of cash flows of the hedged transaction. In most +cases amounts recorded in other comprehensive income will be +released to net income some time after the maturity of the +related derivative. The consolidated statement of income +classification of effective hedge results is the same as that of +the underlying exposure. Results of hedges of revenue and +product costs are recorded in revenue and cost of sales, +respectively, when the underlying hedged transaction affects net +income. Results of hedges of selling and administrative expense +are recorded together with those costs when the related expense +is recorded. Results of hedges of both anticipated sales of +U.S. dollar-denominated available-for-sale securities and +anticipated intercompany transactions are recorded in other +expense, net when the transaction occurs. Hedges of recorded +balance sheet positions are recorded in other expense, net +currently together with the transaction gain or loss from the +hedged balance sheet position. Net foreign currency transaction +gains and losses, which includes hedge results captured in +revenues, cost of sales, selling and administrative expense and +other expense, net, were a $217.8 million loss, a +$304.3 million loss, and a $180.9 million loss for the +years ended May 31, 2005, 2004, and 2003, respectively. +Premiums paid on options are initially recorded as deferred +charges. The Company assesses effectiveness on options based on +the total cash flows method and records total changes in the +options’ fair value to other comprehensive income to the +degree they are effective. +As of May 31, 2005, $31.0 million of deferred net +losses (net of tax) on both outstanding and matured derivatives +accumulated in other comprehensive income are expected to be +reclassified to net income during the next twelve months as a +result of underlying hedged transactions also being recorded in +net income. Actual amounts ultimately reclassified to net income +are dependent on the exchange rates in effect when derivative +contracts that are currently outstanding mature. As of +May 31, 2005, the maximum term over which the Company is +hedging exposures to the variability of cash flows for all +forecasted and recorded transactions is 24 months. +58 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +The Company formally assesses, both at a hedge’s inception +and on an ongoing basis, whether the derivatives that are used +in the hedging transaction have been highly effective in +offsetting changes in the cash flows of hedged items and whether +those derivatives may be expected to remain highly effective in +future periods. When it is determined that a derivative is not, +or has ceased to be, highly effective as a hedge, the Company +discontinues hedge accounting prospectively. +The Company discontinues hedge accounting prospectively when +(1) it determines that the derivative is no longer highly +effective in offsetting changes in the cash flows of a hedged +item (including hedged items such as firm commitments or +forecasted transactions); (2) the derivative expires or is +sold, terminated, or exercised; (3) it is no longer +probable that the forecasted transaction will occur; or +(4) management determines that designating the derivative +as a hedging instrument is no longer appropriate. +When the Company discontinues hedge accounting because it is no +longer probable that the forecasted transaction will occur in +the originally expected period, the gain or loss on the +derivative remains in accumulated other comprehensive income and +is reclassified to net income when the forecasted transaction +affects net income. However, if it is probable that a forecasted +transaction will not occur by the end of the originally +specified time period or within an additional two-month period +of time thereafter, the gains and losses that were accumulated +in other comprehensive loss will be recognized immediately in +net income. In all situations in which hedge accounting is +discontinued and the derivative remains outstanding, the Company +will carry the derivative at its fair value on the balance +sheet, recognizing future changes in the fair value in other +expense, net. Any hedge ineffectiveness is recorded in other +expense, net. Effectiveness for cash flow hedges is assessed +based on forward rates. +For each of the years ended May 31, 2005, 2004 and 2003 the +Company recorded in other expense, net an insignificant loss +representing the total ineffectiveness of all derivatives. Net +income for each of the years ended May 31, 2005, 2004 and +2003 was not materially affected due to discontinued hedge +accounting. +Fair Value Hedges +The Company is also exposed to the risk of changes in the fair +value of certain fixed-rate debt attributable to changes in +interest rates. Derivatives currently used by the Company to +hedge this risk are receive-fixed, pay-variable interest rate +swaps. +Substantially all interest rate swap agreements are designated +as fair value hedges of the related long-term debt and meet the +shortcut method requirements under FAS 133. Accordingly, +changes in the fair values of the interest rate swap agreements +are exactly offset by changes in the fair value of the +underlying long-term debt. No ineffectiveness has been recorded +to net income related to interest rate swaps designated as fair +value hedges for the years ended May 31, 2005, 2004 +and 2003. +As discussed in Note 7, during the year ended May 31, +2004, the Company issued a $50 million medium-term note +maturing October 1, 2013 and simultaneously entered into a +receive-fixed, pay-variable interest rate swap with the same +notional amount and fixed interest rate as the note. However, +the swap expires October 2, 2006. This interest rate swap +is not accounted for as a fair value hedge, accordingly changes +in the fair value of the swap are recorded to net income each +period as a component of other expense, net. The recorded fair +value of the swap was not material for the years ended +May 31, 2005 and 2004. +In fiscal 2003 the Company entered into an interest rate swap +agreement related to a Japanese yen denominated intercompany +loan with one of the Company’s Japanese subsidiaries. The +Japanese subsidiary pays variable interest on the intercompany +loan based on 3-month LIBOR plus a spread. Under the interest +rate swap agreement, the subsidiary pays fixed interest payments +at 0.8% and receives variable interest payments based on 3-month +LIBOR plus a spread based on a notional amount of 8 billion +Japanese yen. This interest rate swap is not accounted for as a +fair value hedge, accordingly changes in the fair value of the +swap +59 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +are recorded to net income each period as a component of other +expense, net. The recorded fair value of the swap was not +material for the years ended May 31, 2005, 2004 +and 2003. +The fair values of all derivatives recorded on the consolidated +balance sheet are as follows: +May 31, +2005 +2004 +(In millions) +Unrealized Gains: +Foreign currency exchange contracts and options +$ +113.2 +$ +83.1 +Interest rate swaps +9.0 +7.0 +Unrealized (Losses): +Foreign currency exchange contracts and options +(62.9 +) +(144.5 +) +Interest rate swaps +(1.3 +) +(3.9 +) +Concentration of Credit Risk +The Company is exposed to credit-related losses in the event of +non-performance by counterparties to hedging instruments. The +counterparties to all derivative transactions are major +financial institutions with investment grade credit ratings. +However, this does not eliminate the Company’s exposure to +credit risk with these institutions. This credit risk is +generally limited to the unrealized gains in such contracts +should any of these counterparties fail to perform as +contracted. To manage this risk, the Company has established +strict counterparty credit guidelines that are continually +monitored and reported to senior management according to +prescribed guidelines. The Company utilizes a portfolio of +financial institutions either headquartered or operating in the +same countries the Company conducts its business. As a result of +the above considerations, the Company considers the risk of +counterparty default to be minimal. +In addition to hedging instruments, the Company is subject to +concentrations of credit risk associated with cash and +equivalents and accounts receivable. The Company places cash and +equivalents with financial institutions with investment grade +credit ratings and, by policy, limits the amount of credit +exposure to any one financial institution. The Company considers +its concentration risk related to accounts receivable to be +mitigated by the Company’s credit policy, the significance +of outstanding balances owed by each individual customer at any +point in time and the geographic dispersion of these customers. +Note 17 — +Operating Segments and Related Information +Operating Segments. The Company’s operating segments +are evidence of the structure of the Company’s internal +organization. The major segments are defined by geographic +regions for operations participating in NIKE brand sales +activity excluding NIKE Golf and Bauer NIKE Hockey. Each NIKE +brand geographic segment operates predominantly in one industry: +the design, production, marketing and selling of sports and +fitness footwear, apparel, and equipment. The “Other” +category shown below represents activities of Cole Haan Holdings +Incorporated, Bauer NIKE Hockey Inc., Hurley International LLC, +NIKE Golf, Converse Inc. (beginning September 4, 2003), and +Exeter Brands Group LLC (beginning August 11, 2004), which +are considered immaterial for individual disclosure based on the +aggregation criteria in SFAS No. 131 “Disclosures +about Segments of an Enterprise and Related Information”. +Where applicable, “Corporate” represents items +necessary to reconcile to the consolidated financial statements, +which generally include corporate activity and corporate +eliminations. +Net revenues as shown below represent sales to external +customers for each segment. Intercompany revenues have been +eliminated and are immaterial for separate disclosure. The +Company evaluates performance of individual operating segments +based on pre-tax income. On a consolidated basis, this amount +60 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +represents income before income taxes and cumulative effect of +accounting change as shown in the Consolidated Statements of +Income. Reconciling items for pre-tax income represent corporate +costs that are not allocated to the operating segments for +management reporting including corporate activity, certain +currency exchange rate gains and losses on transactions, and +intercompany eliminations for specific income statement items in +the Consolidated Statements of Income. +Additions to long-lived assets as presented following represent +capital expenditures. +Accounts receivable, inventory and property, plant and equipment +for operating segments are regularly reviewed by management and +are therefore provided below. Certain NIKE Golf receivables are +managed by the geographic regions and as a result, are included +in the geographic region’s balances. +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Net Revenue +United States +$ +5,129.3 +$ +4,781.8 +$ +4,637.4 +Europe, Middle East and Africa +4,281.6 +3,827.7 +3,221.5 +Asia Pacific +1,897.3 +1,610.8 +1,340.6 +Americas +695.8 +604.5 +509.1 +Other +1,735.7 +1,428.3 +988.4 +$ +13,739.7 +$ +12,253.1 +$ +10,697.0 +Pre-tax Income +United States +$ +1,125.8 +$ +1,007.3 +$ +952.9 +Europe, Middle East and Africa +917.5 +744.0 +522.1 +Asia Pacific +399.8 +352.3 +288.4 +Americas +117.6 +97.4 +91.6 +Other +153.9 +75.3 +7.9 +Corporate +(854.8 +) +(826.3 +) +(739.9 +) +$ +1,859.8 +$ +1,450.0 +$ +1,123.0 +61 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Additions to Long-lived Assets +United States +$ +54.8 +$ +30.8 +$ +27.1 +Europe, Middle East and Africa +38.8 +28.9 +29.2 +Asia Pacific +22.0 +19.9 +26.2 +Americas +6.8 +5.8 +3.5 +Other +31.3 +25.2 +17.5 +Corporate +103.4 +104.2 +82.4 +$ +257.1 +$ +214.8 +$ +185.9 +Depreciation +United States +$ +49.0 +$ +52.1 +$ +49.9 +Europe, Middle East and Africa +45.2 +43.6 +38.9 +Asia Pacific +28.3 +38.5 +38.5 +Americas +4.0 +3.9 +4.5 +Other +28.5 +22.2 +16.1 +Corporate +102.2 +94.9 +91.4 +$ +257.2 +$ +255.2 +$ +239.3 +Accounts Receivable, net +United States +$ +627.0 +$ +616.6 +$ +615.5 +Europe, Middle East and Africa +723.6 +724.1 +785.8 +Asia Pacific +335.6 +272.9 +230.4 +Americas +165.3 +132.1 +120.9 +Other +368.2 +327.8 +289.9 +Corporate +42.4 +46.7 +41.4 +$ +2,262.1 +$ +2,120.2 +$ +2,083.9 +Inventory, net +United States +$ +639.9 +$ +579.4 +$ +640.6 +Europe, Middle East and Africa +496.5 +485.7 +383.4 +Asia Pacific +228.9 +163.9 +143.5 +Americas +94.4 +78.3 +78.1 +Other +316.2 +305.5 +245.5 +Corporate +35.2 +37.4 +23.8 +$ +1,811.1 +$ +1,650.2 +$ +1,514.9 +62 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — +(Continued) +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Property, Plant and Equipment, net +United States +$ +216.0 +$ +213.0 +$ +215.7 +Europe, Middle East and Africa +230.0 +232.0 +241.4 +Asia Pacific +380.4 +379.7 +386.3 +Americas +15.7 +12.7 +11.0 +Other +93.4 +91.8 +82.1 +Corporate +670.3 +682.6 +684.3 +$ +1,605.8 +$ +1,611.8 +$ +1,620.8 +Revenues by Major Product Lines. Revenues to external +customers for NIKE brand products are attributable to sales of +footwear, apparel and equipment. Other revenues to external +customers primarily include external sales by Cole Haan Holdings +Incorporated, Bauer NIKE Hockey Inc., Hurley International LLC, +NIKE Golf, Converse Inc. (beginning September 2003), and Exeter +Brands Group LLC (beginning August 2004). +Year Ended May 31, +2005 +2004 +2003 +(In millions) +Footwear +$ +7,299.7 +$ +6,566.1 +$ +5,980.9 +Apparel +3,879.4 +3,539.1 +3,125.1 +Equipment +824.9 +719.6 +602.6 +Other +1,735.7 +1,428.3 +988.4 +$ +13,739.7 +$ +12,253.1 +$ +10,697.0 +Revenues and Long-Lived Assets by Geographic Area. +Geographical area information is similar to that shown +previously under operating segments with the exception of the +Other activity, which has been allocated to the geographical +areas based on the location where the sales originated. Revenues +derived in the U.S. were $6,284.5 million, +$5,781.0 million, and $5,263.8 million, for the years +ended May 31, 2005, 2004, and 2003, respectively. The +Company’s largest concentrations of long-lived assets are +in the U.S. and Japan. Long-lived assets attributable to +operations in the U.S., which are comprised of net +property, plant & equipment were $956.6 million, +$957.0 million, and $945.9 million at May 31, +2005, 2004, and 2003, respectively. Long-lived assets +attributable to operations in Japan were $321.0 million, +$328.0 million, and $329.0 million at May 31, +2005, 2004, and 2003, respectively. +Major Customers. During the year ended May 31, 2005, +revenues derived from Foot Locker, Inc. represented +11 percent of the Company’s consolidated revenues. +Sales to this customer are included in all segments of the +Company. During the years ended May 31, 2004 and 2003 the +Company did not have a significant customer that accounted for +more than 10 percent of consolidated revenues. +63 +Table of Contents +Item 9. +Changes In and Disagreements with Accountants on +Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements +with accountants on any matter of accounting principles or +practices or financial statement disclosure required to be +reported under this Item. +Item 9A. +Controls and Procedures +The Company maintains disclosure controls and procedures that +are designed to ensure that information required to be disclosed +in the Company’s Exchange Act reports is recorded, +processed, summarized and reported within the time periods +specified in the Securities and Exchange Commission’s rules +and forms and that such information is accumulated and +communicated to the Company’s management, including its +Chief Executive Officer and Chief Financial Officer, as +appropriate, to allow for timely decisions regarding required +disclosure. In designing and evaluating the disclosure controls +and procedures, management recognizes that any controls and +procedures, no matter how well designed and operated, can +provide only reasonable assurance of achieving the desired +control objectives, and management is required to apply its +judgment in evaluating the cost-benefit relationship of possible +controls and procedures. +The Company carries out a variety of on-going procedures, under +the supervision and with the participation of the Company’s +management, including the Company’s Chief Executive Officer +and Chief Financial Officer, to evaluate the effectiveness of +the design and operation of the Company’s disclosure +controls and procedures. Based on the foregoing, the +Company’s Chief Executive Officer and Chief Financial +Officer concluded that the Company’s disclosure controls +and procedures were effective at the reasonable assurance level +as of May 31, 2005. +Management’s report on internal control over financial +reporting and the related attestation report of +PricewaterhouseCoopers LLP are included in Item 8 on +pages 34-36 of this Report. +There has been no change in the Company’s internal control +over financial reporting during the Company’s most recent +fiscal quarter that has materially affected, or is reasonable +likely to materially affect, the Company’s internal control +over financial reporting. +Item 9B. +Other Information +No disclosure is required under this Item. +PART III +Item 10. +Directors and Executive Officers of the Registrant +The information required by Item 401 of Regulation S-K +regarding directors is included under “Election of +Directors” in the definitive Proxy Statement for our 2005 +Annual Meeting of Shareholders and is incorporated herein by +reference. The information required by Item 401 of +Regulation S-K regarding executive officers is included +under “Executive Officers of the Registrant” in +Item 1 of this Report. The information required by +Item 405 of Regulation S-K is included under +“Section 16(a) Beneficial Ownership Reporting +Compliance” in the definitive Proxy Statement for our 2005 +Annual Meeting of Shareholders and is incorporated herein by +reference. The information required by Item 406 of +Regulation S-K is included under “Code of Business +Conduct and Ethics” in the definitive Proxy Statement for +our 2005 Annual Meeting of Shareholders and is incorporated +herein by reference. +Item 11. +Executive Compensation +The information required by this Item is included under +“Director Compensation and Retirement Plan,” +“Executive Compensation” (but excluding the +Performance Graph), “Compensation Committee Interlocks and +Insider Participation” and “Employment Contracts and +Termination of Employment and Change-in-Control +Arrangements” in the definitive Proxy Statement for our +2005 Annual Meeting of Shareholders and is incorporated herein +by reference. +64 +Table of Contents +Item 12. +Security Ownership of Certain Beneficial Owners and +Management and Related Stockholder Matters +The information required by this Item is included under +“Stock Holdings of Certain Owners and Management” and +under “Equity Compensation Plans” in the definitive +Proxy Statement for our 2005 Annual Meeting of Shareholders and +is incorporated herein by reference. +Item 13. +Certain Relationships and Related Transactions +The information required by this Item is included under +“Certain Transactions and Business Relationships” in +the definitive Proxy Statement for our 2005 Annual Meeting of +Shareholders and is incorporated herein by reference. +Item 14. +Principal Accountant Fees and Services +The information required by this Item is included under +“Ratification Of Independent Registered Public Accounting +Firm” in the definitive Proxy Statement for our 2005 Annual +Meeting of Shareholders and is incorporated herein by reference. +PART IV +Item 15. +Exhibits and Financial Statement Schedules +(a) The following documents are filed as part of this +report: +Form 10-K +Page No. +1. +FINANCIAL STATEMENTS: +Report of Independent Registered Public Accounting Firm +35 +Consolidated Statements of Income for each of the three years +ended May 31, 2005, May 31, 2004 and May 31, 2003 +37 +Consolidated Balance Sheets at May 31, 2005 and 2004 +38 +Consolidated Statements of Cash Flows for each of the three +years ended May 31, 2005, May 31, 2004 and +May 31, 2003 +39 +Consolidated Statements of Shareholders’ Equity for each of +the three years ended May 31, 2005, May 31, 2004 and +May 31, 2003 +40 +Notes to Consolidated Financial Statements +41 +2. +FINANCIAL STATEMENT SCHEDULE: +II — Valuation and Qualifying Accounts +F-1 +All other schedules are omitted because they are not applicable +or the required information is shown in the financial statements +or notes thereto. +65 +Table of Contents +3. EXHIBITS: +3 +.1 +Restated Articles of Incorporation, as amended (incorporated by +reference to Exhibit 3.1 to the Company’s Quarterly +Report on Form 10-Q for the fiscal quarter ended +August 31, 1995). +3 +.2 +Third Restated Bylaws, as amended (incorporated by reference to +Exhibit 3.2 to the Company’s Current Report on Form +8-K filed November 18, 2004). +4 +.1 +Restated Articles of Incorporation, as amended (see +Exhibit 3.1). +4 +.2 +Third Restated Bylaws, as amended (see Exhibit 3.2). +4 +.3 +Indenture dated as of December 13, 1996 between the Company +and Bank One Trust Company, National Association (successor in +interest to The First National Bank of Chicago), as Trustee +(incorporated by reference to Exhibit 4.01 to Amendment +No. 1 to Registration Statement No. 333-15953 filed by +the Company on November 26, 1996). +4 +.4 +Form of Officers’ Certificate relating to the +Company’s 5.5% Notes and form of 5.5% Note +(incorporated by reference to Exhibits 4.2 and 4.3 of the +Company’s Current Report on Form 8-K dated August 17, +2001). +4 +.5 +Form of Officers’ Certificate relating to the +Company’s Fixed Rate Medium-Term Notes and the +Company’s Floating Rate Medium-Term Notes, form of Fixed +Rate Note and form of Floating Rate Note (incorporated by +reference to Exhibits 4.2, 4.3 and 4.4 of the +Company’s Current Report on Form 8-K dated May 29, +2002). +4 +.6 +Credit Agreement dated as of November 20, 2003 among NIKE, +Inc., Bank of America, N.A., individually and as Agent, and the +other banks party thereto (incorporated by reference to +Exhibit 4.3 to the Company’s Quarterly Report on +Form 10-Q for the fiscal quarter ended November 30, +2003). +10 +.1 +Form of Non-statutory Stock Option Agreement for options granted +to non-employee directors under the 1990 Stock Incentive Plan +(incorporated by reference to Exhibit 10.3 to the +Company’s Current Report on Form 8-K filed June 21, +2005).* +10 +.2 +Form of Indemnity Agreement entered into between the Company and +each of its officers and directors (incorporated by reference to +the Company’s definitive proxy statement filed in +connection with its annual meeting of shareholders held on +September 21, 1987). +10 +.3 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference +to Exhibit 10.1 to the Company’s Quarterly Report on +Form 10-Q for the fiscal quarter ended August 31, +2004).* +10 +.4 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by +reference to the Company’s definitive proxy statement filed +in connection with its annual meeting of shareholders held on +September 18, 2000).* +10 +.5 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference +to the Company’s definitive proxy statement filed in +connection with its annual meeting of shareholders held on +September 18, 2002).* +10 +.6 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated +effective June 1, 2004) (incorporated by reference to +Exhibit 10.6 to the Company’s Annual Report on +Form 10-K for the fiscal year ended May 31, 2004).* +10 +.7 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan +(incorporated by reference to Exhibit 10.1 to the +Company’s Quarterly Report on Form 10-Q for the fiscal +quarter ended February 28, 2003).* +10 +.8 +Covenant Not To Compete And Non-Disclosure Agreement between +NIKE, Inc. and Mark G. Parker dated December 28, 2004 +(incorporated by reference to Exhibit 10.1 to the +Company’s Current Report on Form 8-K filed +December 30, 2004).* +10 +.9 +Employment Agreement, and Covenant Not To Compete And +Non-Disclosure Agreement between NIKE, Inc. and Mindy F. +Grossman dated September 6, 2000 (incorporated by reference +to Exhibit 10.12 to the Company’s Annual Report on +Form 10-K for the fiscal year ended May 31, 2002).* +10 +.10 +Amendment to Employment Agreement between NIKE, Inc. and Mindy +F. Grossman dated March 17, 2003 (incorporated by reference +to Exhibit 10.14 to the Company’s Annual Report on +Form 10-K for the fiscal year ended May 31, 2003).* +66 +Table of Contents +10 +.11 +Covenant Not to Compete and Non-Disclosure Agreement between +NIKE, Inc. and Charles D. Denson dated December 28, 2004 +(incorporated by reference to Exhibit 10.2 to the +Company’s Current Report on Form 8-K filed +December 30, 2004).* +10 +.12 +Form of Non-Statutory Stock Option Agreement for options granted +to executives under the 1990 Stock Incentive Plan (incorporated +by reference to Exhibit 10.2 to the Company’s Current +Report on Form 8-K filed November 18, 2004).* +10 +.13 +Form of Long-Term Incentive Award Agreement under the Long-Term +Incentive Plan (incorporated by reference to Exhibit 10.1 +to the Company’s Current Report on Form 8-K filed +June 21, 2005).* +10 +.14 +Form of Restricted Stock Bonus Agreement under the 1990 Stock +Incentive Plan (incorporated by reference to Exhibit 10.2 +to the Company’s Current Report on Form 8-K filed +June 21, 2005).* +10 +.15 +Terms of Employment dated November 18, 2004 between the +Company and William D. Perez (incorporated by reference to +Exhibit 10.1 to the Company’s Current Report on +Form 8-K filed November 18, 2004).* +10 +.16 +Dassault Falcon 2000EX Time-Sharing Agreement dated as of +March 1, 2005 between the Company and William D. Perez +(incorporated by reference to Exhibit 10.1 to the +Company’s Current Report on Form 8-K filed March 16, +2005). +12 +.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered +Public Accounting Firm (set forth on page F-2 of this Annual +Report on Form 10-K). +31 +Rule 13a-14(a) Certifications. +32 +Section 1350 Certifications. +* +Management contract or compensatory plan or arrangement. +The exhibits filed herewith do not include certain instruments +with respect to long-term debt of NIKE and its subsidiaries, +inasmuch as the total amount of debt authorized under any such +instrument does not exceed 10% of the total assets of NIKE and +its subsidiaries on a consolidated basis. NIKE agrees, pursuant +to Item 601(b)(4)(iii) of Regulation S-K, that it will +furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., +One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will +furnish shareholders with a copy of any Exhibit upon payment of +$.10 per page, which represents our reasonable expenses in +furnishing Exhibits. +67 +Table of Contents +SCHEDULE II +VALUATION AND QUALIFYING ACCOUNTS +Balance at +Charged to +Charged to +Write-Offs +Balance at +Beginning +Costs and +Other +Net of +End of +Description +of Period +Expenses +Accounts +Recoveries +Period +(In millions) +For the year ended May 31, 2003 +Allowance for doubtful accounts +$ +80.4 +$ +25.8 +$ +1.2 +$ +(25.5 +) +$ +81.9 +For the year ended May 31, 2004 +Allowance for doubtful accounts +$ +81.9 +$ +36.4 +$ +0.1 +$ +(23.1 +) +$ +95.3 +For the year ended May 31, 2005 +Allowance for doubtful accounts +$ +95.3 +$ +33.5 +$ +1.8 +$ +(50.2 +) +$ +80.4 +F-1 +Table of Contents +CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +We hereby consent to the incorporation by reference in the +Registration Statements on Form S-3 (333-71324) and +Form S-8 (Nos. 33-63995, 333-63581, 333-63583, +333-68864, 333-68886, 333-71660, 333-104822, 333-104824, and +333-117059) of NIKE, Inc. of our report dated July 27, 2005 +relating to the financial statements, financial statement +schedule, management’s assessment of the effectiveness of +internal control over financial reporting and the effectiveness +of internal control over financial reporting, which appears in +this Form 10-K. +PricewaterhouseCoopers llp +Portland, Oregon +July 29, 2005 +F-2 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) 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. +NIKE, Inc. +By: +/s/ William D. Perez +William D. Perez +Chief Executive Officer and President +Date: July 29, 2005 +Pursuant to the requirements of the Securities Exchange Act of +1934, this report has been signed below by the following persons +on behalf of the registrant and in the capacities and on the +dates indicated. +Signature +Title +Date +Principal Executive Officer and Director: +/s/ William D. Perez +William +D. Perez +Director, Chief Executive Officer +and President +July 29, 2005 +Principal Financial and Accounting Officer: +/s/ Donald W. Blair +Donald +W. Blair +Chief Financial Officer +July 29, 2005 +Directors: +/s/ Philip H. Knight +Philip +H. Knight +Director +July 29, 2005 +/s/ John G. Connors +John +G. Connors +Director +July 29, 2005 +/s/ Jill K. Conway +Jill +K. Conway +Director +July 29, 2005 +/s/ Ralph D. DeNunzio +Ralph +D. DeNunzio +Director +July 29, 2005 +/s/ Alan B. +Graf, Jr. +Alan +B. Graf, Jr. +Director +July 29, 2005 +/s/ Delbert J. Hayes +Delbert +J. Hayes +Director +July 29, 2005 +/s/ Douglas G. Houser +Douglas +G. Houser +Director +July 29, 2005 +S-1 +Table of Contents +Signature +Title +Date +/s/ Jeanne P. Jackson +Jeanne +P. Jackson +Director +July 29, 2005 +/s/ Orin C. Smith +Orin +C. Smith +Director +July 29, 2005 +/s/ John R. +Thompson, Jr. +John +R. Thompson, Jr. +Director +July 29, 2005 +S-2 \ No newline at end of file diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/filing_metadata.csv b/raw/filings/0000320187/2004/0000950124-05-004551/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..86f1c63effe4a4c717a5bd59305249d25d83f052 --- /dev/null +++ b/raw/filings/0000320187/2004/0000950124-05-004551/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2005-07-29,2005-05-31,2005-07-30T01:12:55.000Z,0000950124-05-004551,v10583e10vk.htm,FORM 10-K,950848,0,0,https://www.sec.gov/Archives/edgar/data/320187/000095012405004551/v10583e10vk.htm,https://www.sec.gov/Archives/edgar/data/320187/000095012405004551/,2004,2004,1 diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/item1.txt b/raw/filings/0000320187/2004/0000950124-05-004551/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..62e96891a0a09a2bc5f52811c8bca1caef5352f3 --- /dev/null +++ b/raw/filings/0000320187/2004/0000950124-05-004551/item1.txt @@ -0,0 +1,688 @@ +Item 1. +Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state +of Oregon. As used in this report, the terms “we”, +“us”, “NIKE” and the “Company” +refer to NIKE, Inc. and its predecessors, subsidiaries and +affiliates, unless the context indicates otherwise. Our Internet +address is www.nike.com. On our NIKE Corporate web site, +located at www.nikebiz.com, we post the following filings +as soon as reasonably practicable after they are electronically +filed with or furnished to the Securities and Exchange +Commission: our annual report on Form 10-K, our quarterly +reports on Form 10-Q, our current reports on Form 8-K +and any amendments to those reports filed or furnished pursuant +to Section 13(a) or 15(d) of the Securities and Exchange +Act of 1934. All such filings on our NIKE Corporate web site are +available free of charge. Also available on the NIKE Corporate +web site are the charters of the committees of our board of +directors, as well as our corporate governance guidelines and +code of ethics; copies of any of these documents will be +provided in print to any shareholder who submits a request in +writing to NIKE Investor Relations, One Bowerman Drive, +Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and +worldwide marketing of high quality footwear, apparel, +equipment, and accessory products. NIKE is the largest seller of +athletic footwear and athletic apparel in the world. We sell our +products to retail accounts, through NIKE-owned retail stores, +and through a mix of independent distributors and licensees, in +over 160 countries around the world. Virtually all of our +products are manufactured by independent contractors. Virtually +all footwear and apparel products are produced outside the +United States, while equipment products are produced both in the +United States and abroad. +Products +NIKE’s athletic footwear products are designed primarily +for specific athletic use, although a large percentage of the +products are worn for casual or leisure purposes. We place +considerable emphasis on high quality construction and +innovation in products designed for men, women and children. +Running, cross-training, basketball, soccer, sport-inspired +urban shoes, and children’s shoes are currently our +top-selling product categories and we expect them to continue to +lead in product sales in the near future. We also market shoes +designed for tennis, golf, baseball, football, bicycling, +volleyball, wrestling, cheerleading, aquatic activities, hiking, +outdoor activities and other athletic and recreational uses. +We sell sports apparel covering most of the above categories, +sports inspired lifestyle apparel, as well as athletic bags and +accessory items. NIKE apparel and accessories are designed to +complement our athletic footwear products, feature the same +trademarks and are sold through the same marketing and +distribution channels. We often market footwear, apparel and +accessories in “collections” of similar design or for +specific purposes. We also market apparel with licensed college +and professional team and league logos. +We sell a line of performance equipment under the NIKE® +brand name, including golf clubs, sport balls, eyewear, +timepieces, electronic media devices, skates, bats, gloves, and +other equipment designed for sports activities. We also have +agreements for licensees to produce and sell NIKE brand +swimwear, cycling apparel, children’s clothing, school +supplies and eyewear. We also sell small amounts of various +plastic products to other manufacturers through our wholly-owned +subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary Converse Inc., headquartered in +North Andover, Massachusetts, designs and distributes athletic +and casual footwear, apparel and accessories under the +Converse®, Chuck Taylor®, All Star®, One +Star® and Jack Purcell® trademarks. +We sell a line of dress and casual footwear, apparel and +accessories for men and women under the brand names Cole +Haan®, g Series© and Bragano© through our +wholly-owned subsidiary, Cole Haan Holdings Incorporated, +headquartered in Yarmouth, Maine. +2 +Table of Contents +Our wholly-owned subsidiary Hurley International LLC, +headquartered in Costa Mesa, California, designs and distributes +a line of action sports apparel for surfing, skateboarding, and +snowboarding, and youth lifestyle apparel and footwear under the +Hurley® brand name. +Our wholly-owned subsidiary, Bauer NIKE Hockey Inc., +headquartered in Greenland, New Hampshire, manufactures and +distributes ice skates, skate blades, protective gear, hockey +sticks, licensed apparel and accessories under the Bauer® +and NIKE® brand names. Bauer also offers a full selection +of products for street and roller hockey. +In the fiscal quarter ended August 31, 2004 the Company +formed Exeter Brands Group LLC, a wholly-owned subsidiary of the +Company, to develop the Company’s athletic footwear and +apparel business in retail channels for value-conscious +consumers, and to market and license athletic footwear and +apparel under the Starter®, Shaq® and Asphalt® +brand names, which we purchased during that quarter. +Sales and Marketing +Financial information about geographic and segment operations +appears in Note 17 of the consolidated financial statements +on page 60. +We experience moderate fluctuations in aggregate sales volume +during the year. Historically, revenues in the first and fourth +fiscal quarters have slightly exceeded those in the second and +third quarters. However, the mix of product sales may vary +considerably from time to time as a result of changes in +seasonal and geographic demand for particular types of footwear, +apparel and equipment. +Because NIKE is a consumer products company, the relative +popularity of various sports and fitness activities and changing +design trends affect the demand for our products. We must +therefore respond to trends and shifts in consumer preferences +by adjusting the mix of existing product offerings, developing +new products, styles and categories, and influencing sports and +fitness preferences through aggressive marketing. This is a +continuing risk. Failure to respond in a timely and adequate +manner could have a material adverse effect on our sales and +profitability. +United States Market +In fiscal 2005, sales in the United States (including +U.S. sales of Bauer NIKE Hockey, Cole Haan, Converse, +Exeter Brands Group, Hurley and NIKE Golf) accounted for +approximately 46 percent of total revenues, compared to +47 percent in fiscal 2004 and 49 percent in fiscal +2003. We sell to approximately 22,000 retail accounts in the +United States. The NIKE brand domestic retail account base +includes a mix of footwear stores, sporting goods stores, +athletic specialty stores, department stores, skate, tennis and +golf shops, and other retail accounts. During fiscal year 2005, +our three largest customers accounted for approximately +31 percent of NIKE brand sales in the United States +excluding sales from NIKE Golf and Bauer NIKE Hockey, and +26 percent of total sales in the United States. +We make substantial use of our “futures” ordering +program, which allows retailers to order five to six months in +advance of delivery with the commitment that 90 percent of +their orders will be delivered within a set time period at a +fixed price. In fiscal year 2005, 91 percent of our +U.S. wholesale footwear shipments (excluding Bauer NIKE +Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley and +NIKE Golf) were made under the futures program, compared to +90 percent in fiscal 2004 and 91 percent in fiscal +2003. In fiscal 2005 and 2004, 71 percent of our +U.S. wholesale apparel shipments (excluding +U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan, +Converse, Exeter Brands Group, Hurley and NIKE Golf) were made +under the futures program, compared to 67 percent in 2004 +and 2003. +3 +Table of Contents +We utilize 22 NIKE sales offices to solicit sales in the United +States. We also utilize 9 independent sales representatives to +sell specialty products for golf and outdoor activities. In +addition, we sell NIKE brand products through our internet +website, www.niketown.com , and we operate the following +retail outlets in the United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily overstock and +closeout merchandise) +77 +NIKE stores (including NIKE Women Stores) +11 +NIKETOWNs (designed to showcase NIKE products) +12 +NIKE employee-only stores +4 +Cole Haan, Converse, and Hurley stores (including factory and +employee stores) +80 +Total +184 +NIKE’s domestic distribution centers for footwear are +located in Wilsonville, Oregon, and Memphis, Tennessee. Apparel +and equipment products are shipped from our Memphis, Tennessee, +Tigard, Oregon, and Foothill Ranch, California distribution +centers. Cole Haan and Bauer NIKE Hockey products are +distributed primarily from Greenland, New Hampshire, Converse +products are shipped from Ontario and Fontana, California, and +Hurley products are shipped from Costa Mesa, California. +International Markets +We sell our products to retail accounts, through NIKE-owned +retail stores, and through a mix of independent distributors and +licensees, in over 160 countries around the world. +Non-U.S. sales (including non-U.S. sales of Bauer NIKE +Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley and +NIKE Golf) accounted for 54 percent of total revenues in +fiscal 2005, compared to 53 percent in fiscal 2004 and +51 percent in fiscal 2003. We estimate that we sell to more +than 37,000 retail accounts outside the United States, excluding +sales by independent distributors and licensees. We operate 21 +distribution centers in Europe, Asia, Australia, Latin America, +Africa and Canada. In many countries and regions, including +Canada, Asia, some Latin American countries, and Europe, we have +a futures ordering program for retailers similar to the United +States futures program described above. NIKE’s three +largest customers outside of the U.S. accounted for +approximately 12 percent of non-U.S. sales. +We operate the following retail outlets outside the United +States: +Non-U.S. Retail Stores +Number +NIKE factory stores +129 +NIKE stores and employee-only stores +8 +NIKETOWNs +2 +Cole Haan stores (including factory and employee stores) +51 +Total +190 +International branch offices and subsidiaries of NIKE are +located in Argentina, Australia, Austria, Belgium, Brazil, +Bulgaria, Canada, Chile, Croatia, Czech Republic, Denmark, +Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, +India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Malaysia, +Mexico, New Zealand, The Netherlands, Norway, People’s +Republic of China, The Philippines, Poland, Portugal, Russia, +Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, +Sweden, Switzerland, Taiwan, Thailand, Turkey, the United +Kingdom and Vietnam. +Significant Customer +Foot Locker Inc., which operates a chain of retail stores +specializing in athletic footwear and apparel, accounted for +approximately 11 percent of global net sales of NIKE, Inc. +during fiscal 2005. No other customer accounted for +10 percent or more of our net sales during fiscal 2005. +4 +Table of Contents +Orders +Worldwide futures orders for NIKE brand athletic footwear and +apparel, scheduled for delivery from June through November 2005, +were $6.3 billion compared to $5.7 billion for the +same period last year. Based upon historical data, we expect +that approximately 95 percent of these orders will be +filled in that time period, although some orders may be +cancelled. Reported futures orders are not necessarily +indicative of our expectation of revenues for this period. This +is because the mix of orders can shift between advance/futures +and at-once orders. In addition, foreign currency exchange rate +fluctuations as well as differing levels of order cancellations +can cause differences in the comparisons between futures orders +and actual revenues. Moreover, a significant portion of our +revenue is not derived from futures orders, including wholesale +sales of equipment, U.S. licensed team apparel, Bauer NIKE +Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE +Golf, and retail sales across all brands. +Product Research and Development +We believe that our research and development efforts are a key +factor in our past and future success. Technical innovation in +the design of footwear, apparel, and athletic equipment receive +continued emphasis as NIKE strives to produce products that help +to reduce injury, aid athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas +of biomechanics, exercise physiology, engineering, industrial +design and related fields, we also utilize research committees +and advisory boards made up of athletes, coaches, trainers, +equipment managers, orthopedists, podiatrists and other experts +who consult with us and review designs, materials and concepts +for product improvement. Employee athletes and other athletes +wear-test and evaluate products during the design and +development process. +Manufacturing +Virtually all of our footwear is produced outside of the United +States. In fiscal 2005, contract suppliers in China, Vietnam, +Indonesia and Thailand manufactured 36 percent, +26 percent, 22 percent and 15 percent of total +NIKE brand footwear, respectively. We also have manufacturing +agreements with independent factories in Argentina, Brazil, +India, Italy, Mexico and South Africa to manufacture footwear +for sale primarily within those countries. Our largest single +footwear supplier accounted for approximately 7 percent of +total fiscal 2005 footwear production. +Almost all of NIKE brand apparel production for sale to the +United States market, and all of our apparel production for sale +to the international market, was manufactured outside of the +United States by independent contract manufacturers located in +38 countries. Most of this apparel production occurred in +Bangladesh, China, Honduras, India, Indonesia, Malaysia, Mexico, +Pakistan, Sri Lanka, Taiwan, Thailand, Turkey and Vietnam. Our +largest single apparel supplier accounted for approximately +5 percent of total fiscal 2005 apparel production. +The principal materials used in our footwear products are +natural and synthetic rubber, plastic compounds, foam cushioning +materials, nylon, leather, canvas and polyurethane films used to +make AIR-SOLE cushioning components. NIKE IHM, Inc., a +wholly-owned subsidiary of NIKE, is our sole supplier of the +AIR-SOLE cushioning components used in footwear. The principal +materials used in our apparel products are natural and synthetic +fabrics and threads, plastic and metal hardware, and specialized +performance fabrics designed to repel rain, retain heat, or +efficiently transport body moisture. NIKE and its contractors +and suppliers buy raw materials in bulk. Most raw materials are +available in the countries where manufacturing takes place. We +have thus far experienced little difficulty in satisfying our +raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz +America”) and its predecessor, Nissho Iwai American +Corporation, a subsidiary of Nissho Iwai Corporation, a large +Japanese trading company, have performed significant +import-export financing services for us. During fiscal 2005, +Sojitz America provided such financing services for nearly all +of the NIKE brand products sold outside of the United States, +Europe, Middle East, Africa and Japan, excluding products +produced and sold in the same country. However, less +5 +Table of Contents +than 11 percent of NIKE brand products, excluding products +produced and sold in the same country, were sold outside of the +United States, Europe, Middle East, Africa and Japan in fiscal +2005. Any failure of Sojitz America to provide these services or +any failure of Sojitz America’s banks could disrupt our +ability to acquire products from our suppliers and to deliver +products to our customers outside of the United States, Europe, +Middle East, Africa and Japan. Such a disruption could result in +cancelled orders that would adversely affect sales and +profitability. However, we believe that any such disruption +would be short term in duration due to the ready availability of +alternative sources of financing at competitive rates. Our +current agreements with Sojitz America expire on May 31, +2008. +International Operations and Trade +Our international operations and sources of supply are subject +to the usual risks of doing business abroad, such as possible +revaluation of currencies, export duties, anti-dumping duties, +quotas, safeguard measures, trade restrictions, restrictions on +the transfer of funds and, in certain parts of the world, +political instability and terrorism. We have not, to date, been +materially affected by any such risk, but cannot predict the +likelihood of such developments occurring. We believe that we +have the ability to develop, over a period of time, adequate +alternative sources of supply for the products obtained from our +present suppliers outside of the United States. If events +prevented us from acquiring products from our suppliers in a +particular country, our operations could be temporarily +disrupted and we could experience an adverse financial impact. +However, we believe that we could abate any such disruption +within a period of no more than 12 months, and that much of +the adverse impact on supply would, therefore, be of a +short-term nature. We believe that our principal competitors are +subject to similar risks. +As a result of the Trade Act of 2003, the United States +implemented significant new Federal requirements for cargo +security, focused on imports of containerized cargo. We are a +significant importer of containerized cargo. Accordingly, we +participate actively in appropriate governmental programs, such +as the Customs Trade Partnership Against Terrorism +(“C-TPAT”), to reduce risks of possible supply +disruptions caused by U.S. and international cargo security +mandates and terrorism. +All of our products manufactured overseas and imported into the +United States, the European Union and other countries are +subject to customs duties collected by customs authorities. +Customs information submitted by us is routinely subject to +review by customs authorities. We are unable to predict whether +additional customs duties, anti-dumping duties, quotas, +safeguard measures, or other trade restrictions may be imposed +on the importation of our products in the future. Such actions +could result in increases in the cost of our products generally +and might adversely affect the sales or profitability of NIKE +and the imported footwear and apparel industry as a whole. +Accordingly, we are actively monitoring the developments +described below. +Footwear Imports into the European Union +From 1994 through January 1, 2005, the European Union +(“EU”) imposed limits (or “quotas”) on the +import of certain types of footwear manufactured in China. +Footwear designed for use in sporting activities, meeting +certain technical criteria and having a CIF (cost, insurance and +freight) price above 9 euros (“Special Technology Athletic +Footwear” or “STAF”), was excluded from the +quotas. As a result of the STAF exclusion, and the amount of +quota made available to us, the quotas did not have a material +effect on our business. However, as part of China’s 2001 +accession to the World Trade Organization (“WTO”), +China entered into an agreement with the EU and other WTO +members to abide by a special safeguard arrangement whereby +quotas could be imposed on any product sourced in China, +including footwear, if there was a surge in imports from China +into another WTO country, and after a legal proceeding it was +determined that such imports were injuring a domestic producer. +Additionally, under longstanding WTO rules, all WTO member +countries reserved the right to impose (1) safeguard +measures (temporary quotas) if it can be demonstrated in a legal +proceeding that increased imports are injuring another WTO +member’s domestic industry; and (2) anti-dumping +measures if it can be demonstrated in a legal proceeding that +imports are being sold at an unfair low price in another WTO +member’s home market, and those imports were causing or +threatening to cause material injury to the domestic industry. +6 +Table of Contents +Accordingly, with the phase-out of the quotas at the beginning +of 2005, and the expiration of a separate EU anti-dumping case +in 2003 against footwear made in China, Indonesia, and Thailand, +there has been renewed pressure from some parts of the EU +footwear manufacturing sector to re-impose some level of trade +protection on imported footwear from China, India, Vietnam, and +other exporting countries. In mid-2005 the European Commission, +at the request of the European domestic footwear industry, +initiated investigations into leather footwear imported from +China and Vietnam. NIKE and all other major athletic footwear +manufacturers are currently participating actively as +respondents in this investigation and are taking the position +that athletic footwear (i) should not be within the product +scope of this investigation and (ii) does not meet the +legal requirements of injury and price in an anti-dumping +investigation. We believe that our major competitors stand in +much the same position of risk regarding these potential trade +measures. +Expiration of the Textile and Apparel Multi-Fiber +Arrangement +Under the WTO, the Multi-Fiber Arrangement, a four-decade old +agreement that allows WTO countries to impose quotas on the +import of textile and apparel products, expired on +January 1, 2005. This effectively meant that absent some +other form of trade restrictions (see China discussion below) +all trade of textile and apparel products between WTO members is +free from quotas as of the end of the 2004 calendar year. +Elimination of textile and apparel quotas is significant for +NIKE and other textile and apparel companies as it provides +these companies greater flexibility in their global sourcing +decisions. At the same time, we are monitoring closely actions +by textile and apparel importing countries to ensure that they +do not unilaterally attempt to re-impose restrictions through +some other legal mechanism, such as safeguards, anti-dumping +measures, or in the case of China (as part of the agreement +reached in China’s 2001 WTO accession), through the +short-term re-imposition of quotas on certain categories of +textile and apparel products in order to protect a domestic +market from rising Chinese imports. +We are currently monitoring potential restrictions by the United +States and the European Union. In early 2005 the EU began +consultations with China over imposition of quotas. However, as +a result of those negotiations, in June of 2005, the EU and +China reached an agreement which voluntarily limits the amount +of apparel product China can export to the EU in particular +categories until January 1, 2008. NIKE monitored these +negotiations closely, adjusted its sourcing and distribution +strategy, and as a result, the agreement has not had a material +effect on our business. +In early 2005 the United States launched provisional safeguard +measures on several categories of apparel products from China. +In May of 2005, the U.S. found that imports from China of +certain apparel categories were causing market disruption to the +U.S. industry and the United States reimposed quota on +certain apparel categories. NIKE monitored these negotiations +closely, adjusted its sourcing and distribution strategy, and as +a result, the actions have not had a material effect on our +business. We believe that our principal competitors face the +same risks regarding these trade measures. +Vietnam Imports into the United States +We currently source a portion of our footwear and apparel +products from factories in Vietnam. In 2001, the United States +Congress and the Vietnamese National Assembly approved a +comprehensive bilateral trade agreement, which, among other +things, provides reciprocal, non-discriminatory Normal Trade +Relations (“NTR”) between the U.S. and Vietnam. +Following that approval, the U.S. granted an annual +extension of NTR to Vietnam. The U.S. President must renew +this grant annually with the opportunity for review by Congress. +In June 2005, President Bush renewed NTR for Vietnam for an +additional year and we anticipate Congress will support this +decision, as it has done for the past four years. We currently +believe that, absent unforeseen circumstances, the President +will continue his annual extensions of NTR to Vietnam and that +Congress will support the President’s decisions. The annual +extensions on NTR will remain in place until Vietnam enters the +WTO, at which time the U.S. must grant Vietnam permanent +NTR. Vietnam’s WTO accession negotiations are ongoing, and +may conclude as early as the end of 2005. Ongoing NTR trading +status for Vietnam will allow us to expand our production and +marketing opportunities in Vietnam and allow for +Vietnamese-sourced product to continue to enter the United +States at NTR tariff rates. +7 +Table of Contents +Competition +The athletic footwear, apparel and equipment industry is keenly +competitive in the United States and on a worldwide basis. We +compete internationally with an increasing number of athletic +and leisure shoe companies, athletic and leisure apparel +companies, sports equipment companies, and large companies +having diversified lines of athletic and leisure shoes, apparel +and equipment, including Reebok, Adidas and others. The intense +competition and the rapid changes in technology and consumer +preferences in the markets for athletic and leisure footwear and +apparel, and athletic equipment, constitute significant risk +factors in our operations. +NIKE is the largest seller of athletic footwear and athletic +apparel in the world. Performance and reliability of shoes, +apparel, and equipment, new product development, price, product +identity through marketing and promotion, and customer support +and service are important aspects of competition in the athletic +footwear, apparel and equipment industry. To help market our +products, we contract with prominent and influential athletes, +coaches, teams, colleges and sports leagues to endorse our +brands and use our products, and we actively sponsor sporting +events and clinics. We believe that we are competitive in all of +these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe +that having distinctive marks that are readily identifiable is +an important factor in creating a market for our goods, in +identifying the Company, and in distinguishing our goods from +the goods of others. We consider our NIKE® and Swoosh +Design® trademarks to be among our most valuable assets and +we have registered these trademarks in over 100 countries. +In addition, we own many other trademarks that we utilize in +marketing our products. We continue to vigorously protect our +trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell +footwear using patented “Air” technology. The process +utilizes pressurized gas encapsulated in polyurethane. Some of +the early NIKE AIR® patents have expired, which may enable +competitors to use certain types of similar technology. +Subsequent NIKE AIR patents will not expire for several years. +We also have hundreds of U.S. and foreign patents covering +components, features, and designs used in various athletic and +leisure shoes, apparel and equipment. These patents expire at +various times, and have a remaining duration of from now to at +least 2025, although the duration of patents varies by country. +We believe that our success depends primarily upon skills in +design, research and development, production and marketing +rather than upon our patent position. However, we have followed +a policy of filing applications for United States and foreign +patents on inventions, designs and improvements that we deem +valuable. +Employees +We had approximately 26,000 employees at May 31, 2005. +Management considers its relationship with employees to be +excellent. None of our employees is represented by a union, with +the exception of Bauer NIKE Hockey Inc. Of Bauer NIKE +Hockey’s employees, approximately 33 percent, or +approximately 157, are covered by two union collective +bargaining agreements with two separate bargaining units. The +collective bargaining agreements expire on various dates from +2005 through 2007. There has never been a material interruption +of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE as of July 25, 2005 are as +follows: +Philip H. Knight, Chairman of the Board — +Mr. Knight, 67, a director since 1968, is a co-founder of +NIKE and, except for the period from June 1983 through September +1984, served as its President from 1968 to 1990, and from June +2000 to December 2004. Prior to 1968, Mr. Knight was a +certified public accountant with Price Waterhouse and +Coopers & Lybrand and was an Assistant Professor of +Business Administration at Portland State University. +8 +Table of Contents +William D. Perez, Chief Executive Officer and +President — Mr. Perez, 57, joined NIKE in +December 2004 as CEO and President. Immediately prior to joining +NIKE, he was President and Chief Executive Officer of S. C. +Johnson & Son, Inc., a household consumer products +company in Racine, Wisconsin, a position he held since 1997. +Mr. Perez joined S. C. Johnson & Son, Inc. in +1970, where he held a number of senior positions in marketing, +regional management, and global management, becoming President +and Chief Operating Officer of Worldwide Consumer Products in +1993. Mr. Perez is also a director of Kellogg Company, +where he serves on the Audit Committee and the Consumer +Marketing Committee. +Donald W. Blair, Vice President and Chief Financial +Officer — Mr. Blair, 47, joined NIKE in November +1999. Prior to joining NIKE, he held a number of financial +management positions with Pepsico, Inc., including Vice +President, Finance of Pepsi-Cola Asia, Vice President, Planning +of PepsiCo’s Pizza Hut Division, and Senior Vice President, +Finance of The Pepsi Bottling Group, Inc. Prior to joining +Pepsico, Mr. Blair was a certified public accountant with +Deloitte, Haskins, and Sells. +Thomas E. Clarke, President of New Ventures — +Dr. Clarke, 54, a director from 1994 to 2004, joined NIKE +in 1980. He was appointed divisional Vice President in charge of +marketing in 1987, elected corporate Vice President in 1989, +appointed General Manager in 1990, and served as President and +Chief Operating Officer from 1994 to 2000. Dr. Clarke +previously held various positions with the Company, primarily in +research, design, development and marketing. Dr. Clarke +holds a doctorate degree in biomechanics. +Wesley A. Coleman, Vice President, Global Human +Resources — Mr. Coleman, 55, has been employed by +NIKE since 2002 in his current role. Prior to joining NIKE, he +held a number of Human Resource positions over a 20-year period +with S. C. Johnson & Son, Inc., including Vice +President HR, North America and Vice President HR, Asia/ Pacific. +Charles D. Denson, President of the NIKE +Brand — Mr. Denson, 49, has been employed by NIKE +since 1979. Mr. Denson held several positions within the +Company, including his appointments as Director of USA Apparel +Sales in 1994, divisional Vice President, US Sales in 1994, +divisional Vice President European Sales in 1997, divisional +Vice President and General Manager, NIKE Europe in 1998, Vice +President and General Manager of NIKE USA in 2000, and President +of the NIKE Brand in 2001. +Gary M. DeStefano, President of USA +Operations — Mr. DeStefano, 48, has been employed +by NIKE since 1982, with primary responsibilities in sales and +regional administration. Mr. DeStefano was appointed +Director of Domestic Sales in 1990, divisional Vice President in +charge of domestic sales in 1992, Vice President of Global Sales +in 1996, Vice President and General Manager of Asia Pacific in +1997, and President of USA Operations in 2001. +Trevor Edwards, Vice President, Global Brand +Management — Mr. Edwards, 42, joined NIKE in +1992. He was appointed Marketing Manager, Strategic Accounts, +Foot Locker in 1993, Director of Marketing, the Americas in +1995, Director of Marketing, Europe in 1997, Vice President, +Marketing for Europe, Middle East and Africa in 1999, and Vice +President, US Brand Marketing in 2000. Mr. Edwards was +appointed corporate Vice President, Global Brand Management in +2002. +Mindy F. Grossman, Vice President of Global +Apparel — Ms. Grossman, 47, joined NIKE in 2000. +Prior to joining NIKE, she was President and Chief Executive +Officer of Polo Jeans Company/ Ralph Lauren, a division of Jones +Apparel Group, Inc. from 1995 to 2000. Prior to that, +Ms. Grossman was Vice President of New Business Development +at Polo Ralph Lauren Corp. from 1994 to 1995, President of The +Warnaco Group Inc. Chaps Ralph Lauren division, and Senior Vice +President of The Warnaco Group Inc. Menswear division from 1991 +to 1994. +Adam S. Helfant, Vice President, Global Sports +Marketing — Mr. Helfant, 40, joined NIKE in 1995 +in the Company’s legal department, and was appointed +Director of Business Affairs for Global Sports Marketing in +1997, Director of Global Sports Marketing in 1998, Director of +US Sports Marketing in 2001, Vice President of US Sports +Marketing in 2003, and corporate Vice President, Global Sports +Marketing in August 2004. Prior to joining NIKE, he was in +private practice and an attorney for NHL Enterprises, Inc. +9 +Table of Contents +P. Eunan McLaughlin, Vice President, Europe, Middle +East & Africa — Mr. McLaughlin, 47, joined +NIKE as Director of Sales, NIKE Europe in 1999, and was +appointed Vice President Commercial Sales and Retail in 2000, +Vice President, Asia Pacific in 2001, and Vice President, +Europe, Middle East & Africa in May 2004. Prior to +joining NIKE, he was Partner and Vice President of +Consumer & Retail Practices Division, Korn/ Ferry +International from 1996 to 1999. From 1983 to 1996 +Mr. McLaughlin held various positions with Mars, Inc. in +finance, sales, marketing and general management. +D. Scott Olivet, Vice President, NIKE Subsidiaries +and New Business Development — Mr. Olivet, 43, +joined NIKE in 2001. Prior to joining NIKE, he was a Senior Vice +President of Gap Inc., responsible for real estate, store +design, and construction across Gap, Banana Republic, and Old +Navy brands from 1998 to 2001. Prior to that, Mr. Olivet +was employed by Bain & Company, an international +strategic consulting firm from 1984 to 1998 (a Partner from 1993 +to 1998). +Mark G. Parker, President of the NIKE Brand — +Mr. Parker, 49, has been employed by NIKE since 1979 with +primary responsibilities in product research, design and +development, marketing, and brand management. Mr. Parker +was appointed divisional Vice President in charge of development +in 1987, corporate Vice President in 1989, General Manager in +1993, Vice President of Global Footwear in 1998, and President +of the NIKE Brand in 2001. +Eric D. Sprunk, Vice President, Global +Footwear — Mr. Sprunk, 41, joined NIKE in 1993. +He was appointed Finance Director and General Manager of the +Americas in 1994, Finance Director, NIKE Europe in 1995, +Regional General Manager, NIKE Europe Footwear in 1998, and Vice +President & General Manager of the Americas in 2000. +Mr. Sprunk was appointed corporate Vice President, Global +Footwear in 2001. Prior to joining NIKE, Mr. Sprunk was a +certified public accountant with Pricewaterhouse from 1987 to +1993. +Lindsay D. Stewart, Vice President and Chief of Staff, +and Secretary — Mr. Stewart, 58, joined NIKE as +Assistant Corporate Counsel in 1981. Mr. Stewart became +Corporate Counsel in 1983. He was appointed Vice President and +General Counsel in 1991, and Chief of Staff in 2001. Prior to +joining NIKE, Mr. Stewart was in private practice and an +attorney for Georgia-Pacific Corporation. +Roland P. Wolfram, Vice President and General Manager, +Asia Pacific — Mr. Wolfram, 45, joined NIKE as Vice +President, Strategic Planning in 1998, and was appointed Vice +President, Global Operations & Technology in 2002, and +Corporate Vice President, Asia Pacific in April 2004. Prior to +NIKE, Mr. Wolfram was Vice President and General Manager at +Pacific Bell Video Services. \ No newline at end of file diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/item13.txt b/raw/filings/0000320187/2004/0000950124-05-004551/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..2e1a309254dffac641624c90d99839701448c86e --- /dev/null +++ b/raw/filings/0000320187/2004/0000950124-05-004551/item13.txt @@ -0,0 +1,6 @@ +Item 13. +Certain Relationships and Related Transactions +The information required by this Item is included under +“Certain Transactions and Business Relationships” in +the definitive Proxy Statement for our 2005 Annual Meeting of +Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/item9a.txt b/raw/filings/0000320187/2004/0000950124-05-004551/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..3ddabc685d131408149434c2e49aa1160cd617b3 --- /dev/null +++ b/raw/filings/0000320187/2004/0000950124-05-004551/item9a.txt @@ -0,0 +1,37 @@ +Item 9A. +Controls and Procedures +The Company maintains disclosure controls and procedures that +are designed to ensure that information required to be disclosed +in the Company’s Exchange Act reports is recorded, +processed, summarized and reported within the time periods +specified in the Securities and Exchange Commission’s rules +and forms and that such information is accumulated and +communicated to the Company’s management, including its +Chief Executive Officer and Chief Financial Officer, as +appropriate, to allow for timely decisions regarding required +disclosure. In designing and evaluating the disclosure controls +and procedures, management recognizes that any controls and +procedures, no matter how well designed and operated, can +provide only reasonable assurance of achieving the desired +control objectives, and management is required to apply its +judgment in evaluating the cost-benefit relationship of possible +controls and procedures. +The Company carries out a variety of on-going procedures, under +the supervision and with the participation of the Company’s +management, including the Company’s Chief Executive Officer +and Chief Financial Officer, to evaluate the effectiveness of +the design and operation of the Company’s disclosure +controls and procedures. Based on the foregoing, the +Company’s Chief Executive Officer and Chief Financial +Officer concluded that the Company’s disclosure controls +and procedures were effective at the reasonable assurance level +as of May 31, 2005. +Management’s report on internal control over financial +reporting and the related attestation report of +PricewaterhouseCoopers LLP are included in Item 8 on +pages 34-36 of this Report. +There has been no change in the Company’s internal control +over financial reporting during the Company’s most recent +fiscal quarter that has materially affected, or is reasonable +likely to materially affect, the Company’s internal control +over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/rp_note.txt b/raw/filings/0000320187/2004/0000950124-05-004551/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2004/0000950124-05-004551/rpt_disclosure.txt b/raw/filings/0000320187/2004/0000950124-05-004551/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/filing.txt b/raw/filings/0000320187/2005/0001193125-06-156152/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..23dee27c138b6b4c826fa95629b83df6fc9823e9 --- /dev/null +++ b/raw/filings/0000320187/2005/0001193125-06-156152/filing.txt @@ -0,0 +1,5265 @@ +10-K +1 +d10k.htm +FORM 10-K +Form 10-K +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +Form 10-K +(Mark One) +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended May 31, 2006 +or +¨ +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. 1-10635 +NIKE, Inc. +(Exact name of Registrant as specified in its charter) +Oregon +93-0584541 +(State or other jurisdiction +of incorporation) +(IRS Employer +Identification No.) +One Bowerman Drive +(503) 671-6453 +Beaverton, Oregon 97005-6453 +(Registrant’s Telephone Number, Including Area Code) +(Address of principal executive offices) (Zip Code) +Securities registered pursuant to Section 12(b) of the Act: +Class B Common Stock +New York Stock Exchange +(Title of Each Class) +(Name of Each Exchange on Which Registered) +Securities registered pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant +is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨ +Indicate by check mark if the registrant is not required to file +reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ +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 (or for such shorter period that the Registrant was required to file such reports), and +(2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to +Item 405 of Regulation S-K (§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. ¨ +Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of +“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated Filer ¨ +Non-accelerated filer ¨ +Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the +Act). Yes ¨ No þ +As of November 30, 2005, the aggregate market value of the Registrant’s Class A Common Stock held by nonaffiliates of the Registrant was +$488,038,576 and the aggregate market value of the Registrant’s Class B Common Stock held by nonaffiliates of the Registrant was $16,212,090,022. +As of July 25, 2006, the number of shares of the Registrant’s Class A Common Stock outstanding was 63,906,694 and the number of shares of the Registrant’s Class B Common Stock outstanding was +191,491,507. +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the annual meeting of shareholders to be held on September 18, 2006 are incorporated by reference into Part III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +TABLE OF CONTENTS +Page +PART I +Item 1. +Business +2 +General +2 +Products +2 +Sales and Marketing +3 +United States Market +3 +International Markets +4 +Significant Customer +5 +Orders +5 +Product Research and Development +5 +Manufacturing +5 +International Operations and Trade +6 +Competition +7 +Trademarks and Patents +8 +Employees +8 +Executive Officers of the Registrant +8 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +17 +Item 2. +Properties +17 +Item 3. +Legal Proceedings +17 +Item 4. +Submission of Matters to a Vote of Security Holders +17 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +18 +Item 6. +Selected Financial Data +19 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +20 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +39 +Item 8. +Financial Statements and Supplemental Data +42 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +71 +Item 9A. +Controls and Procedures +71 +Item 9B. +Other Information +71 +PART III +(Except for the information set forth under “Executive Officers of the Registrant” in +Item 1 above, Part III is incorporated by reference from the Proxy Statement for the +NIKE, +Inc. 2006 annual meeting of shareholders.) +Item 10. +Directors and Executive Officers of the Registrant +72 +Item 11. +Executive Compensation +72 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +72 +Item 13. +Certain Relationships and Related Transactions +72 +Item 14. +Principal Accountant Fees and Services +72 +PART IV +Item 15. +Exhibits and Financial Statement Schedules +73 +Signatures +S-1 +1 +Table of Contents +PART I +Item 1. Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon. As used in this report, the +terms “we”, “us”, “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. Our Internet address is www.nike.com. On our +NIKE Corporate web site, located at www.nikebiz.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form +10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934. All such filings on our NIKE +Corporate web site are available free of charge. Also available on the NIKE Corporate web site are the charters of the committees of our board of directors, as well as our corporate governance guidelines and code of ethics; copies of any of these +documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic +apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores, and through a mix of independent distributors and licensees, in over 160 countries around the world. Virtually all of our products are manufactured by +independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a +large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovation in products designed for men, women and children. Running, cross-training, basketball, soccer, +sport-inspired urban shoes, and children’s shoes are currently our top-selling product categories and we expect them to continue to lead in product sales in the near future. We also market shoes designed for tennis, golf, baseball, football, +walking, hiking, outdoor activities, skateboarding, bicycling, volleyball, wrestling, cheerleading, aquatic activities and other athletic and recreational uses. +We sell sports apparel and accessories covering most of the above categories, sports inspired lifestyle apparel, as well as athletic bags and accessory items. NIKE apparel and accessories are designed to complement +our athletic footwear products, feature the same trademarks and are sold through the same marketing and distribution channels. We often market footwear, apparel and accessories in “collections” of similar design or for specific purposes. +We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the +NIKE brand name, including golf clubs and balls, sport balls, eyewear, timepieces, electronic devices, bats, gloves, protective equipment, and other equipment designed for sports activities. We also have agreements for licensees to produce and sell +NIKE brand swimwear, cycling apparel, children’s clothing, school supplies, electronic devices, eyewear, golf accessories, and belts. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned +subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary Converse Inc. (“Converse”), headquartered in North Andover, +Massachusetts, designs and distributes athletic and casual footwear, apparel and accessories under the Converse ® , Chuck Taylor ® , All Star ® , One +Star ® and Jack Purcell ® trademarks, and footwear under the Hurley ® trademark. +We sell a line of dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan ® , G Series ® and Bragano ® through our wholly-owned subsidiary, Cole Haan Holdings Incorporated (“Cole Haan”), headquartered in Yarmouth, Maine. +2 +Table of Contents +Our wholly-owned subsidiary Hurley International LLC (“Hurley”), headquartered in Costa Mesa, +California, designs and distributes a line of action sports apparel for surfing, skateboarding, and snowboarding, and youth lifestyle apparel, and accessories under the Hurley ® trademark. +Our wholly-owned subsidiary, NIKE Bauer Hockey Inc. (“NIKE Bauer Hockey”), headquartered in Greenland, New Hampshire, manufactures and distributes ice skates, skate blades, protective gear, hockey sticks, licensed apparel and +accessories under the NIKE Bauer ® , Bauer ® , and NIKE ® trademarks. NIKE Bauer ™ also offers a full selection of products for street and roller hockey. +Our wholly-owned subsidiary, Exeter Brands Group LLC (“Exeter Brands Group”), headquartered in New York City, New York, sells athletic footwear +and apparel in retail channels for value-conscious consumers, and markets and licenses athletic footwear and apparel under the Starter logo ® and Shaq ® brand names. +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 of the +consolidated financial statements on page 68. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, +revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for +particular types of footwear, apparel and equipment. +Because NIKE is a consumer products company, the relative popularity of various +sports and fitness activities and changing design trends affect the demand for our products. We must therefore respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles +and categories, and influencing sports and fitness preferences through aggressive marketing. This is a continuing risk. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. +United States Market +In fiscal 2006, sales in the United States (including U.S. sales of Cole Haan, Converse, +Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf) accounted for approximately 47 percent of total revenues, compared to 46 percent in fiscal 2005 and 47 percent in fiscal 2004. We sell to approximately 24,000 retail accounts in the +United States. The NIKE brand domestic retail account base includes a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts. During fiscal year 2006, our +three largest customers accounted for approximately 30 percent of NIKE brand sales in the United States excluding sales from NIKE Bauer Hockey and NIKE Golf, and 25 percent of total sales in the United States. +We make substantial use of our “futures” ordering program, which allows retailers to order five to six months in advance of delivery with the +commitment that 90 percent of their orders will be delivered within a set time period at a fixed price. In fiscal year 2006, 90 percent of our U.S. wholesale footwear shipments (excluding Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer +Hockey and NIKE Golf) were made under the futures program, compared to 91 percent in fiscal 2005 and 90 percent in fiscal 2004. In fiscal 2006, 69 percent of our U.S. wholesale apparel shipments (excluding U.S. licensed team apparel, Cole Haan, +Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf) were made under the futures program, compared to 71 percent in fiscal 2005, and 67 percent in fiscal 2004. +3 +Table of Contents +We utilize 20 NIKE sales offices to solicit sales in the United States. We also utilize 10 independent +sales representatives to sell specialty products for golf and outdoor activities. In addition, we sell NIKE brand products through our internet website, www.niketown.com , and we operate the following retail outlets in the United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily overstock and closeout merchandise) +87 +NIKE stores (including NIKE Women Stores) +14 +NIKETOWNs (designed to showcase NIKE products) +12 +NIKE employee-only stores +4 +Cole Haan stores (including factory and employee stores) +83 +Converse stores (including factory and employee stores) +9 +Hurley stores +3 +Total +212 +NIKE’s domestic distribution centers for footwear are located in Wilsonville, Oregon, and +Memphis, Tennessee. Apparel and equipment products are shipped from our Memphis, Tennessee, Tigard, Oregon, and Foothill Ranch, California distribution centers. Cole Haan and NIKE Bauer Hockey products are distributed primarily from Greenland, New +Hampshire, Converse products are shipped from Ontario and Fontana, California, and Hurley products are shipped from Irvine, California. +International Markets +We sell our products to retail accounts, through NIKE-owned retail stores, and through a +mix of independent distributors and licensees, in over 160 countries around the world. Non-U.S. sales (including non-U.S. sales of Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf) accounted for 53 percent of total +revenues in fiscal 2006, compared to 54 percent in fiscal 2005 and 53 percent in fiscal 2004. We estimate that we sell to more than 27,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. We +operate 21 distribution centers in Europe, Asia, Australia, Africa and Canada. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United +States futures program described above. NIKE’s three largest customers outside of the U.S. accounted for approximately 11 percent of NIKE brand sales outside the United States excluding sales from NIKE Bauer Hockey and NIKE Golf, and +approximately 10 percent of total non-U.S. sales. +We operate the following retail outlets outside the United States: +Non-U.S. Retail Stores +Number +NIKE factory stores +106 +NIKE stores and employee-only stores +38 +NIKETOWNs +2 +Cole Haan stores (including factory and employee stores) +59 +Hurley stores +1 +Total +206 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, +Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Malaysia, Mexico, New Zealand, The +Netherlands, Norway, People’s Republic of China, The Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, Uruguay and Vietnam. +4 +Table of Contents +Significant Customer +Foot Locker Inc., which operates a chain of retail stores specializing in athletic +footwear and apparel, accounted for approximately 10 percent of global net sales of NIKE, Inc. during fiscal 2006. No other customer accounted for 10 percent or more of our net sales during fiscal 2006. +Orders +Worldwide futures and advance orders for NIKE brand athletic footwear and apparel, scheduled for +delivery from June through November 2006, were $6.6 billion compared to $6.3 billion for the same period last year. This futures and advance order amount is calculated based upon our forecast of the actual exchange rates under which our revenues +will be translated during this period, which approximate current spot rates. Based upon historical data, we expect that approximately 95 percent of these orders will be filled in that time period, although some orders may be cancelled. Reported +futures and advance orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, foreign currency exchange rate +fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between futures and advance orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures +and advance orders, including at-once and closeout sales of NIKE footwear and apparel, wholesale sales of equipment, U.S. licensed team apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey, NIKE Golf, and retail sales across +all brands. +Product Research and Development +We believe that our research and development efforts are a key factor in our +past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce products that help to reduce injury, enhance athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, exercise physiology, engineering, industrial design and +related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials and concepts for +product improvement. Employee athletes and other athletes wear-test and evaluate products during the design and development process. +Manufacturing +Virtually all of our footwear is produced outside of the United States. In fiscal 2006, contract +suppliers in China, Vietnam, Indonesia and Thailand manufactured 35 percent, 29 percent, 21 percent and 13 percent of total NIKE brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, +India, Italy, and South Africa to manufacture footwear for sale primarily within those countries. Our largest single footwear factory accounted for approximately 6 percent of total fiscal 2006 footwear production. +Almost all of NIKE brand apparel production for sale to the United States market, and all of our apparel production for sale to the international market, +was manufactured outside of the United States by independent contract manufacturers located in 40 countries. Most of this apparel production occurred in Bangladesh, China, Honduras, India, Indonesia, Malaysia, Mexico, Pakistan, Sri Lanka, Taiwan, +Thailand, Turkey and Vietnam. Our largest single apparel factory accounted for approximately 5 percent of total fiscal 2006 apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films used to make Air-Sole cushioning components. NIKE IHM, Inc. +and NIKE (Suzhou) Sports Company, Ltd., wholly-owned subsidiaries of NIKE, are our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and +threads, plastic and metal hardware, and specialized +5 +Table of Contents +performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture. NIKE and its contractors and suppliers buy raw materials in +bulk. Most raw materials are available in the countries where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”) and its predecessor, Nissho Iwai American Corporation, a subsidiary of Nissho Iwai +Corporation, a large Japanese trading company, have performed significant import-export financing services for us. During fiscal 2006, Sojitz America provided such financing services for most of the NIKE brand products sold outside of the United +States, Europe, Middle East, Africa and Japan, excluding products produced and sold in the same country. However, less than 13 percent of NIKE brand products, excluding products produced and sold in the same country, were sold outside of the United +States, Europe, Middle East, Africa and Japan in fiscal 2006. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver +products to our customers outside of the United States, Europe, Middle East, Africa and Japan. Such a disruption could result in cancelled orders that would adversely affect sales and profitability. However, we believe that any such disruption would +be short term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2008. +International Operations and Trade +Our international operations and sources of supply are subject to the usual +risks of doing business abroad, such as possible revaluation of currencies, export duties, anti-dumping duties, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political +instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring. We believe that we have the ability to develop, over a period of time, adequate alternative +sources of supply for the products obtained from our present suppliers outside of the United States. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we +could experience an adverse financial impact. However, we believe that we could abate any such disruption within a period of no more than 12 months, and that much of the adverse impact on supply would, therefore, be of a short-term nature. We +believe that our principal competitors are subject to similar risks. +As a result of the Trade Act of 2003, the United States implemented +significant new Federal requirements for cargo security, focused on imports of containerized cargo. We are a significant importer of containerized cargo. Accordingly, we participate actively in appropriate governmental programs, such as the Customs +Trade Partnership Against Terrorism, to reduce risks of possible supply disruptions caused by U.S. and international cargo security mandates and terrorism. Additionally in 2006, we and a broad coalition of businesses have been actively working with +the United States Congress as it considers legislation to make U.S. ports more secure. We are actively following this proposed legislation and believe that any legislation, if passed, will not have a significant impact on our supply chain. We +believe that our major competitors stand in much the same position of risk regarding this potential legislation. +All of our products +manufactured overseas and imported into the United States, the European Union and other countries are subject to customs duties collected by customs authorities. Customs information submitted by us is routinely subject to review by customs +authorities. We are unable to predict whether additional customs duties, anti-dumping duties, quotas, safeguard measures, or other trade restrictions may be imposed on the importation of our products in the future. Such actions could result in +increases in the cost of our products generally and might adversely affect the sales or profitability of NIKE and the imported footwear and apparel industry as a whole. Accordingly, we are actively monitoring the developments described below. +Footwear Imports into the European Union +From 1994 through January 1, 2005, the European Union (“EU”) imposed limits (or “quotas”) on the import of certain types of footwear manufactured in China. Footwear designed for use in +sporting activities, meeting +6 +Table of Contents +certain technical criteria and having a CIF (cost, insurance and freight) price above nine euros (“Special Technology Athletic Footwear” or +“STAF”), was excluded from the quotas. As a result of the STAF exclusion, and the amount of quota made available to us, the quotas did not have a material effect on our business. However, as part of China’s 2001 accession to the World +Trade Organization (“WTO”), China entered into an agreement with the EU and other WTO members to abide by a special safeguard arrangement whereby quotas could be imposed on any product sourced in China, including footwear, if there was a +surge in imports from China into another WTO country, and after a legal proceeding it was determined that such imports were injuring a domestic producer. Additionally, under longstanding WTO rules, all WTO member countries reserved the right to +impose (1) safeguard measures (temporary quotas) if it can be demonstrated in a legal proceeding that increased imports are injuring another WTO member’s domestic industry; and (2) anti-dumping measures if it can be demonstrated in a +legal proceeding that imports are being sold at an unfair low price in another WTO member’s home market, and those imports were causing or threatening to cause material injury to the domestic industry. +Accordingly, with the phase-out of the quotas at the beginning of 2005, and the expiration of a separate EU anti-dumping case in 2003 against footwear +made in China, Indonesia, and Thailand, there has been renewed pressure from some parts of the EU footwear manufacturing sector to re-impose some level of trade protection on imported footwear from China, India, Vietnam, and other exporting +countries. In July 2005, the European Commission, at the request of the European domestic footwear industry, initiated investigations into leather footwear imported from China and Vietnam. NIKE and all other major athletic footwear manufacturers are +currently participating actively as respondents in this investigation and are taking the position that athletic footwear (i) should not be within the product scope of this investigation and (ii) does not meet the legal requirements of +injury and price in an anti-dumping investigation. The EU agreed on provisional anti-dumping duties in March 2006 but excluded STAF from the measures. We anticipate that the definitive anti-dumping duties will be adopted by early October 2006 and we +expect STAF to be excluded from the final measures. We believe that our major competitors stand in much the same position regarding these potential trade measures. +Vietnam Imports into the United States +We currently source a portion of our footwear and apparel +products from factories in Vietnam. In 2001, the United States Congress and the Vietnamese National Assembly approved a comprehensive bilateral trade agreement, which, among other things, provides reciprocal, non-discriminatory Normal Trade +Relations (“NTR”) between the U.S. and Vietnam. Following that approval, the U.S. granted an annual extension of NTR to Vietnam. The U.S. President must renew this grant annually with the opportunity for review by Congress. In June 2006, +President Bush renewed NTR for Vietnam for an additional year and we anticipate Congress will support this decision, as it has done for the past five years. Additionally, in the spring of 2006 Vietnam finished its WTO accession negotiations with +several WTO countries and has embarked on entering the WTO as a full member. Legislation has been introduced within Congress to provide Vietnam Permanent Normal Trade Relations (“PNTR”) and we anticipate Congressional approval of this +legislation in 2006. Vietnam’s entry into the WTO and the U.S. providing Vietnam PNTR will provide us greater certainty about our business within Vietnam. It will likewise enable us to further expand our production and marketing opportunities +in Vietnam and allow for Vietnamese-sourced products to continue to enter the United States at NTR tariff rates. +Competition +The athletic footwear, apparel and equipment industry is keenly competitive in the United States +and on a worldwide basis. We compete internationally with an increasing number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and +leisure shoes, apparel and equipment, including Adidas and others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute +significant risk factors in our operations. +7 +Table of Contents +NIKE is the largest seller of athletic footwear and athletic apparel in the world. Performance and +reliability of shoes, apparel, and equipment, new product development, price, product identity through marketing and promotion, and customer support and service are important aspects of competition in the athletic footwear, apparel and equipment +industry. To help market our products, we contract with prominent and influential athletes, coaches, teams, colleges and sports leagues to endorse our brands and use our products, and we actively sponsor sporting events and clinics. We believe that +we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe that having distinctive +marks that are readily identifiable is an important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We consider our NIKE ® and Swoosh Design ® trademarks to be among our most valuable assets and we have registered these trademarks in over 100 countries. In +addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR ® patents have expired, which may enable competitors to +use certain types of similar technology. Subsequent NIKE AIR ® patents will not expire for several years. We also have hundreds of U.S. and foreign patents covering components, features, and designs used in various athletic and leisure shoes, apparel and equipment. These patents +expire at various times, and have a remaining duration of from now to at least 2026, although the duration of patents varies by country. We believe that our success depends primarily upon skills in design, research and development, production and +marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on inventions, designs and improvements that we deem valuable. +Employees +We had approximately 28,000 employees at May 31, 2006. Management considers its relationship +with employees to be excellent. None of our employees is represented by a union, with the exception of NIKE Bauer Hockey Inc. Of NIKE Bauer Hockey’s employees, approximately 37 percent, or approximately 183, are covered by three union +collective bargaining agreements with three separate bargaining units. The collective bargaining agreements expire on various dates from 2007 through 2008. There has never been a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE as of July 25, 2006 are as follows: +Philip H. Knight, Chairman of the Board — Mr. Knight, 68, a director since 1968, is a co-founder of NIKE and, except for +the period from June 1983 through September 1984, served as its President from 1968 to 1990, and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand +and was an Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, Chief Executive Officer and +President — Mr. Parker, 50, was appointed CEO and President in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management. +Mr. Parker was appointed divisional Vice President in charge of development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in 2001. +Lewis L. Bird III, President, Subsidiaries — Mr. Bird, 42, joined NIKE as President, Subsidiaries in July 2006. Prior to joining NIKE, +he held a number of management positions within multinational companies with +8 +Table of Contents +diverse brand portfolios. He was Executive Vice President of New Business Development for Gap Inc. from September 2005 to March 2006. Prior to that, +Mr. Bird served as Chief Operating Officer of Gap Inc.’s North American division from March 2003 to September 2005, Chief Financial Officer of Gap Inc.’s Old Navy division from 2001 to 2003, Vice President Finance & +Operations of Gateway, Inc. from 1999 to 2001, Director of business Analysis & Planning at AlliedSignal Inc. from 1998 to 1999, and prior to that held financial management positions with AlliedSignal, Ford Motor Company and BayBanks, Inc. +Donald W. Blair, Vice President and Chief Financial Officer — Mr. Blair, 48, joined NIKE in November 1999. Prior to +joining NIKE, he held a number of financial management positions with Pepsico, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi +Bottling Group, Inc. Prior to joining Pepsico, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Mary +Kate Buckley, Vice President/General Manager, Americas and NIKE Bauer Hockey — Ms. Buckley, 46, has been employed by NIKE since 1998. She was appointed Director of New Business Development in 1998, Director of nike.com in 1998, +divisional Vice President of nike.com in 1999, and divisional Vice President and General Manger, Americas Region in 2001. Ms. Buckley was appointed corporate Vice President and General Manager, Americas and NIKE Bauer Hockey in July 2006. Prior +to joining NIKE, Ms. Buckley worked in several positions in finance, marketing and strategic planning for The Walt Disney Company. +Thomas E. Clarke, President of New Ventures — Dr. Clarke, 55, a director from 1994 to 2004, joined NIKE in 1980. He was appointed divisional Vice President in charge of marketing in 1987, elected corporate Vice President in +1989, appointed General Manager in 1990, and served as President and Chief Operating Officer from 1994 to 2000. Dr. Clarke previously held various positions with the Company, primarily in research, design, development and marketing. +Dr. Clarke holds a doctorate degree in biomechanics. +Wesley A. Coleman, Vice President, Global Human Resources — +Mr. Coleman, 56, has been employed by NIKE since 2002 in his current role. Prior to joining NIKE, he held a number of Human Resource positions over a 20-year period with S. C. Johnson & Son, Inc., including Vice President HR, North +America and Vice President HR, Asia/Pacific. +Charles D. Denson, President of the NIKE Brand — Mr. Denson, 50, has been +employed by NIKE since 1979. Mr. Denson held several management positions within the Company, including his appointments as Director of USA Apparel Sales in 1994, divisional Vice President, U.S. Sales in 1994, divisional Vice President European +Sales in 1997, divisional Vice President and General Manager, NIKE Europe in 1998, Vice President and General Manager of NIKE USA in 2000, and President of the NIKE Brand in 2001. +Gary M. DeStefano, President of USA Operations — Mr. DeStefano, 49, has been employed by NIKE since 1982, with primary responsibilities +in sales and regional administration. Mr. DeStefano was appointed Director of Domestic Sales in 1990, divisional Vice President in charge of domestic sales in 1992, Vice President of Global Sales in 1996, Vice President and General Manager of +Asia Pacific in 1997, and President of USA Operations in 2001. +Trevor Edwards, Vice President, Global Brand Management — +Mr. Edwards, 43, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts, Foot Locker in 1993, Director of Marketing, the Americas in 1995, Director of Marketing, Europe in 1997, Vice President, Marketing for Europe, Middle +East and Africa in 1999, and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002. +Adam S. Helfant, Vice President, Global Sports Marketing — Mr. Helfant, 41, joined NIKE in 1995 in the Company’s legal department, and was appointed Director of Business Affairs for Global Sports +Marketing in 1997, Director of Global Sports Marketing in 1998, Director of U.S. Sports Marketing in 2001, Vice President of U.S. Sports Marketing in 2003, and corporate Vice President, Global Sports Marketing in August 2004. Prior to joining NIKE, +he was in private practice and an attorney for NHL Enterprises, Inc. +9 +Table of Contents +P. Eunan McLaughlin, Vice President, Europe, Middle East & Africa — +Mr. McLaughlin, 48, joined NIKE as Director of Sales, NIKE Europe in 1999, and was appointed Vice President Commercial Sales and Retail in 2000, Vice President, Asia Pacific in 2001, and Vice President, Europe, Middle East & Africa in +May 2004. Prior to joining NIKE, he was Partner and Vice President of Consumer & Retail Practices Division, Korn/Ferry International from 1996 to 1999. From 1983 to 1996 Mr. McLaughlin held various positions with Mars, Inc. in finance, +sales, marketing and general management. +Eric D. Sprunk, Vice President, Global Footwear — Mr. Sprunk, 42, joined NIKE in +1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director, NIKE Europe in 1995, Regional General Manager, NIKE Europe Footwear in 1998, and Vice President & General Manager of the Americas in +2000. Mr. Sprunk was appointed corporate Vice President, Global Footwear in 2001. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +Lindsay D. Stewart, Vice President and Chief of Staff — Mr. Stewart, 59, joined NIKE as Assistant Corporate Counsel in 1981. +Mr. Stewart became Corporate Counsel in 1983. He was appointed Vice President and General Counsel in 1991, and Chief of Staff in 2001. Prior to joining NIKE, Mr. Stewart was in private practice and an attorney for Georgia-Pacific +Corporation. +Hans van Alebeek, Vice President, Global Operations & Technology — Mr. van Alebeek, 40, joined NIKE +as Director of Operations of Europe in 1999, and was appointed Vice President, Operations & Administration in EMEA in 2001, Vice President, Global Operations in 2003, Vice President, Global Operations & Technology in 2004, and +Corporate Vice President in November 2005. Prior to joining NIKE, Mr. van Alebeek worked for McKinsey & Company as a management consultant, and at N.V. Indivers in business development. +Roland P. Wolfram, Vice President and General Manager, Asia Pacific — Mr. Wolfram, 46, joined NIKE as Vice President, Strategic Planning +in 1998, and was appointed Vice President, Global Operations & Technology in 2002, and Corporate Vice President, Asia Pacific in April 2004. Prior to NIKE, Mr. Wolfram was Vice President and General Manager at Pacific Bell Video +Services. +Roger S. Wyett, Vice President, Global Apparel — Mr. Wyett, 49, returned to NIKE in April 2005 as President and +Chief Operating Officer of the Company’s Hurley brand and was appointed Vice President, Global Apparel in 2006. Mr. Wyett first joined NIKE in 1994, holding a number of management positions in soccer and NIKE Team Sports. In 2000, +Mr. Wyett joined The Walt Disney Company where he was Senior Vice President for Global Apparel, Accessories and Footwear, and later promoted to Executive Vice President for Global Sales and Marketing for Consumer Products. +Item 1A. Risk Factors +Special Note Regarding Forward-Looking Statements and +Analyst Reports +Certain written and oral statements, other than purely historical information, including estimates, projections, +statements relating to NIKE’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this +report, other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and +Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words +“believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or words or phrases of similar meaning. Forward-looking +statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including Forms +8-K, 10-Q, and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, +10 +Table of Contents +apparel, and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel, and equipment for +consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting +changes in consumer preferences, consumer demand for NIKE products, and the various market factors described above; difficulties in implementing, operating, and maintaining NIKE’s increasingly complex information systems and controls, +including, without limitation, the systems related to demand and supply planning, and inventory control; interruptions in data and communications systems; fluctuations and difficulty in forecasting operating results, including, without limitation, +the fact that advance “futures” orders may not be indicative of future revenues due to the changing mix of futures and at-once orders, currency exchange rate fluctuations, order cancellations, and the fact that a significant portion of our +revenue is not derived from futures orders; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; new product development and introduction; the ability to secure +and protect trademarks, patents, and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; +increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in our debt ratings; changes in business strategy or development plans; general risks associated with doing business outside +the United States, including without limitation, import duties, tariffs, quotas, political and economic instability, and terrorism; changes in government regulations; liability and other claims asserted against NIKE; the ability to attract and +retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. +The risks included +here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New +risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on NIKE’s business or the extent to which any factor, or combination of factors, +may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is keenly +competitive in the United States and on a worldwide basis. We compete internationally with an increasing number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having +diversified lines of athletic and leisure shoes, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products and for import quota capacity. +Our competitors’ product offerings, technologies, marketing expenditures (including for advertising and endorsements), pricing, costs of production, +and customer service are areas of intense competition. This, plus rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our +operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our net revenues and profitability. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands +in a timely manner. All of our products are subject to changing +11 +Table of Contents +consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift +rapidly to different types of performance or other sports apparel or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately +and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing, we +could experience lower sales, excess inventories and lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. +We rely on technical innovation to compete in the market for our products. +Although design +and aesthetics of our products appear to be the most important factor for consumer acceptance of our products, technical innovation in the design of footwear, apparel, and athletic equipment is also essential to the commercial success of our +products. Research and development plays a key role in technical innovation. We rely upon specialists in the fields of biomechanics, exercise physiology, engineering, industrial design and related fields, as well as research committees and advisory +boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop cutting edge performance products. While we strive to produce products that help to reduce injury, enhance athletic performance +and maximize comfort, failure to introduce technical innovation in our products could result in a decline in consumer demand for our products. +Failure to continue to obtain high quality endorsers of our products could harm our business. +We establish +relationships with professional athletes and sports teams and leagues to evaluate and promote our products, and establish the authenticity of our products with consumers. If certain of our endorsers were to stop using our products contrary to their +endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues could also harm our brand image +with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes to use and endorse our products, or a +failure to enter into endorsement arrangements with prominent athletes and sports organizations could adversely affect our brand and result in decreased sales of our products. +Failure of our contractors to comply with our code of conduct, local laws, and other standards could harm our business. +We contract with hundreds of contractors outside of the United States to manufacture NIKE Brand products, and we impose on those contractors a code of conduct and other environmental, health, and safety standards for +the benefit of workers. However, from time to time contractors may not be in compliance with such standards or applicable local law. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our +reputation and, as a result, could have an adverse effect on our sales and financial condition. +Our business is affected by seasonality, which could +result in fluctuations in our operating results and stock price. +We experience moderate fluctuations in aggregate sales volume +during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in +seasonal and geographic demand for particular types of footwear, apparel and equipment. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be +able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our +12 +Table of Contents +control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas and currency exchange rate +fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of factors that are beyond our control, including shifts in product sales mix, geographic sales +trends, and currency exchange rate fluctuations, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +“Futures” orders may not be an accurate indication of our future revenues. +We make substantial use of our “futures” ordering program, which allows retailers to order five to six months in advance of delivery with the +commitment that 90 percent of their orders will be delivered within a set period at a fixed price. Our futures ordering program allows us to minimize the amount of products we hold in inventory, purchasing costs, the time necessary to fill customer +orders, and the risk of non-delivery. We report changes in futures orders in our periodic financial reports. Reported futures orders are not necessarily indicative of our expectation of changes in revenues for any future period. This is because the +mix of orders can shift between advance/futures and at-once orders. In addition, foreign currency exchange rate fluctuations and order cancellations can cause differences in the comparisons between futures orders and actual revenues. Moreover, a +significant portion of our revenue is not derived from futures orders, including wholesale sales of equipment, U.S. licensed team apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey, NIKE Golf, and retail sales across all +brands. +Our “futures” ordering program does not prevent excess inventories or inventory shortages, which could result in decreased +operating margins and harm to our business. +We purchase products from manufacturers outside of our futures ordering program and in +advance of customer orders, which we hold in inventory and re-sell to customers. There is a risk that we may be unable to sell excess products that we have ordered from manufacturers. Inventory levels in excess of customer demand may result in +inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for +our products or if our manufacturers fail to supply the products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor +relationships, and diminish brand loyalty. +The difficulty in forecasting demand also makes it difficult to estimate our future results of +operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in +advance. +We may be adversely affected by the financial health of our retailers. +We extend credit to our customers based on an assessment of a customer’s financial circumstances, generally without requiring collateral. To assist +in the scheduling of production and the shipping of seasonal products, we offer customers the ability to place orders five to six months ahead of delivery under our “futures” ordering program. These advance orders may be cancelled, and the +risk of cancellation may increase when dealing with financially ailing retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties, which in turn have had an adverse effect on our +business. From time to time retailers will be more cautious than usual with orders as a result of weakness in the retail economy. A slowing economy in our key markets could have an adverse effect on the financial health of our customers, which could +in turn have an adverse effect on our results of operations and financial condition. +Failure to adequately protect our intellectual property rights +could adversely affect our business. +We utilize trademarks on nearly all of our products and believe that having distinctive marks +that are readily identifiable is an important factor in creating a market for our goods, in identifying us, and in distinguishing our +13 +Table of Contents +goods from the goods of others. We consider our NIKE ® and Swoosh Design ® trademarks to be among our most valuable assets and we have registered these trademarks in over 100 countries. In addition, we own many other trademarks that we utilize in marketing our products. We +believe that our trademarks, patents, and other intellectual property rights are important to our brand, our success and our competitive position. We periodically discover products that are counterfeit reproductions of our products or that otherwise +infringe on our intellectual property rights. If we are unsuccessful in challenging a party’s products on the basis of trademark or design infringement, continued sales of these products could adversely affect our sales and our brand and result +in the shift of consumer preference away from our products. The actions we take to establish and protect trademarks, patents, and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent +others from seeking to block sales of our products as violations of proprietary rights. +In addition, the laws of certain foreign countries +may not protect intellectual property rights to the same extent as do the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the United States, and +if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources. +We are a defendant from time to time in lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and +regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant +litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our +athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business +abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which we manufacture or +sell products. In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to +import products, our ability to sell products in international markets, and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely +affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are +produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, or other charges or restrictions, any of which +could have an adverse effect on our results of operations and financial condition. The outcomes of an ongoing investigation into anti-dumping practices in the EU, and the annual renewal of the NTR with Vietnam, each of which are discussed elsewhere +in this Report, could each have a material impact on our business. +Currency exchange rate fluctuations could result in higher costs and decreased +margins. +A majority of our products are sold outside of the United States. As a result, we conduct transactions in various +currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these +revenues and expenses could be affected by currency fluctuations, including amounts +14 +Table of Contents +recorded in foreign currencies and translated into U.S. dollars for consolidated financial reporting. Currency exchange rate fluctuations could also disrupt +the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations could have an adverse effect on our results of operations +and financial condition. +We engage in hedging activities to mitigate the impact of the translation of foreign currencies on our financial +results. See Note 16 to our financial statements, Risk Management and Derivatives. Our hedging activities are designed to reduce and delay, but not to eliminate, the effects of foreign currency fluctuations. Factors that could affect the +effectiveness of our hedging activities include accuracy of sales forecasts, volatility of currency markets, and the availability of hedging instruments. Since the hedging activities are designed to reduce volatility, they not only reduce the +negative impact of a stronger U.S. dollar, but they also reduce the positive impact of a weaker U.S. dollar. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which +we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +Our products are subject to risks associated with overseas sourcing, manufacturing, and financing. +The principal +materials used in our apparel products — natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture — are available +in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films — are also +locally available to manufacturers. NIKE contractors and suppliers buy raw materials in bulk. +There could be a significant disruption in +the supply of fabrics or raw materials from current sources or, in the event of a disruption, we might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. In addition, we cannot be +certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional supplies of fabrics +or raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In +addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, +products, quality control standards, and labor, health and safety standards. Any delays, interruption or increased costs in the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer +and consumer demand for our products and result in lower revenues and net income both in the short and long term. +Because independent +manufacturers manufacture a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the +availability of transportation, work stoppages, port strikes, or other factors could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more +expensive, transportation methods such as aircraft, which could adversely affect our profit margins. The cost of fuel is a significant component in transportation costs, so increases in the price of petroleum products can adversely affect our profit +margins. +In addition, Sojitz America performs significant import-export financing services for nearly all of the NIKE brand products sold +outside of the United States, Europe, Middle East, Africa and Japan, excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our +ability to acquire products from our suppliers and to deliver products to our customers outside of the United States, Europe, Middle East, Africa, and Japan. Such a disruption could result in cancelled orders that would adversely affect sales and +profitability. +15 +Table of Contents +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet +customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities, and the +timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as +earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse affect on our business. We maintain business interruption insurance, but it may not adequately protect us from the adverse effect that could be +caused by significant disruptions in our distribution facilities. +We rely significantly on information technology in our supply chain, and any +failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate our business. +We are heavily dependent on information technology systems across our supply chain, including for design, production, forecasting, ordering, manufacturing, transportation, sales, and distribution. Our ability to effectively manage and +maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these supply chain systems. Over the last several years, as part of the ongoing initiative to upgrade our worldwide supply chain, +we have implemented new systems in Canada, and the U.S., EMEA, and Asia Pacific regions and are now implementing them in the Americas regions. Over the next few years, we will work to continue to enhance the systems and related processes in these +operations and complete the implementation of new systems in the remainder of our global operations. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of +these systems could cause delays in product fulfillment and reduced efficiency of our operations, and it could require significant capital investments to remediate the problem. +We depend on key personnel, the loss of whom would harm our business. +Our future success will +depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individuals could harm us. Our future success also depends on our ability to identify, attract and retain additional qualified +personnel. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. +The sale of +a large number of shares held by our Chairman could depress the market price of our common stock. +Philip H. Knight, the Chairman of +our Board of Directors, beneficially owns over 90 percent of our Class A Common Stock and, if it was converted into Class B Common Stock, 24 percent of our Class B Common Stock. These shares are available for resale, subject to the requirements +of the U.S. securities laws. The sale or prospect of the sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. +Anti-takeover provisions may impair an acquisition of the company or reduce the price of our common stock. +There are provisions of our articles of incorporation and Oregon law that are intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to +negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freezeout statute, two classes of stock that vote separately on certain issues, and the fact that the holders +of Class A Common Stock shares elect three-fourths of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of the +Company that some shareholders might believe to be in their best interests, or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control +of the Company. +16 +Table of Contents +We may fail to meet analyst expectations, which could cause the price of our stock to decline. +Our common stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These +reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based upon their own opinions and are often different from our estimates or +expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies +following a decline in the market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s +attention and resources that are needed to successfully run our business. +Item 1B. Unresolved Staff Comments +Not applicable. +Item 2. Properties +The following is a summary of principal +properties owned or leased by NIKE. +The NIKE World Campus, owned by NIKE and located in Beaverton, Oregon, USA, is a 176 acre facility of +16 buildings which functions as our world headquarters and is occupied by almost 6,000 employees engaged in management, research, design, development, marketing, finance, and other administrative functions from nearly all divisions of the Company. +We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, The Netherlands, which serves as the headquarters for the Europe, Middle East and Africa +(“EMEA”) Region. +There are three significant distribution and customer service facilities for NIKE brand products in the United +States. Two of them are located in Memphis, Tennessee, one of which is leased, and one is located in Wilsonville, Oregon, which is owned by us. Cole Haan and NIKE Bauer Hockey also operate a distribution facility in Greenland, New Hampshire, which +is owned by us. Smaller leased distribution facilities for other brands and subsidiaries are located in various parts of the country. We also own or lease distribution and customer service facilities in many parts of the world, the most significant +of which are the distribution facilities located in Tomisatomachi, Japan, and in Laakdal, Belgium, both of which we own. +We manufacture +NIKE AIR-SOLE cushioning materials and components at NIKE IHM, Inc. manufacturing facilities located in Beaverton, Oregon and St. Charles, Missouri, which are owned by us, and at NIKE (Suzhou) Sports Company, Ltd., facilities in the People’s +Republic of China which is owned by us. +Aside from the principal properties described above, we lease approximately 22 production offices +outside the United States, approximately 93 sales offices and showrooms worldwide, and approximately 76 administrative offices worldwide. We lease approximately 418 retail stores worldwide, which consist primarily of factory outlet stores. See +“United States Market” and “International Markets” on pages 3 and 4 of this Report. Our leases expire at various dates through the year 2034. +Item 3. Legal Proceedings +There are no material pending legal +proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +Item 4. Submission of Matters to a Vote of Security Holders +No matter was submitted during the fourth quarter of the 2006 fiscal year to a vote of security holders, through the solicitation of proxies or otherwise. +17 +Table of Contents +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 25, 2006, there were 19,348 +holders of record of our Class B Common Stock and 18 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but +each share is convertible upon request of the holder into one share of Class B Common Stock. +We refer to the table entitled +“Selected Quarterly Financial Data” in Item 6, which lists, for the periods indicated, the range of high and low stock prices on the New York Stock Exchange. That table also describes the amount and frequency of all cash dividends +declared on our Class B Common Stock for the 2006 and 2005 fiscal years. +The following table presents a summary of share repurchases +made by NIKE during the quarter ended May 31, 2006 under the four-year $1.5 billion share repurchase program authorized by our Board of Directors and announced in June 2004. +Period +Total Number of +Shares Purchased +Average Price +Paid per +Share +Total Number of Shares +Purchased as Part of +Publicly +Announced +Plans or Programs +Maximum Dollar +Value of Shares that May +Yet Be Purchased +Under the Plans or Programs +(In millions) +March 1 — March 31, 2006 +660,000 +$ +85.59 +660,000 +$ +369.0 +April 1 — April 30, 2006 +873,300 +$ +82.76 +873,300 +296.7 +May 1 — May 31, 2006 +1,667,600 +$ +80.42 +1,667,600 +162.6 +Total +3,200,900 +$ +82.12 +3,200,900 +18 +Table of Contents +Item 6. Selected Financial Data +Financial History +2006 +2005 +2004 +2003 +2002 +(In millions, except per share data and financial ratios) +Year Ended May 31, +Revenues +$ +14,954.9 +$ +13,739.7 +$ +12,253.1 +$ +10,697.0 +$ +9,893.0 +Gross margin +6,587.0 +6,115.4 +5,251.7 +4,383.4 +3,888.3 +Gross margin % +44.0 +% +44.5 +% +42.9 +% +41.0 +% +39.3 +% +Income before cumulative effect of accounting change +1,392.0 +1,211.6 +945.6 +740.1 +668.3 +Cumulative effect of accounting change +— +— +— +266.1 +5.0 +Net income +1,392.0 +1,211.6 +945.6 +474.0 +663.3 +Basic earnings per common share: +Income before cumulative effect of accounting change +5.37 +4.61 +3.59 +2.80 +2.50 +Cumulative effect of accounting change +— +— +— +1.01 +0.02 +Net income +5.37 +4.61 +3.59 +1.79 +2.48 +Diluted earnings per common share: +Income before cumulative effect of accounting change +5.28 +4.48 +3.51 +2.77 +2.46 +Cumulative effect of accounting change +— +— +— +1.00 +0.02 +Net income +5.28 +4.48 +3.51 +1.77 +2.44 +Average common shares outstanding +259.0 +262.6 +263.2 +264.5 +267.7 +Diluted average common shares outstanding +263.8 +270.3 +269.7 +267.6 +272.2 +Cash dividends declared per common share +1.18 +0.95 +0.74 +0.54 +0.48 +Cash flow from operations +1,667.9 +1,570.7 +1,518.5 +922.0 +1,082.2 +Price range of common stock +High +91.54 +92.43 +78.56 +57.85 +63.99 +Low +76.53 +68.61 +49.60 +38.53 +40.81 +At May 31, +Cash and equivalents +$ +954.2 +$ +1,388.1 +$ +828.0 +$ +634.0 +$ +575.5 +Short-term investments +1,348.8 +436.6 +400.8 +— +— +Inventories +2,076.7 +1,811.1 +1,650.2 +1,514.9 +1,373.8 +Working capital +4,735.7 +4,351.9 +3,498.1 +2,766.5 +2,321.5 +Total assets +9,869.6 +8,793.6 +7,908.7 +6,821.1 +6,440.0 +Long-term debt +410.7 +687.3 +682.4 +551.6 +625.9 +Redeemable Preferred Stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +6,285.2 +5,644.2 +4,781.7 +3,990.7 +3,839.0 +Year-end stock price +80.31 +82.20 +71.15 +55.99 +53.75 +Market capitalization +20,564.5 +21,462.3 +18,724.2 +14,758.8 +14,302.5 +Financial Ratios: +Return on equity +23.3 +% +23.2 +% +21.6 +% +18.9 +% +18.2 +% +Return on assets +14.9 +% +14.5 +% +12.8 +% +11.2 +% +10.9 +% +Inventory turns +4.3 +4.4 +4.4 +4.4 +4.3 +Current ratio at May 31 +2.8 +3.2 +2.7 +2.4 +2.3 +Price/Earnings ratio at May 31 (Diluted before accounting change) +15.2 +18.3 +20.3 +20.2 +21.8 +19 +Table of Contents +Selected Quarterly Financial Data +1st Quarter +2nd Quarter +3rd Quarter +4th Quarter +2006 +2005 +2006 +2005 +2006 +2005 +2006 +2005 +(Unaudited) +(In millions, except per share data and financial ratios) +Revenues +$ +3,862.0 +$ +3,561.8 +$ +3,474.7 +$ +3,148.3 +$ +3,612.8 +$ +3,308.2 +$ +4,005.4 +$ +3,721.4 +Gross margin +1,748.1 +1,585.8 +1,511.4 +1,388.1 +1,574.1 +1,458.8 +1,753.4 +1,682.7 +Gross margin % +45.3 +% +44.5 +% +43.5 +% +44.1 +% +43.6 +% +44.1 +% +43.8 +% +45.2 +% +Net income +432.3 +326.8 +301.1 +261.9 +325.8 +273.4 +332.8 +349.5 +Basic earnings per common share +1.66 +1.24 +1.16 +0.99 +1.26 +1.04 +1.29 +1.34 +Diluted earnings per common share +1.61 +1.21 +1.14 +0.97 +1.24 +1.01 +1.27 +1.30 +Average common shares outstanding +260.9 +262.7 +259.0 +263.3 +258.9 +263.3 +257.2 +261.1 +Diluted average common shares outstanding +268.6 +269.8 +263.7 +271.1 +263.4 +271.7 +261.4 +268.5 +Cash dividends declared per common share +0.25 +0.20 +0.31 +0.25 +0.31 +0.25 +0.31 +0.25 +Price range of common stock +High +90.93 +77.34 +88.55 +87.80 +91.54 +92.43 +88.04 +88.52 +Low +77.36 +68.61 +76.53 +74.52 +80.60 +82.60 +77.39 +75.10 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +Overview +NIKE designs, develops and markets high quality footwear, apparel, equipment and accessory +products worldwide. We are the largest seller of athletic footwear and athletic apparel in the world and sell our products primarily through a combination of retail accounts, NIKE-owned retail stores, independent distributors and licensees, in the +United States and over 160 countries worldwide. Our goal is to deliver value to our shareholders by building a profitable portfolio of global footwear, apparel, equipment and accessories brands. Our strategy for building this portfolio is focused in +four key areas: +• +Deepening our relationship with consumers; +• +Delivering superior, innovative products to the marketplace; +• +Making our supply chain a competitive advantage, through operational discipline and excellence; and +• +Accelerating growth through focused execution. +By +executing this strategy, we aim to deliver the following long-term financial goals: +• +High single digit revenue growth; +• +Mid-teens earnings per share growth; +• +Increased return on invested capital and accelerated cash flows; and +• +Consistent results through effective management of our diversified portfolio of businesses. +In fiscal 2006, we met most of these financial goals. Our revenues grew 9% to $15 billion, net income grew 15% to $1.4 billion, and we delivered diluted +earnings per share of $5.28, an 18% increase versus fiscal 2005. These reported results included a $51.9 million charge related to an unfavorable arbitration ruling involving our Converse subsidiary (see Note 5 — Accrued Liabilities in +the accompanying Notes to Consolidated Financial Statements for more information on the Converse arbitration charge). Excluding this charge, our net income grew 17% and we delivered diluted earnings per share of $5.39, a 20% increase versus +fiscal 2005. For fiscal 2006, our consolidated gross margin percentage decreased 50 basis points to 44.0% primarily due to lower in-line net pricing margins (net revenue for current product offerings minus product costs) partially offset by +improvements in year-over-year currency hedge rates. The decline in the gross margin percentage and the Converse arbitration charge were more than offset by 80 basis points of selling and administrative expense leverage (due entirely to slowing the +growth of operating overhead spending), and higher interest income resulting in a higher pre-tax income margin in fiscal 2006 than in fiscal 2005. In addition, we increased free cash flow from operations and +20 +Table of Contents +continued to return larger amounts of cash to shareholders through higher dividends and increased share repurchases. Our return on invested capital declined +slightly as compared to fiscal 2005. Although we may not meet all of the financial goals outlined above in any particular fiscal quarter or fiscal year, we continue to believe these are appropriate long-term goals. +Reconciliation of Net Income and Diluted Earnings Per Share Excluding the Converse Arbitration Charge +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +(In millions, except per share data) +Net income, as reported +$ +1,392.0 +$ +1,211.6 +15 +% +Exclude: Converse arbitration charge, net of tax of $21.1 +30.8 +— +Net income, excluding Converse arbitration charge +$ +1,422.8 +$ +1,211.6 +17 +% +Diluted EPS, as reported +$ +5.28 +$ +4.48 +18 +% +Diluted EPS, excluding Converse arbitration charge +$ +5.39 +$ +4.48 +20 +% +We are providing net income and diluted earnings per share results excluding the Converse +arbitration charge to enhance the visibility of the underlying earnings trend excluding this identifiable expense. +Results of Operations +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions, except per share data) +Revenues +$ +14,954.9 +$ +13,739.7 +9 +% +$ +12,253.1 +12 +% +Cost of sales +8,367.9 +7,624.3 +10 +% +7,001.4 +9 +% +Gross margin +6,587.0 +6,115.4 +8 +% +5,251.7 +16 +% +Gross margin % +44.0 +% +44.5 +% +42.9 +% +Selling and administrative expense +4,477.8 +4,221.7 +6 +% +3,702.0 +14 +% +% of Revenues +29.9 +% +30.7 +% +30.2 +% +Income before income taxes +2,141.6 +1,859.8 +15 +% +1,450.0 +28 +% +Net income +1,392.0 +1,211.6 +15 +% +945.6 +28 +% +Diluted earnings per share +5.28 +4.48 +18 +% +3.51 +28 +% +Consolidated Operating Results +Revenues +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Revenues +$ +14,954.9 +$ +13,739.7 +9 +% +$ +12,253.1 +12 +% +Fiscal 2006 Compared to Fiscal 2005 +In fiscal 2006, changes in currency exchange rates reduced the reported consolidated revenue growth by 1 percentage point. The U.S. Region contributed 4 +percentage points of the consolidated revenue growth for fiscal 2006. Excluding the impact of changes in currency exchange rates, revenue growth in our international regions contributed 4 percentage points of the consolidated revenue growth for +fiscal 2006, as all of our international regions posted higher revenues. Sales in our Other businesses drove the remainder of the consolidated revenue growth for fiscal 2006. Revenues for our Other businesses are comprised substantially of results +from Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf. +21 +Table of Contents +Fiscal 2005 Compared to Fiscal 2004 +In fiscal 2005, 3 percentage points of the revenue growth were attributed to changes in currency exchange rates, primarily the stronger euro. Excluding +the impact of changes in foreign currency, revenue growth in our international regions contributed 4 percentage points to the consolidated revenue growth, as all of our international regions posted higher revenues. The U.S. Region contributed 3 +percentage points of the consolidated revenue growth for fiscal 2005. Sales in our Other businesses drove the remainder of the improvement of consolidated revenue growth for fiscal 2005. Converse was acquired at the beginning of the second quarter +of fiscal 2004. The comparison of a full year of Converse results in fiscal 2005 versus a partial year in fiscal 2004 contributed 1 percentage point to the consolidated revenue growth. See the accompanying Notes to Consolidated Financial +Statements (Note 15 — Acquisitions) for additional information related to the acquisition . +Gross Margin +2006 +2005 +FY06 vs. +FY05 +Change +2004 +FY05 vs. +FY04 +Change +(In millions) +Gross Margin +$ +6,587.0 +$ +6,115.4 +8% +$ +5,251.7 +16% +Gross Margin % +44.0 +% +44.5 +% +(50 +) bps +42.9 +% +160 bps +Fiscal 2006 Compared to Fiscal 2005 +During fiscal 2006, our consolidated gross margin percentage declined 50 basis points versus the prior year. The primary factors contributing to the +reduced gross margin percentage for fiscal 2006 were as follows: +(1) +Lower footwear in-line net pricing margins in the U.S., Europe, Middle East and Africa (“EMEA”) and Asia Pacific regions. The lower footwear in-line net pricing margins +were due to higher product costs, primarily the result of higher oil prices; additional costs incurred to meet strong footwear unit demand in the U.S.; higher sales incentives in EMEA and Asia Pacific; strategies to improve consumer value in EMEA +and Japan; and a shift in the mix of footwear models sold towards models with lower margins within EMEA and Japan. +(2) +A shift in the mix of revenues reported from our operating segments towards regions and subsidiaries with lower margins. +The factors driving a reduced gross margin percentage were partially offset by: +(1) +Year-over-year currency hedge rate improvements, primarily for the euro. +(2) +Improved gross margin percentages in our Other businesses driven by improvements at Converse, Hurley and NIKE Golf. +Fiscal 2005 Compared to Fiscal 2004 +During fiscal 2005, our consolidated gross margin percentage improved 160 basis points versus the prior year. The primary factors contributing to the improved gross margin percentage for fiscal 2005 were as follows: +(1) +Higher gross margins in our international regions, driven primarily by our EMEA Region. This improvement was driven by changes in currency hedge rates, primarily the euro, partially +offset by lower in-line net pricing margins and a higher percentage of less profitable closeout sales (non-current product offerings) in our EMEA and Asia Pacific regions. The lower in-line net pricing margins were due to strategies to improve +consumer value. The increased levels of closeout sales and lower closeout pricing were the result of the liquidation of higher footwear and apparel closeout inventories in our EMEA and Asia Pacific regions. +22 +Table of Contents +(2) +Higher gross margins in the U.S. Region primarily due to fewer, more profitable closeouts in footwear partially offset by increased sales discounts and higher costs incurred to meet +strong footwear unit demand. +(3) +Improved gross margin percentages in our Other businesses driven by the addition of Converse (acquired in the second quarter of fiscal 2004) and Exeter Brands Group (formed in the +first quarter of fiscal 2005). Both Exeter Brands Group and the international portion of Converse’s business operate on a licensing model, which carries higher gross margins and lower operating expenses than the remainder of our Other +businesses. +Selling and Administrative Expense +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +Change +Fiscal 2004 +FY05 vs. +FY04 +Change +(In millions) +Demand creation expense* +$ +1,740.2 +$ +1,600.7 +9% +$ +1,377.9 +16% +Operating overhead expense +2,737.6 +2,621.0 +4% +2,324.1 +13% +Selling and administrative expense +4,477.8 +4,221.7 +6% +3,702.0 +14% +% of Revenues +29.9 +% +30.7 +% +(80) bps +30.2 +% +50 bps +* +Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts. +Fiscal 2006 Compared to Fiscal 2005 +In fiscal 2006, selling and administrative expenses decreased as a percentage of revenues by 80 basis points for the year driven by operating overhead leverage. Changes in currency exchange rates reduced selling and administrative expense +growth by 1 percentage point. +In fiscal 2006, changes in currency exchange rates reduced the rate of growth in demand creation by +1 percentage point. The growth in demand creation spending in fiscal 2006 was in line with our revenue growth. The year-over-year increase in demand creation spending was primarily due to increased spending on sports marketing endorsement +contracts and events, increased spending on retail marketing programs (in-store marketing at our retail partners), and advertising primarily around the global World Cup and Winter Olympics campaigns and for the global Air Max 360 ™ footwear launch. +While consolidated revenues grew 9% in fiscal 2006, operating overhead for fiscal 2006 increased only 4% over fiscal 2005 as a result of expense +management strategies to slow the growth of operating overhead spending. Changes in currency exchange rates reduced the rate of growth in operating overhead by 1 percentage point. Excluding the effects of changes in foreign currency exchange +rates, the increase in operating overhead for fiscal 2006 versus fiscal 2005 was mainly attributable to higher personnel costs (both increased headcount and higher compensation) to support the growth of our business, including our Other businesses +and new NIKE-owned retail stores. +Fiscal 2005 Compared to Fiscal 2004 +In fiscal 2005, 3 percentage points of the selling and administrative expense increase were due to changes in currency exchange rates. The impact of a +full fiscal year for Converse and the formation of Exeter Brands Group added 1 percentage point of growth. +In fiscal 2005, 3 percentage +points of the increase in demand creation were due to changes in currency exchange rates. Excluding the impact of changes in foreign currency rates, the increase in demand creation spending for the fiscal year was attributable to higher spending on +sports marketing endorsement contracts and +23 +Table of Contents +events primarily in the U.S., EMEA and Asia Pacific regions, higher advertising spending primarily in the EMEA Region, and increased spending on retail +marketing programs in the U.S., EMEA and Asia Pacific regions. The addition of Converse and formation of Exeter Brands Group also contributed to the demand creation increase for the year. +Changes in currency exchange rates contributed 3 percentage points of the increase to operating overhead expense in fiscal 2005. Excluding the effects of +foreign currency, operating overhead increases for fiscal 2005 were mainly attributable to higher personnel costs (both increased headcount and higher compensation), investments in emerging markets (such as China, India and our Central Europe, +Middle East and Africa unit) and our Other businesses, increased costs due to sales and leadership events and higher spending associated with new NIKE-owned retail stores. +Other Expense, net +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Other Expense, net +$ +4.4 +$ +29.1 +(85 +)% +$ +74.7 +(61 +)% +Fiscal 2006 Compared to Fiscal 2005 +The significant reduction in Other expense, net for fiscal 2006 as compared to fiscal 2005 was primarily driven by foreign currency hedge gains in fiscal +2006 compared to foreign currency hedge losses in the prior year, partially offset by the Converse arbitration charge. The fiscal 2006 hedge gains primarily reflected that the euro had weakened since we entered into these hedge contracts and are +reflected in the Corporate line in our segment presentation of pre-tax income in the accompanying Notes to Consolidated Financial Statements (Note 17 — Operating Segments and Related Information) . +In fiscal 2006, these net foreign currency hedge gains were partially offset by unfavorable U.S. dollar translation of foreign currency denominated +profits, most significantly in the EMEA Region. We estimate that the combination of net foreign currency hedge gains in other expense, net, and the unfavorable U.S. dollar translation of foreign currency denominated profits resulted in an increase +to consolidated income before income taxes of approximately $55 million for fiscal 2006 compared to the prior year. +Fiscal 2005 +Compared to Fiscal 2004 +The most significant component of other expense, net, of $29.1 million for fiscal 2005 was foreign currency +hedge losses. The hedge losses reflected that the euro had strengthened since we entered into these hedge contracts. In fiscal 2004, foreign currency hedge losses were also the most significant component of other expense, net, of $74.7 million. The +year-over-year improvement in other expense, net, for fiscal 2005 was mainly due to lower foreign currency hedge losses and lower net losses on asset disposals compared to those recorded in fiscal 2004. +In fiscal 2005, these net foreign currency losses in other expense, net, were more than offset by favorable U.S. dollar translation of foreign currency +denominated profits, most significantly in the EMEA Region. We estimate that the combination of net foreign currency hedge losses in other expense, net, and the favorable U.S. dollar translation of foreign currency denominated profits resulted in an +increase to consolidated income before income taxes of approximately $95 million for fiscal 2005 compared to the prior year. +24 +Table of Contents +Income Taxes +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +Change +Fiscal 2004 +FY05 vs. +FY04 +Change +Effective Tax Rate +35.0 +% +34.9 +% +10 bps +34.8 +% +10 bps +Fiscal 2006 Compared to Fiscal 2005 +Our effective tax rate for fiscal 2006 was consistent with the rate reported for fiscal 2005. +During the second quarter of fiscal 2006, our CEO and Board of Directors approved a domestic reinvestment plan as required by the American Jobs Creation +Act of 2004 (the “Act”) to repatriate $500 million of foreign earnings in fiscal 2006. The Act creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the U.S. by providing an 85% +dividend received deduction for certain dividends from controlled foreign corporations. A $500 million repatriation was made during the quarter ending May 31, 2006 comprised of both foreign earnings for which U.S. taxes has previously been +provided and foreign earnings that had been designated as permanently reinvested. Accordingly, the provisions made did not have a material impact on the Company’s income tax expense or effective tax rate for the year. +Fiscal 2005 Compared to Fiscal 2004 +Our effective tax rate for fiscal 2005 was slightly higher than the fiscal 2004 rate primarily due to decreases in tax credits partially offset by lower taxes on foreign earnings in fiscal 2005. +During the fourth quarter of fiscal 2005, we decided to repatriate $500 million of foreign earnings during fiscal 2006 under the Act. As discussed above, +because we elected to repatriate a combination of foreign earnings for which U.S. taxes had previously been provided and foreign earnings that had been designated as permanently reinvested, the provisions made did not have a material impact on our +income tax expense or our effective tax rate for fiscal 2005. +Futures Orders +Worldwide futures and advance orders for footwear and apparel scheduled for delivery from June through November 2006 were 5.0% higher than such orders +reported for the comparable period of fiscal 2005. This futures growth rate is calculated based upon our forecasts of the actual exchange rates under which our revenues will be translated during this period, which approximate current spot rates. The +net effect from changes in currency exchange rates did not have a significant impact on this reported growth versus the same period last year. Slightly higher average selling prices for both footwear and apparel contributed approximately 1 +percentage point of the growth in overall futures and advance orders. The remaining 4 percentage points of the increase were due to volume increases for both footwear and apparel. The reported futures and advance orders growth is not necessarily +indicative of our expectation of revenue growth during this period. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, exchange rate fluctuations as well as differing levels of order cancellations +and discounts can cause differences in the comparisons between futures and advance orders, and actual revenues. Moreover, a significant portion of our revenue is not derived from futures and advance orders, including at-once and closeout sales of +NIKE footwear and apparel, wholesale sales of equipment, U.S. licensed team apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey, NIKE Golf and retail sales across all brands. +25 +Table of Contents +Operating Segments +The breakdown of revenues follows: +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +U.S. Region +Footwear +$ +3,832.2 +$ +3,358.2 +14 +% +$ +3,070.4 +9 +% +Apparel +1,591.6 +1,457.7 +9 +% +1,433.5 +2 +% +Equipment +298.7 +313.4 +(5 +)% +277.9 +13 +% +Total U.S +5,722.5 +5,129.3 +12 +% +4,781.8 +7 +% +EMEA Region +Footwear +2,454.3 +2,500.0 +(2 +)% +2,232.2 +12 +% +Apparel +1,559.0 +1,497.1 +4 +% +1,333.8 +12 +% +Equipment +313.3 +284.5 +10 +% +261.7 +9 +% +Total EMEA +4,326.6 +4,281.6 +1 +% +3,827.7 +12 +% +Asia Pacific Region +Footwear +1,044.1 +962.9 +8 +% +855.3 +13 +% +Apparel +815.6 +755.5 +8 +% +612.3 +23 +% +Equipment +194.1 +178.9 +8 +% +143.2 +25 +% +Total Asia Pacific +2,053.8 +1,897.3 +8 +% +1,610.8 +18 +% +Americas Region +Footwear +635.3 +478.6 +33 +% +408.2 +17 +% +Apparel +201.8 +169.1 +19 +% +159.5 +6 +% +Equipment +67.8 +48.1 +41 +% +36.8 +31 +% +Total Americas +904.9 +695.8 +30 +% +604.5 +15 +% +13,007.8 +12,004.0 +8 +% +10,824.8 +11 +% +Other +1,947.1 +1,735.7 +12 +% +1,428.3 +22 +% +Total Revenues +$ +14,954.9 +$ +13,739.7 +9 +% +$ +12,253.1 +12 +% +The breakdown of income before income taxes (“pre-tax income”) follows: +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +U.S. Region +$ +1,244.5 +$ +1,127.9 +10 +% +$ +1,007.3 +12 +% +EMEA Region +960.7 +917.5 +5 +% +744.0 +23 +% +Asia Pacific Region +412.5 +399.8 +3 +% +352.3 +13 +% +Americas Region +172.6 +116.5 +48 +% +97.4 +20 +% +Other +151.6 +151.4 +— +% +75.3 +101 +% +Corporate +(800.3 +) +(853.3 +) +6 +% +(826.3 +) +(3 +)% +Total Pre-tax Income +$ +2,141.6 +$ +1,859.8 +15 +% +$ +1,450.0 +28 +% +** +Certain prior year amounts have been reclassified to conform to fiscal year 2006 presentation. These changes had no impact on previously reported results of operations or +shareholders’ equity. +26 +Table of Contents +The discussion following includes disclosure of pre-tax income for our operating segments. We have +reported pre-tax income for each of our operating segments in accordance with Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As discussed in Note 17 — +Operating Segments and Related Information in the accompanying Notes to Consolidated Financial Statements, certain corporate costs are not included in pre-tax income of our operating segments. +U.S. Region +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Revenues +Footwear +$ +3,832.2 +$ +3,358.2 +14 +% +$ +3,070.4 +9 +% +Apparel +1,591.6 +1,457.7 +9 +% +1,433.5 +2 +% +Equipment +298.7 +313.4 +(5 +)% +277.9 +13 +% +Total Revenues +$ +5,722.5 +$ +5,129.3 +12 +% +$ +4,781.8 +7 +% +Pre-tax Income +$ +1,244.5 +$ +1,127.9 +10 +% +$ +1,007.3 +12 +% +Fiscal 2006 Compared to Fiscal 2005 +The increase in footwear revenues was due to a strong increase in unit sales, accounting for 12 percentage points of the growth, and an increase in the +average selling price per pair, accounting for 2 percentage points of the growth. The strong unit increase was driven by increased consumer demand across a majority of the footwear product categories, most significantly high demand for our Jordan +branded and sport culture products. The higher average selling price per pair was primarily due to increased consumer demand for products with a suggested retail price over $100, driven by Jordan branded products as well as NIKE branded sport +performance and sport culture products. +The increase in U.S. apparel sales for fiscal 2006 was driven by increased unit sales in NIKE and +Jordan branded apparel, partially offset by sales declines in licensed apparel, primarily due to the expiration of our license agreement with the NBA in the second quarter of fiscal 2005. The increases in NIKE branded apparel were primarily due to +increased sales of sport performance products. +For the U.S. Region, the increase in pre-tax income for fiscal 2006 as compared to 2005 was +driven by higher revenues and lower selling and administrative expenses as a percentage of revenues, more than offsetting a lower gross margin percentage. The lower gross margin percentage was primarily the result of lower in-line net pricing +margins for footwear due to higher product costs, primarily the result of higher oil prices, and additional costs incurred to meet strong footwear unit demand. Selling and administrative expenses were higher than fiscal 2005, but represented a lower +percentage of revenues due to operating overhead leverage. The increase in selling and administrative costs was due to increases in both demand creation and operating overhead. The increase in demand creation was primarily driven by increased +spending on sports marketing endorsements and events and increased advertising, primarily due to the global campaigns discussed above. The increase in operating overhead spending was driven by increased spending for new NIKE-owned retail stores, +higher personnel costs and higher travel and meeting expenses. +Fiscal 2005 Compared to Fiscal 2004 +The increase in footwear revenue was due to a 5 percentage point increase in unit sales and a 4 percentage point increase in the average price per pair. +The increases in unit sales and the average price per pair were due to increased consumer demand for sport performance products, especially those with a suggested retail price over $100. +27 +Table of Contents +The increase in apparel sales for fiscal 2005 was driven by volume increases in branded apparel, +partially offset by a decline in revenue from sales of licensed apparel. The decline in revenue from licensed apparel was due to the expiration of our license agreement with the NBA, in the second quarter of fiscal 2005, and a shift in consumer +preference towards branded apparel. +For fiscal 2005, higher revenues, an improved gross margin percentage, and slightly lower selling and +administrative expenses as a percentage of revenues drove the U.S. Region pre-tax income increase. The improved gross margin percentage was primarily the result of fewer, more profitable closeout sales partially offset by increased sales discounts +(the result of increased sales to high volume accounts) and higher costs incurred to meet strong footwear unit demand. Selling and administrative expenses were higher than fiscal 2004, but represented a slightly smaller percentage of revenues due to +operating overhead leverage. The increase in selling and administrative costs was due to increases in both demand creation and operating overhead. The increase in demand creation was primarily driven by increased spending on sports marketing +endorsements and events and increased retail marketing spending. The increase in operating overhead spending was driven by increased spending on personnel costs and new NIKE-owned retail stores and higher costs related to sales and leadership +events. +EMEA Region +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Revenues +Footwear +$ +2,454.3 +$ +2,500.0 +(2 +)% +$ +2,232.2 +12 +% +Apparel +1,559.0 +1,497.1 +4 +% +1,333.8 +12 +% +Equipment +313.3 +284.5 +10 +% +261.7 +9 +% +Total Revenues +$ +4,326.6 +$ +4,281.6 +1 +% +$ +3,827.7 +12 +% +Pre-tax Income +$ +960.7 +$ +917.5 +5 +% +$ +744.0 +23 +% +Fiscal 2006 Compared to Fiscal 2005 +For the EMEA Region, changes in currency exchange rates reduced revenue growth by 4 percentage points in fiscal 2006. Excluding changes in currency +exchange rates, all three product business units grew. Excluding currency changes, the increase in footwear revenues reflected increased unit sales partially offset by declines in the average selling price per pair. The increased unit sales were +driven by increased demand for sport culture products. The declines in the average selling price per pair were due in part to changes in the mix of in-line products sold towards products with a lower average selling price and higher sales incentives +as a result of a difficult retail environment in Western Europe. The increase in EMEA apparel revenue was driven by increased unit sales and average selling prices of NIKE branded apparel, primarily increased unit sales of sport performance +products, including soccer products driven by the World Cup, and increased average selling prices across most apparel categories. Excluding changes in currency exchange rates, sales increases in the emerging markets of our Central Europe, Middle +East and Africa unit led the revenue growth, while sales increases in Western and Northern Europe also contributed to the EMEA sales growth for fiscal 2006. +The increase in pre-tax income for the EMEA Region for fiscal 2006 was driven by higher revenues and lower selling and administrative expenses as a percentage of revenues more than offsetting a lower gross margin +percentage and unfavorable foreign currency translation versus fiscal 2005. The lower gross margin percentage was primarily the result of lower in-line net pricing margins in footwear and apparel, partially offset by improved year-over-year hedge +rates. The lower in-line net pricing margins for footwear were due to higher product costs, primarily the result of higher oil prices, higher sales incentives, strategies to improve consumer value, and a shift in the mix of products sold towards +products with lower margins. The reduced in-line net pricing margins for +28 +Table of Contents +apparel were primarily due to higher product costs and higher sales incentives. Excluding changes in currency exchange rates, selling and administrative +expenses in fiscal 2006 were higher than in fiscal 2005 but represented a lower percentage of revenues due to operating overhead leverage. Excluding currency changes, the increase in selling and administrative costs was driven by higher demand +creation expenses partially offset by slightly lower operating overhead expenses. The higher demand creation expenses were primarily due to spending related to the World Cup campaign and increased spending on retail marketing programs. The slightly +lower operating overhead expenses were due to lower spending on travel and meeting expenses, lower bad debt expense and slightly lower personnel costs related to our wholesale business, partially offset by increased spending to support the growth of +NIKE-owned retail stores. +Fiscal 2005 Compared to Fiscal 2004 +For EMEA, changes in foreign currency exchange rates accounted for 7 percentage points of the reported revenue growth in fiscal 2005. Excluding the +effects of foreign currency, all three product business units grew. Excluding currency changes, the increase over the prior year was primarily driven by increased unit sales of footwear, apparel and equipment partially offset by declines in the +average prices in each of the product business units. For fiscal 2005, excluding the changes in currency exchange rates, sales increases in the emerging markets in our Central Europe, Middle East and Africa unit, along with sales increases in the UK +and Italy, drove the growth. These increases were partially offset by lower sales in France, Germany and Northern Europe. +The increase in +pre-tax income in the EMEA region in fiscal 2005 was driven by higher revenues and gross margin improvements, more than offsetting increased selling and administrative costs as a percentage of revenues. The improved gross margins were primarily the +result of improved year-over-year hedge rates partially offset by reduced in-line net pricing margins (due to strategies to improve consumer value) and higher, less profitable closeout sales (the result of the liquidation of higher footwear and +apparel closeout inventories). The increase in selling and administrative expenses was driven by increases in both demand creation and operating overhead. The increase in demand creation was primarily driven by increased advertising and higher +spending on sports marketing endorsements and events. The increase in operating overhead spending was driven by increased spending on personnel costs to support the growth of our wholesale business and new NIKE-owned retail stores and higher costs +related to sales and leadership events. +Asia Pacific Region +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Revenues +Footwear +$ +1,044.1 +$ +962.9 +8 +% +$ +855.3 +13 +% +Apparel +815.6 +755.5 +8 +% +612.3 +23 +% +Equipment +194.1 +178.9 +8 +% +143.2 +25 +% +Total Revenues +$ +2,053.8 +$ +1,897.3 +8 +% +$ +1,610.8 +18 +% +Pre-tax Income +$ +412.5 +$ +399.8 +3 +% +$ +352.3 +13 +% +Fiscal 2006 Compared to Fiscal 2005 +In the Asia Pacific Region, changes in currency exchange rates reduced revenue growth by 1 percentage point for fiscal 2006. Excluding the changes in +currency exchange rates, revenues for each Asia Pacific product business unit were higher than fiscal 2005. Excluding changes in currency exchange rates, footwear revenues reflected increased unit sales (driven by increased unit sales across most +countries and categories), partially offset by lower average selling prices (due to strategies to improve consumer value in Japan). The increase in apparel revenues was driven by increases across sport performance and sport culture categories. +Increased revenue in +29 +Table of Contents +China (driven by expansion of retail distribution and strong consumer demand) was the primary growth driver for fiscal 2006, partially offset by lower sales +in Japan driven by lower average selling prices due to investments in consumer value and a challenging retail marketplace. +The increase in +fiscal 2006 pre-tax income for the Asia Pacific Region was driven by higher revenues and lower selling and administrative expenses as a percentage of revenues, partially offset by a lower gross margin percentage. The lower gross margin percentage +was primarily attributable to lower in-line net pricing margins due to higher footwear product costs, primarily the result of higher oil prices; strategies to improve consumer value for footwear in Japan; and a shift in the mix of footwear and +apparel products sold in Japan toward products with lower margins. Selling and administrative expenses in fiscal 2006 were higher than fiscal 2005, but represented a lower percentage of revenues due to operating overhead leverage. The increased +selling and administrative expenses were due to increases in demand creation, primarily driven by spending related to the World Cup campaign, and slightly higher operating overhead, primarily due to higher personnel costs to support growth in China. +Fiscal 2005 Compared to Fiscal 2004 +In the Asia Pacific Region, 4 percentage points of reported revenue growth for fiscal 2005 were due to changes in currency exchange rates. Excluding changes in currency exchange rates, sales in each Asia Pacific +product business unit grew versus fiscal 2004 with the growth primarily due to unit volume; average price per unit increased slightly. Excluding currency changes, significant revenue increases in China (driven by expansion of retail distribution and +strong consumer demand) and increases in every other country in the region except Australia and New Zealand were the key growth drivers for fiscal 2005. +The increase in pre-tax income for the Asia Pacific Region in fiscal 2005 was driven by higher revenues, partially offset by a lower gross margin percentage and increased selling and administrative costs as a +percentage of revenues. The reduced gross margin percentage was primarily attributable to less profitable closeout sales and lower in-line net pricing margins due to strategies to improve the consumer value in Japan, partially offset by better +year-over-year currency hedge rates. The increase in selling and administrative expenses was due to increases in both demand creation (driven by higher spending on sports marketing endorsements and events and increased spending on retail marketing +programs) and operating overhead (driven by increased spending on personnel costs to support the growth of our business and higher costs related to sales and leadership events). +Americas Region +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Revenues +Footwear +$ +635.3 +$ +478.6 +33 +% +$ +408.2 +17 +% +Apparel +201.8 +169.1 +19 +% +159.5 +6 +% +Equipment +67.8 +48.1 +41 +% +36.8 +31 +% +Total Revenues +$ +904.9 +$ +695.8 +30 +% +$ +604.5 +15 +% +Pre-tax Income +$ +172.6 +$ +116.5 +48 +% +$ +97.4 +20 +% +Fiscal 2006 Compared to Fiscal 2005 +In the Americas Region, 11 percentage points of the revenue growth for fiscal 2006 were due to changes in currency exchange rates. Even excluding the +changes in currency exchange rates, sales in each Americas product business unit grew in fiscal 2006. The revenue growth was driven by increased sales in every country in the region, with significant sales increases in Brazil, Argentina and Mexico. +30 +Table of Contents +The increase in fiscal 2006 pre-tax income for the Americas Region was attributable to higher revenues, +an improved gross margin percentage, lower selling and administrative expenses as a percentage of revenues and favorable currency translation. Selling and administrative expenses were higher than fiscal 2005, but represented a lower percentage of +revenues for fiscal 2006. The increased selling and administrative expenses were due to increases in both demand creation (due to increased sports marketing endorsement contracts, and increased advertising spending and retail marketing programs +primarily related to the World Cup campaign) and operating overhead (driven by increased personnel costs as a result of continued expansion of the business across the region). +Fiscal 2005 Compared to Fiscal 2004 +In the Americas Region, 1 percentage point of the revenue growth for fiscal 2005 was due to changes in currency exchange rates. Excluding the effects of changes in foreign currency, sales in each Americas product business unit grew in +fiscal 2005. The revenue growth was driven primarily by higher sales in Central and South America, partially offset by lower sales in Canada. +The increase in fiscal 2005 pre-tax income for the Americas Region was attributable to higher revenues and an improved gross margin percentage, partially offset by higher selling and administrative costs as a percentage of revenues. The +increased selling and administrative expenses were due to increases in both demand creation (due to increased spending on sports marketing endorsement contract and events, advertising and retail marketing programs) and operating overhead (driven by +increased personnel costs). +Other Businesses +Fiscal 2006 +Fiscal 2005 +FY06 vs. +FY05 +% Change +Fiscal 2004 +FY05 vs. +FY04 +% Change +(In millions) +Revenues +$ +1,947.1 +$ +1,735.7 +12 +% +$ +1,428.3 +22 +% +Pre-tax Income +$ +151.6 +$ +151.4 +— +% +$ +75.3 +101 +% +Converse arbitration charge +51.9 +— +— +Pre-tax Income, excluding the Converse arbitration charge +$ +203.5 +$ +151.4 +34 +% +$ +75.3 +101 +% +We are providing pre-tax income excluding the Converse arbitration charge to enhance the +visibility of the underlying earnings trend excluding this identifiable expense. +Fiscal 2006 Compared to Fiscal 2005 +Revenue increases for our Other businesses in fiscal 2006 as compared to fiscal 2005 were driven primarily by growth at Cole Haan, Converse, Hurley and +NIKE Golf. +Pre-tax income from the Other businesses for fiscal 2006 was consistent with fiscal 2005 and included a $51.9 million charge +related to the unfavorable arbitration ruling involving a licensing agreement contract dispute with our Converse subsidiary and a former South American licensee. This charge reduced reported pre-tax income for the Other businesses by 34 percentage +points. Excluding the Converse arbitration charge, the pre-tax income improvement was driven by improved profitability at Converse, Hurley and NIKE Golf, partially offset by a loss at NIKE Bauer Hockey. The loss at NIKE Bauer Hockey was largely the +result of costs incurred in connection with a re-branding initiative. +Fiscal 2005 Compared to Fiscal 2004 +For fiscal 2005, the addition of Converse, acquired in the second quarter of fiscal 2004, and the formation of Exeter Brands Group, formed in the first +quarter of fiscal 2005 to develop the Company’s business in retail +31 +Table of Contents +channels serving value-conscious consumers and to operate the business obtained in the acquisition of Official Starter Properties LLC and Official Starter +LLC (collectively “Official Starter”), together drove 12 percentage points of the Other business revenue increase of 22% over fiscal 2004. The remainder of the increase was driven by revenue growth at Cole Haan, Hurley and NIKE Golf. +The year-over-year improvement in fiscal 2005 pre-tax income from the Other businesses was driven by the addition of Converse, improved +results from Cole Haan and NIKE Bauer Hockey and the formation of the Exeter Brands Group. +Liquidity and Capital Resources +Fiscal 2006 Cash Flow Activity +Cash provided by operations was $1.7 billion in fiscal 2006, compared to $1.6 billion in fiscal 2005. Our primary source of operating cash flow was net income of $1.4 billion. For fiscal 2006, our net investment in working capital increased +$43.2 million as compared to an increase of $13.0 million in fiscal 2005. This increased investment in working capital was largely attributable to a larger increase in inventories and prepaid expenses and other current assets, partially offset by +increases in accounts payable and accrued liabilities. The increase in inventories reflects higher in-transit inventories (due primarily to growth in reported futures and other orders, and earlier product ordering compared to last year) and higher +inventories to support the expansion of NIKE-owned retail stores. Prepaid expenses and other current assets increased in fiscal 2006 compared to a decrease in the prior year, primarily due to the timing of payments, including earlier payments of +income taxes in certain foreign locations. The increase in accounts payable and accrued liabilities is primarily due to the timing of payments and inventory receipts compared to the prior year. +Cash used by investing activities during fiscal 2006 was $1.3 billion, compared to $360.4 million invested during fiscal 2005. The increase over the +prior year was primarily due to a higher net increase in short-term investments (purchases net of maturities), which increased from $35.3 million in fiscal 2005 to $909.9 million in fiscal 2006, and increased net additions to property, plant and +equipment. The additions to property, plant and equipment primarily reflect capital expenditures on computer equipment and software (to support both normal business operations and our supply chain systems upgrade), and continued investment in +NIKE-owned retail stores. +In fiscal 2006, we purchased approximately 9.5 million shares of NIKE’s Class B Common Stock for +$781.2 million. The share repurchases were part of a four-year, $1.5 billion share repurchase program that was approved by the Board of Directors in June 2004. Since the inception of this program, we have repurchased 16.4 million shares, at a +total cost of $1.3 billion. In June 2006, the Board of Directors approved a new four-year, $3.0 billion share repurchase program, to commence upon completion of the $1.5 billion share repurchase program. We expect to fund share repurchases from +operating cash flow, excess cash, and/or debt. The timing and the ultimate amount of shares purchased under the programs will be dictated by our capital needs and stock market conditions. +Dividends declared per share of common stock for fiscal 2006 were $1.18, compared to $0.95 in fiscal 2005. We have paid a dividend every quarter since +February 1984. Our current dividend policy is to provide an annual dividend equal to 20% to 30% of the trailing twelve-months’ earnings per share, paid out on a quarterly basis. We review our dividend policy from time to time, and based upon +current projected earnings and cash flow requirements, we anticipate continuing to pay a quarterly dividend in the foreseeable future. +Off-Balance Sheet Arrangements +In connection with various contracts and agreements, we provide routine +indemnifications relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items that fall under the scope of Financial Accounting Standards Board Interpretation No. 45, +“Guarantor’s Accounting and +32 +Table of Contents +Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. Currently, we have several such agreements in place. +However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnifications is not material to our financial position or results of operations. +Contractual Obligations +Our +long-term contractual obligations as of May 31, 2006 are as follows: +Cash Payments Due During the Year Ended May 31, +Description of Commitment +2007 +2008 +2009 +2010 +2011 +Thereafter +Total +(In millions) +Operating Leases +$ +229.0 +$ +190.6 +$ +158.8 +$ +129.9 +$ +116.9 +$ +599.3 +$ +1,424.5 +Long-term Debt +255.9 +31.0 +6.0 +30.9 +6.0 +341.8 +671.6 +Endorsement Contracts (1) +476.5 +349.6 +241.2 +160.8 +108.0 +306.0 +1,642.1 +Product Purchase Obligations (2) +1,850.4 +1.0 +— +— +— +— +1,851.4 +Other (3) +196.3 +53.0 +39.5 +12.6 +10.6 +1.3 +313.3 +Total +$ +3,008.1 +$ +625.2 +$ +445.5 +$ +334.2 +$ +241.5 +$ +1,248.4 +$ +5,902.9 +(1) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete +and sport team endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product +sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish the endorsers with NIKE products for their use. It is not possible to determine how much we will spend on this product +on an annual basis as the contracts do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors including general playing conditions, the number of sporting +events in which they participate, and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source, and purchase the products furnished to the endorsers are incurred over a period of time and are +not necessarily tracked separately from similar costs incurred for products sold to customers. +(2) +We generally order product at least four to five months in advance of sale based primarily on advanced futures orders received from customers. The amounts listed for +product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business, that are enforceable and legally binding and that specify all significant terms. In some cases, prices are +subject to change throughout the production process. The reported amounts exclude product purchase liabilities included in accounts payable on the Consolidated Balance Sheet as of May 31, 2006. +(3) +Other amounts primarily include service and marketing commitments made in the ordinary course of business. The amounts represent the minimum payments required by +legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. The reported amounts exclude those liabilities included in accounts payable or accrued liabilities on the +Consolidated Balance Sheet as of May 31, 2006. +Excluded from the table above is a commitment to an outsourcing +contractor that provides us with information technology operations management services through fiscal 2008. The amount of the payments in future years depends on our level of monthly use of the different elements of the contractor’s services. +If we were to terminate the entire contract as of May 31, 2006, we would be required to provide the contractor with four months’ notice and pay a termination fee of $18.7 million. Our monthly payments to the contractor currently +approximate $6 million. +33 +Table of Contents +We also have the following outstanding short-term debt obligations as of May 31, 2006. Please refer +to the accompanying Notes to Consolidated Financial Statements (Note 6 — Short-term Borrowings and Credit Lines) for further description and interest rates related to the short-term debt obligations listed below. +Outstanding as of +May 31, 2006 +(In millions) +Notes payable, due at mutually agreed-upon dates, generally ninety days from issuance or on demand +$ +43.4 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +$ +69.7 +As of May 31, 2006, letters of credit of $347.6 million were outstanding, generally for the +purchase of inventory. Most letters of credit expire within one year. +Capital Resources +In October 2001, we filed a shelf registration statement with the Securities and Exchange Commission (“SEC”) under which $1 billion in debt +securities may be issued. In May 2002, we commenced a medium-term note program under the shelf registration that allows us to issue up to $500 million in medium-term notes, as our capital needs dictate. We entered into this program to provide +additional liquidity to meet our working capital and general corporate cash requirements and since commencement of the medium-term note program we have issued $240.0 million in medium-term notes. During fiscal 2006, there were no medium-term notes +issued under the program. We may issue additional notes under the shelf registration in fiscal 2007 depending on general corporate needs. +As of May 31, 2006, we had a multi-year $750 million revolving credit facility in place with a group of banks, and we currently have no amounts outstanding under the facility. The maturity date is November 20, 2008 and the +facility can be extended for one additional year on the anniversary date. Based on our current long-term senior unsecured debt ratings of A+ and A2 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the +interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.18%. The facility fee is 0.07% of the total commitment. +If our long-term debt rating were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would +decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then outstanding borrowings or any future borrowings under the committed credit facilities. Under this committed credit facility, we have agreed to +various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur, and set a minimum capitalization ratio. In the event we were to have any borrowings outstanding under this +facility, failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks, any borrowings would become immediately due and payable. As of May 31, 2006, we were in full compliance with each of these covenants and +believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our commercial +paper program, under which there was no amount outstanding at May 31, 2006 or May 31, 2005. We currently have short-term debt ratings of A1 and P1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively. +We currently believe that cash generated by operations, together with access to external sources of funds as described above, will be +sufficient to meet our operating and capital needs in the foreseeable future. +Recently Issued Accounting Standards +In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) +No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” +34 +Table of Contents +(“FAS 151”). FAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted +materials (spoilage) are required to be recognized as current period charges. The provisions of FAS 151 are effective for our fiscal year beginning June 1, 2006. We have evaluated the provisions of FAS 151 and do not expect that the adoption +will have a material impact on our consolidated financial position or results of operations. +On December 16, 2004, the FASB finalized +SFAS No. 123R “Share Based Payment,” (“FAS 123R”) which, after the SEC amended the compliance dates on April 15, 2005, is effective for our fiscal year beginning June 1, 2006. The new standard will require us to +record compensation expense for stock options using a fair value method. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the Staff’s views regarding interactions between FAS +123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. +We +plan to adopt the new requirements under FAS 123R and SAB 107 beginning in our first quarter of fiscal 2007 using the modified prospective transition method and the Black-Scholes fair value model. As a result of the adoption of FAS 123R, we will +recognize additional compensation expense of approximately $0.36 per diluted share in fiscal 2007. The amount of expense that will be recognized is largely dependent on several variables, including the level of share-based payments that will be +granted during the fiscal year in addition to the assumptions used in the valuation model. Accordingly, the actual effect per diluted share could differ from this estimate. The effect on our results of operations of expensing stock options for +fiscal 2006, 2005 and 2004 using the Black-Scholes model is presented in the accompanying Notes to Consolidated Financial Statements (Note 1 — Significant Accounting Policies). +Under certain conditions, stock options granted by the Company are eligible for accelerated vesting upon the retirement of the employee. The FASB +clarified in FAS 123R that the fair value of such stock options should be expensed based on the applicable accelerated vesting schedule, rather than ratably over the vesting period stated in the grant. Our pro forma disclosure currently reflects the +expense of such options ratably over the stated vesting period, expensing all unvested shares upon actual retirement. The SEC clarified that companies should continue to follow the vesting method they have been using until adoption of FAS 123R, then +apply the accelerated vesting schedule to all subsequent grants to those employees eligible for accelerated vesting upon retirement. Had we been accounting for such stock options using the accelerated vesting schedule for those employees eligible +for accelerated vesting upon retirement, we would have recognized additional stock-based compensation expense in our pro forma disclosure of the effect of expensing stock options presented in the accompanying Notes to Consolidated Financial +Statements (Note 1 — Significant Accounting Policies) of $0.01 per diluted share in fiscal 2006 and $0.05 per diluted share in fiscal 2005 and 2004. We usually grant the majority of stock options in a single grant in the first three months +of each fiscal year. As a result, accelerated vesting will normally result in higher expense in the first three months and lower expense in the last nine months of each fiscal year, as compared to the pro forma expense we disclosed under our current +policy of expensing such options ratably over the stated vesting period. +In June 2006, the FASB issued FASB Interpretation No. 48, +“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in our financial statements in accordance with FASB Statement No. 109, “Accounting for +Income Taxes”. The provisions of FIN 48 are effective for our fiscal year beginning June 1, 2007. We are currently evaluating the impact of the provisions of FIN 48. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and +results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires +us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. +35 +Table of Contents +We believe that the estimates, assumptions and judgments involved in the accounting policies described +below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in +applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the reserve for uncollectible accounts receivable, inventory reserves, +and contingent payments under endorsement contracts. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to +these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters. +Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result +in materially different amounts being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title +passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale. +In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the +customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several weeks. +In +certain countries outside of the U.S., precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic +location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically. +As part of our revenue recognition policy, we record estimated sales returns and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. We base our estimates on historical +rates of product returns and claims, and specific identification of outstanding claims and outstanding returns not yet received from customers. Actual returns and claims in any future period are inherently uncertain and thus may differ from our +estimates. If actual or expected future returns and claims were significantly greater or lower than the reserves we had established, we would record a reduction or increase to net revenues in the period in which we made such determination. +Reserve for Uncollectible Accounts Receivable +We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining +the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial +stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be +required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling and administrative expense in the period in which we made such a determination. +Inventory Reserves +We also +make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our +36 +Table of Contents +inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the +estimated net realizable value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our +reserve in the period in which we made such a determination and record a charge to cost of sales. +Contingent Payments under +Endorsement Contracts +A significant portion of our demand creation expense relates to payments under endorsement contracts. In +general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract. +Some of the contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We +record selling and administrative expense for these amounts when the endorser achieves the specific goal. +Some of the contracts provide +for payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts are reported in selling and administrative expense when we +determine that it is probable that the specified level of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s +athletic performance, increased or decreased selling and administrative expense may be reported in a future period. +Some of the contracts +provide for royalty payments to endorsers based upon a predetermined percentage of sales of particular products. We expense these payments in cost of sales as the related sales are made. In certain contracts, we offer minimum guaranteed royalty +payments. For contractual obligations for which we estimate that we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of +product in selling and administrative expense uniformly over the remaining guarantee period. +Property, Plant and Equipment +Property, plant and equipment, including buildings, equipment, and computer hardware and software is recorded at cost (including, +in some cases, the cost of internal labor) and is depreciated over its estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated +useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value. +When events or circumstances indicate that the carrying value of property, plant and equipment may be impaired, we estimate the future +undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the +carrying value of the asset over our estimate of its fair market value. Any impairment charges are recorded as other expense, net. We estimate future undiscounted cash flows using assumptions about our expected future operating performance. Our +estimates of undiscounted cash flows may change in future periods due to, among other things, technological changes, economic conditions, changes to our business operations or inability to meet business plans. Such changes may result in impairment +charges in the period in which such changes in estimates are made. +Goodwill and Other Intangible Assets +In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets with +indefinite lives are not amortized but instead measured for impairment at least annually in +37 +Table of Contents +the fourth fiscal quarter, or when events indicate that an impairment exists. As required by FAS 142, in our impairment tests for goodwill and other +indefinite-lived intangible assets, we compare the estimated fair value of goodwill and other intangible assets to the carrying value. If the carrying value exceeds our estimate of fair value, we calculate impairment as the excess of the carrying +value over our estimate of fair value. Our estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including our assumptions about the expected future operating +performance of our reporting units. Our estimates may change in future periods due to, among other things, technological change, economic conditions, changes to our business operations or inability to meet business plans. Such changes may result in +impairment charges recorded in future periods. Any impairment charge related to goodwill would be classified as a separate line item on our consolidated statement of income as part of income before income taxes and any impairment charge related to +other indefinite-lived intangible assets would be classified as other expense, net. +Intangible assets that are determined to have definite +lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. In these cases, we estimate the future undiscounted cash flows to be derived from the asset to +determine whether or not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair +value. Any impairment charges would be classified as other expense, net. +Hedge Accounting for Derivatives +We use forward exchange contracts and option contracts to hedge certain anticipated foreign currency exchange transactions, as well as any resulting +receivable or payable balance. When specific criteria required by SFAS No. 133, “Accounting for Derivative and Hedging Activities,” as amended and interpreted (“FAS 133”) have been met, changes in fair values of hedge +contracts relating to anticipated transactions are recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income. In most cases, this results in gains and losses on hedge derivatives being +released from other comprehensive income into net income some time after the maturity of the derivative. One of the criteria for this accounting treatment is that the forward exchange contract amount should not be in excess of specifically +identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts +decrease below hedged levels, or when the timing of transactions changes significantly, we are required to reclassify at least a portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to other +expense, net during the quarter in which such changes occur. Once an anticipated transaction estimate or actual transaction amount decreases below hedged levels, we make adjustments to the related hedge contract in order to reduce the amount of the +hedge contract to that of the revised anticipated transaction. +Taxes +We record valuation allowances against our deferred tax assets, when necessary, in accordance with SFAS No. 109, “Accounting for Income +Taxes.” Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be +recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing our income tax expense in the period such determination is made. +In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested offshore, thus +reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and +foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +38 +Table of Contents +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be +reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts +declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current +expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings +(for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our income tax expense would be reduced in the year of such determination. +On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. The estimated annual effective tax rate is then applied to +the year-to-date pre-tax income excluding significant or infrequently occurring items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the +fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal +year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. +Other Contingencies +In the +ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims +against us, including related legal costs, when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss +will materially exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any +future period are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations. However, if actual or estimated probable future +losses exceed our recorded liability for such claims, we would record additional charges as other expense, net during the period in which the actual loss or change in estimate occurred. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest +rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for speculative purposes. +We are exposed to foreign currency fluctuation as a result of our international sales, product sourcing and funding activities. Our foreign currency risk +management objective is to reduce the variability of local entity cash flows as a result of exchange rate movements. We use forward exchange contracts and options to hedge certain anticipated but not yet firmly committed transactions as well as +certain firm commitments and the related receivables and payables, including third party and intercompany transactions. +When we begin +hedging exposures depends on the nature of the exposure and market conditions. Generally, all anticipated and firmly committed transactions that are hedged are to be recognized within twelve months, although at May 31, 2006 we had forward +contracts hedging anticipated transactions that will be recognized in as many as 18 months. The majority of the contracts expiring in more than twelve months relate to the anticipated purchase of inventory by our European and Japanese subsidiaries. +We use forward contracts to hedge +39 +Table of Contents +non-functional currency denominated payments under intercompany loan agreements. When intercompany loans are hedged, it is typically for their expected +duration. Hedged transactions are principally denominated in euros, Japanese yen, Korean won, Canadian dollars and Mexican pesos. +Our +earnings are also exposed to movements in short and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows, and to reduce overall borrowing +costs. To achieve these objectives, we maintain a mix of medium and long-term fixed rate debt, commercial paper, and bank loans and have entered into interest rate swaps. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives +using a variety of techniques including a review of market value, sensitivity analysis, and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments, as defined by the SEC, are foreign currency forward +contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. dollar denominated debt, and fixed interest rate Japanese yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR +determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques +that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency +market changes and interest rate changes over the preceding one year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjusted the potential loss in option value for +the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only, and does not include +the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances, and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur, nor does it +consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in +market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day +loss in fair value on our foreign currency sensitive financial instruments, derived using the VaR model, was $17.5 million and $25.7 million at May 31, 2006 and May 31, 2005, respectively. The decrease in VaR as of May 31, 2006 +occurred due to a lower notional value of outstanding foreign currency derivative instruments as of May 31, 2006 compared to May 31, 2005. Such a hypothetical loss in fair value of our derivatives would be offset by increases in the value +of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $34.9 million and $37.2 million for fiscal 2006 and fiscal 2005, +respectively. +40 +Table of Contents +Details of other market-sensitive financial instruments and derivative financial instruments not included +in the VaR calculation above are provided in the table below, except the interest rate swaps which are described below. These instruments include intercompany loans denominated in non-functional currencies, fixed interest rate Japanese yen +denominated debt, fixed interest rate U.S. dollar denominated debt and interest rate swaps. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. +Expected Maturity Date +Year Ended May 31, +2007 +2008 +2009 +2010 +2011 +Thereafter +Total +Fair Value +(In millions, except interest rates) +Foreign Exchange Risk +Euro Functional Currency +Intercompany loan — U.S. dollar denominated — +Fixed rate +Principal payments +$ +— +— +— +— +— +270.4 +$ +270.4 +$ +270.4 +Average interest rate +— +— +— +— +— +5.7 +% +5.7 +% +Intercompany loan — British pound denominated — Fixed rate +Principal payments +$ +86.1 +— +— +— +— +— +$ +86.1 +$ +86.1 +Average interest rate +3.9 +% +— +— +— +— +— +3.9 +% +U.S. Dollar Functional Currency +Intercompany loan — Japanese yen denominated — Variable rate +Principal payments +$ +93.8 +— +— +— +— +— +$ +93.8 +$ +93.8 +Average interest rate +0.5 +% +— +— +— +— +— +0.5 +% +Intercompany loan — Japanese yen denominated—Fixed rate +Principal payments +$ +180.5 +— +35.7 +— +— +— +$ +216.2 +$ +216.2 +Average interest rate +0.6 +% +0.8 +% +0.8 +% +— +— +— +0.6 +% +Canadian Dollar Functional Currency +Intercompany loan — U.S. Dollar denominated — Fixed rate +Principal payments +$ +50.0 +— +— +— +— +— +$ +50.0 +$ +50.0 +Average interest rate +4.9 +% +4.9 +% +Korean Won Functional Currency +Intercompany loan — U.S. Dollar denominated — Fixed rate +Principal payments +$ +28.0 +— +— +— +— +— +$ +28.0 +$ +28.0 +Average interest rate +5.4 +% +— +— +— +— +— +5.4 +% +Japanese Yen Functional Currency +Long-term Japanese yen debt — Fixed rate +Principal payments +$ +6.0 +6.0 +6.0 +6.0 +6.0 +150.2 +$ +180.2 +$ +192.4 +Average interest rate +3.4 +% +3.4 +% +3.5 +% +3.5 +% +3.5 +% +2.5 +% +2.8 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese yen debt — Fixed rate +Principal payments +$ +6.0 +6.0 +6.0 +6.0 +6.0 +150.2 +$ +180.2 +$ +192.4 +Average interest rate +3.4 +% +3.4 +% +3.5 +% +3.5 +% +3.5 +% +2.5 +% +2.8 +% +U.S. Dollar Functional Currency +Long-term U.S. dollar debt — Fixed rate +Principal payments +$ +250.0 +25.0 +— +25.0 +— +190.0 +$ +490.0 +$ +481.6 +Average interest rate +5.2 +% +5.1 +% +5.1 +% +5.1 +% +5.1 +% +5.1 +% +5.1 +% +Intercompany loans and related interest amounts eliminate in consolidation. Intercompany loans are +generally hedged against foreign exchange risk through the use of forward contracts with third parties, as discussed above. +41 +Table of Contents +The fixed interest rate Japanese yen denominated debts were issued by and are accounted for by two of our +Japanese subsidiaries. Accordingly, the monthly remeasurement of these instruments due to changes in foreign exchange rates is recognized in accumulated other comprehensive income upon the consolidation of these subsidiaries. +There were no significant changes in debt market risks during fiscal 2006. We did not issue any long-term fixed-rate corporate bonds during fiscal 2006 +or 2005; however, in previous years we issued a total of $490 million in long-term fixed-rate corporate bonds that mature between August 2006 and October 2015. Fixed interest rates on these bonds range from 4.7% to 5.66%. For each of the bonds +issued, we have entered into interest rate swap agreements whereby we receive fixed interest payments at the same rate as the bonds and pay variable interest payments based on the three-month or six-month LIBOR plus a spread. As a result of the +interest rate swap agreements the average effective interest rate payable on these bonds was 6.07% at May 31, 2006 and 4.17% at May 31, 2005. For $440 million of the issued bonds, the associated swaps have the same notional amount and +maturity date as the corresponding bond. These interest rate swaps are accounted for as fair value hedges, so changes in the recorded fair values of the swaps are offset by changes in the recorded fair value of the related debt. The remaining $50 +million bond matures in October 2013 whereas the associated interest rate swap expires in October 2006. Accordingly, changes in the fair value of this swap are recorded to net income each period. The recorded fair value of the interest rate swaps +accounted for as fair value hedges was a net $5.6 million loss at May 31, 2006 and a $9.0 million gain at May 31, 2005. The change in fair value of the $50 million interest rate swap expiring October 2006 was not material for the years +ended May 31, 2006, 2005 and 2004. +In fiscal 2003 we also entered into an interest rate swap agreement related to a Japanese yen +denominated intercompany loan with one of our Japanese subsidiaries. The Japanese subsidiary pays variable interest on the intercompany loan based on 3-month LIBOR plus a spread. Under the interest rate swap agreement, the subsidiary pays fixed +interest payments at 0.8% and receives variable interest payments based on 3-month LIBOR plus a spread based on a notional amount of 8 billion Japanese yen. This interest rate swap is not accounted for as a hedge, accordingly changes in the fair +value of the swap are recorded to net income each period. The change in fair value of the swap was not material for the years ended May 31, 2006, 2005 and 2004. +Item 8. Financial Statements and Supplemental Data +Management +of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with the generally accepted accounting principles we considered appropriate in the circumstances +and include some amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure that assets are safeguarded from unauthorized use or disposition and which provide for the preparation of financial statements in conformity with +generally accepted accounting principles. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An Internal Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently consisting of three outside +directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews with the independent registered public accounting firm, management and the internal audit staff, the scope and the +results of the annual examination, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as they deem appropriate. The independent registered public accounting firm and the internal auditors +have full access to the Committee, with and without the presence of management, to discuss any appropriate matters. +42 +Table of Contents +Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act +rule 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the +framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting is +effective as of May 31, 2006. +Internal control over financial reporting cannot provide absolute assurance of achieving financial +reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal +control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control +over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the consolidated financial statements, +(2) management’s assessment of the effectiveness of our internal control over financial reporting as of May 31, 2006 and (3) the effectiveness of our internal control over financial reporting as of May 31, 2006, as stated in +their report herein. +Mark G. Parker +Donald W. Blair +Chief Executive Officer and President +Chief Financial Officer +43 +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Board of Directors and +Shareholders of NIKE, Inc.: +We have completed integrated audits of NIKE, Inc.’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of May 31, 2006 and an audit of its 2004 +consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. +Consolidated financial statements and financial statement schedule +In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries at +May 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2006 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 index appearing under Item 15(a)(2) 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 and financial statement schedule +based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements 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 audits provide a reasonable basis for our opinion. +Internal control over financial reporting +Also, in +our opinion, management’s assessment, included in “Management’s Report on Internal Control Over Financial Reporting” appearing under Item 8, that the Company maintained effective internal control over financial reporting as +of May 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, +based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2006, based on criteria established in Internal Control — +Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. +Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial +reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over +financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and +evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial +reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting +44 +Table of Contents +includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, +and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized +acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of +its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because +of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ P RICEWATERHOUSE C OOPERS LLP +PricewaterhouseCoopers LLP +Portland, Oregon +July 27, 2006 +45 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF INCOME +Year Ended May 31, +2006 +2005 +2004 +(In millions, except per share data) +Revenues +$ +14,954.9 +$ +13,739.7 +$ +12,253.1 +Cost of sales +8,367.9 +7,624.3 +7,001.4 +Gross margin +6,587.0 +6,115.4 +5,251.7 +Selling and administrative expense +4,477.8 +4,221.7 +3,702.0 +Interest (income) expense, net (Notes 1, 6 and 7) +(36.8 +) +4.8 +25.0 +Other expense, net (Notes 5 and 16) +4.4 +29.1 +74.7 +Income before income taxes +2,141.6 +1,859.8 +1,450.0 +Income taxes (Note 8) +749.6 +648.2 +504.4 +Net income +$ +1,392.0 +$ +1,211.6 +$ +945.6 +Basic earnings per common share (Notes 1 and 11) +$ +5.37 +$ +4.61 +$ +3.59 +Diluted earnings per common share (Notes 1 and 11) +$ +5.28 +$ +4.48 +$ +3.51 +Dividends declared per common share +$ +1.18 +$ +0.95 +$ +0.74 +The accompanying notes to consolidated financial statements are an integral part of this +statement. +46 +Table of Contents +NIKE, INC. +CONSOLIDATED BALANCE SHEETS +May 31, +2006 +2005 +(In millions) +ASSETS +Current assets: +Cash and equivalents +$ +954.2 +$ +1,388.1 +Short-term investments +1,348.8 +436.6 +Accounts receivable, less allowance for doubtful accounts of $67.6 and $80.4 +2,395.9 +2,262.1 +Inventories (Note 2) +2,076.7 +1,811.1 +Deferred income taxes (Note 8) +203.3 +110.2 +Prepaid expenses and other current assets +380.1 +343.0 +Total current assets +7,359.0 +6,351.1 +Property, plant and equipment, net (Note 3) +1,657.7 +1,605.8 +Identifiable intangible assets, net (Note 4) +405.5 +406.1 +Goodwill (Note 4) +130.8 +135.4 +Deferred income taxes and other assets (Note 8) +316.6 +295.2 +Total assets +$ +9,869.6 +$ +8,793.6 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current liabilities: +Current portion of long-term debt (Note 7) +$ +255.3 +$ +6.2 +Notes payable (Note 6) +43.4 +69.8 +Accounts payable (Note 6) +952.2 +775.0 +Accrued liabilities (Notes 5 and 16) +1,286.9 +1,053.2 +Income taxes payable +85.5 +95.0 +Total current liabilities +2,623.3 +1,999.2 +Long-term debt (Note 7) +410.7 +687.3 +Deferred income taxes and other liabilities (Note 8) +550.1 +462.6 +Commitments and contingencies (Notes 14 and 16) +— +— +Redeemable Preferred Stock (Note 9) +0.3 +0.3 +Shareholders’ equity: +Common stock at stated value (Note 10): +Class A convertible — 63.9 and 71.9 shares outstanding +0.1 +0.1 +Class B — 192.1 and 189.2 shares outstanding +2.7 +2.7 +Capital in excess of stated value +1,451.4 +1,182.9 +Unearned stock compensation +(4.1 +) +(11.4 +) +Accumulated other comprehensive income (Note 13) +121.7 +73.4 +Retained earnings +4,713.4 +4,396.5 +Total shareholders’ equity +6,285.2 +5,644.2 +Total liabilities and shareholders’ equity +$ +9,869.6 +$ +8,793.6 +The accompanying notes to consolidated financial statements are an integral part of this statement. +47 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF CASH FLOWS +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Cash provided (used) by operations: +Net income +$ +1,392.0 +$ +1,211.6 +$ +945.6 +Income charges not affecting cash: +Depreciation +282.0 +257.2 +255.2 +Deferred income taxes +(26.0 +) +21.3 +19.0 +Amortization and other +8.9 +30.5 +58.3 +Income tax benefit from exercise of stock options +54.2 +63.1 +47.2 +Changes in certain working capital components: +(Increase) decrease in accounts receivable +(85.1 +) +(93.5 +) +97.1 +Increase in inventories +(200.3 +) +(103.3 +) +(55.9 +) +(Increase) decrease in prepaids and other current assets +(37.2 +) +71.4 +(103.6 +) +Increase in accounts payable, accrued liabilities and income taxes payable +279.4 +112.4 +255.6 +Cash provided by operations +1,667.9 +1,570.7 +1,518.5 +Cash provided (used) by investing activities: +Purchases of short-term investments +(2,619.7 +) +(1,527.2 +) +(400.8 +) +Maturities of short-term investments +1,709.8 +1,491.9 +— +Additions to property, plant and equipment +(333.7 +) +(257.1 +) +(214.8 +) +Disposals of property, plant and equipment +1.6 +7.2 +11.6 +Increase in other assets +(30.3 +) +(39.1 +) +(53.4 +) +(Decrease) increase in other liabilities +(4.3 +) +11.1 +(4.1 +) +Acquisition of subsidiary, net of cash acquired +— +(47.2 +) +(289.1 +) +Cash used by investing activities +(1,276.6 +) +(360.4 +) +(950.6 +) +Cash provided (used) by financing activities: +Proceeds from long-term debt issuance +— +— +153.8 +Reductions in long-term debt including current portion +(6.0 +) +(9.2 +) +(206.6 +) +Decrease in notes payable +(18.2 +) +(81.7 +) +(0.3 +) +Proceeds from exercise of stock options and other stock issuances +225.3 +226.8 +253.6 +Repurchase of stock +(761.1 +) +(556.2 +) +(419.8 +) +Dividends — common and preferred +(290.9 +) +(236.7 +) +(179.2 +) +Cash used by financing activities +(850.9 +) +(657.0 +) +(398.5 +) +Effect of exchange rate changes +25.7 +6.8 +24.6 +Net (decrease) increase in cash and equivalents +(433.9 +) +560.1 +194.0 +Cash and equivalents, beginning of year +1,388.1 +828.0 +634.0 +Cash and equivalents, end of year +$ +954.2 +$ +1,388.1 +$ +828.0 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +54.2 +$ +33.9 +$ +37.8 +Income taxes +752.6 +585.3 +418.6 +Dividends declared and not paid +79.4 +65.3 +52.6 +The accompanying notes to consolidated financial statements are an integral part of this statement. +48 +Table of Contents +NIKE, INC. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +Common Stock +Capital in +Excess of +Stated +Value +Unearned +Stock +Compensation +Accumulated +Other +Comprehensive +Income (Loss) +Retained +Earnings +Total +Class A +Class B +Shares +Amount +Shares +Amount +(In millions, except per share data) +Balance at May 31, 2003 +97.8 +$ +0.2 +165.8 +$ +2.6 +$ +589.0 +$ +(0.6 +) +$ +(239.7 +) +$ +3,639.2 +$ +3,990.7 +Stock options exercised +5.5 +284.9 +284.9 +Conversion to Class B Common Stock +(20.2 +) +(0.1 +) +20.2 +0.1 +— +Repurchase of Class B Common Stock +(6.4 +) +(7.6 +) +(406.7 +) +(414.3 +) +Dividends on Common stock ($.74 per share) +(194.9 +) +(194.9 +) +Issuance of shares to employees +0.4 +23.2 +(7.5 +) +15.7 +Amortization of unearned compensation +2.6 +2.6 +Forfeiture of shares from employees +(1.7 +) +(0.3 +) +(2.0 +) +Comprehensive income (Note 13): +Net income +945.6 +945.6 +Other comprehensive income (net of tax expense of $69.0): +Foreign currency translation +27.5 +27.5 +Adjustment for fair value of hedge derivatives +125.9 +125.9 +Comprehensive income +153.4 +945.6 +1,099.0 +Balance at May 31, 2004 +77.6 +$ +0.1 +185.5 +$ +2.7 +$ +887.8 +$ +(5.5 +) +$ +(86.3 +) +$ +3,982.9 +$ +4,781.7 +Stock options exercised +4.4 +273.2 +273.2 +Conversion to Class B Common Stock +(5.7 +) +5.7 +— +Repurchase of Class B Common Stock +(6.9 +) +(8.3 +) +(547.9 +) +(556.2 +) +Dividends on Common stock ($.95 per share) +(249.4 +) +(249.4 +) +Issuance of shares to employees +0.5 +32.1 +(10.2 +) +21.9 +Amortization of unearned compensation +3.9 +3.9 +Forfeiture of shares from employees +(1.9 +) +0.4 +(0.7 +) +(2.2 +) +Comprehensive income (Note 13): +Net income +1,211.6 +1,211.6 +Other comprehensive income (net of tax expense of $40.2): +Foreign currency translation +70.1 +70.1 +Adjustment for fair value of hedge derivatives +89.6 +89.6 +Comprehensive income +159.7 +1,211.6 +1,371.3 +Balance at May 31, 2005 +71.9 +$ +0.1 +189.2 +$ +2.7 +$ +1,182.9 +$ +(11.4 +) +$ +73.4 +$ +4,396.5 +$ +5,644.2 +Stock options exercised +4.0 +254.0 +254.0 +Conversion to Class B Common Stock +(8.0 +) +8.0 +— +Repurchase of Class B Common Stock +(9.5 +) +(11.3 +) +(769.9 +) +(781.2 +) +Dividends on Common stock ($1.18 per share) +(304.9 +) +(304.9 +) +Issuance of shares to employees +0.5 +33.0 +(6.1 +) +26.9 +Amortization of unearned compensation +11.5 +11.5 +Forfeiture of shares from employees +(0.1 +) +(7.2 +) +1.9 +(0.3 +) +(5.6 +) +Comprehensive income (Note 13): +Net income +1,392.0 +1,392.0 +Other comprehensive income (net of tax benefit of $37.8): +Foreign currency translation +87.1 +87.1 +Adjustment for fair value of hedge derivatives +(38.8 +) +(38.8 +) +Comprehensive income +48.3 +1,392.0 +1,440.3 +Balance at May 31, 2006 +63.9 +$ +0.1 +192.1 +$ +2.7 +$ +1,451.4 +$ +(4.1 +) +$ +121.7 +$ +4,713.4 +$ +6,285.2 +The accompanying notes to consolidated financial statements are an integral part of this statement. +49 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Note 1 — Summary of Significant Accounting Policies +Basis of Consolidation +The consolidated financial statements include the accounts of NIKE, Inc. and its subsidiaries +(the “Company”). All significant intercompany transactions and balances have been eliminated. +Recognition of Revenues +Wholesale revenues are recognized when the risks and rewards of ownership have passed to the customer, based on the terms of sale. +This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale. Provisions for sales discounts, returns and miscellaneous +claims from customers are made at the time of sale. +Shipping and Handling Costs +Shipping and handling costs are expensed as incurred and included in cost of sales. +Advertising and Promotion +Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement costs are expensed in the month the advertising appears. A significant amount of the Company’s promotional expenses +result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed uniformly over the term of the contract after giving recognition to +periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in prepaid expenses and other current assets or other assets depending on the length of the contract. Through cooperative advertising +programs, the Company reimburses its retail customers for certain of their costs of advertising the Company’s products. The Company records these costs in selling and administrative expense at the point in time when it is obligated to its +customers for the costs, which is when the related revenues are recognized. This obligation may arise prior to the related advertisement being run. Total advertising and promotion expenses were $1,740.2 million, $1,600.7 million, and $1,377.9 +million for the years ended May 31, 2006, 2005 and 2004, respectively. Prepaid advertising and promotion expenses recorded as appropriate in prepaid expenses and other current assets and other assets totaled $177.1 million and $169.9 million at +May 31, 2006 and 2005, respectively. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid investments with maturities of three months or less at date of purchase. The carrying +amounts reflected in the consolidated balance sheet for cash and cash equivalents approximate fair value due to the short maturities. +Short-term Investments +Short-term investments consist of highly liquid investments, primarily U.S. Treasury debt +securities, with maturities over three months from the date of purchase. Debt securities which the Company has the ability and positive intent to hold to maturity are carried at amortized cost. Available-for-sale debt securities are recorded at fair +value with any net unrealized gains and losses reported, net of tax, in other comprehensive income. Realized gains or losses are determined based on the specific identification method. The Company holds no investments considered to be trading +securities. Amortized cost of both available-for-sale and held-to-maturity debt securities approximates fair market value due to their short maturities. Substantially all short-term investments held at +50 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +May 31, 2006 have remaining maturities of 180 days or less. Included in interest (income) expense, net for the years ended May 31, 2006, 2005, and +2004, was interest income of $87.3 million, $34.9 million and $15.3 million, respectively, related to short-term investments and cash and cash equivalents. +Inventory Valuation +Inventories are stated at the lower of cost or market. Inventories are +valued on a first-in, first-out (“FIFO”) or moving-average cost basis. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation for financial reporting purposes is determined on a straight-line +basis for buildings and leasehold improvements over 2 to 40 years and principally on a double declining balance basis for machinery and equipment over 2 to 15 years. Computer software (including, in some cases, the cost of internal labor) is +depreciated on a straight-line basis over 3 to 10 years. +Impairment of Long-Lived Assets +In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of +Long-Lived Assets” (“FAS 144”), the Company estimates the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists when events or circumstances indicate the carrying value of a +long-lived asset may be impaired. If the carrying value exceeds the Company’s estimate of future undiscounted cash flows, the Company then calculates the impairment as the excess of the carrying value of the asset over the Company’s +estimate of its fair market value. +Identifiable Intangible Assets and Goodwill +In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets with +indefinite lives are not amortized but instead are measured for impairment at least annually in the fourth quarter, or when events indicate that an impairment exists. As required by FAS 142, in the Company’s impairment test of goodwill, the +Company compares the fair value of the applicable reporting unit to its carrying value. The Company estimates the fair value of its reporting units by using a combination of discounted cash flow analysis and comparisons with the market values of +similar publicly traded companies. If the carrying value of the reporting unit exceeds the estimate of fair value, the Company calculates the impairment as the excess of the carrying value of goodwill over its implied fair value. In the impairment +tests for indefinite-lived intangible assets, the Company compares the estimated fair value of the indefinite-lived intangible assets to the carrying value. The Company estimates the fair value of indefinite-lived intangible assets, trademarks, +using the relief from royalty approach, which is a standard form of discounted cash flow analysis typically used for the valuation of trademarks. If the carrying value exceeds the estimate of fair value, the Company calculates impairment as the +excess of the carrying value over the estimate of fair value. +Intangible assets that are determined to have definite lives are amortized +over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired in accordance with FAS 144 discussed above. +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency translation +adjustment, a component of accumulated other comprehensive income in shareholders’ equity. +51 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Transaction gains and losses generated by the effect of foreign exchange rates on recorded assets and +liabilities denominated in a currency different from the functional currency of the applicable Company entity are recorded in other expense, net, in the period in which they occur. +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to limit exposure to changes in foreign currency exchange rates and interest rates. The Company accounts for derivatives pursuant to SFAS No. 133, +“Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (“FAS 133”). FAS 133 establishes accounting and reporting standards for derivative instruments and requires that all derivatives be +recorded at fair value on the balance sheet. Changes in the fair value of derivative financial instruments are either recognized in other comprehensive income (a component of shareholders’ equity) or net income depending on whether the +derivative is being used to hedge changes in cash flows or fair value. +See Note 16 for more information on the Company’s Risk +Management program and derivatives. +Stock-Based Compensation +The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board (“APB”) +Opinion No. 25, “Accounting for Stock Issued to Employees” as permitted by SFAS No. 123 “Accounting for Stock-Based Compensation” (“FAS 123”). The Company’s usual practice is to grant stock options with +an exercise price equal to the market value at the date of grant, and accordingly, no compensation expense is recognized. +As required by +FAS 123 and amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (“FAS 148”), the Company has computed, for pro forma disclosure purposes, the fair value of options granted and +employees’ purchase rights under the Employee Stock Purchase Plan (“ESPP”) during the years ended May 31, 2006, 2005 and 2004 using the Black-Scholes option pricing model. The weighted average assumptions used for the majority of +stock options granted for each of the years ended May 31, 2006, 2005 and 2004 are as follows: +Year Ended May 31, +2006 +2005 +2004 +Dividend yield +1 +% +1 +% +1 +% +Expected volatility (1) +21 +% +42 +% +44 +% +Weighted-average expected life +4.5 +5.0 +5.0 +Interest Rate +4.0 +% +3.7 +% +2.9 +% +(1) +For the year ended May 31, 2006, the Company estimated the expected volatility based on +the implied volatility in market traded options on the Company’s common stock, with a term of greater than one year. For the years ended May 31, 2005 and 2004, the Company estimated the expected volatility based on the historical +volatility of the Company’s common stock. +Adjustments for forfeitures are made as they occur. For the years ended +May 31, 2006, 2005 and 2004, the total value of the options granted, for which no previous expense has been recognized, was computed as approximately $111.6 million, $150.2 million, and $102.3 million, respectively, which would be amortized on +a straight line basis over the vesting period of the options. The weighted average fair value per share of the options granted in the years ended May 31, 2006, 2005 and 2004 are $19.35, $27.90, and $20.36, respectively. +52 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +If the Company had accounted for these stock options and ESPP purchase rights issued to employees in +accordance with FAS 123, the Company’s pro forma net income and pro forma earnings per share (“EPS”) would have been reported as follows: +Year Ended May 31, +2006 +2005 +2004 +(In millions, except per share data) +Net income as reported +$ +1,392.0 +$ +1,211.6 +$ +945.6 +Add: Stock-based compensation expense included in reported net income, net of tax +0.2 +0.6 +— +Deduct: Total stock-based employee compensation expense under fair value based method for all awards, net of tax +(76.8 +) +(64.1 +) +(48.7 +) +Pro forma net income +$ +1,315.4 +$ +1,148.1 +$ +896.9 +Earnings per share: +Basic — as reported +$ +5.37 +$ +4.61 +$ +3.59 +Basic — pro forma +$ +5.08 +$ +4.37 +$ +3.41 +Diluted — as reported +$ +5.28 +$ +4.48 +$ +3.51 +Diluted — pro forma +$ +5.01 +$ +4.28 +$ +3.35 +The pro forma effects of applying FAS 123 may not be representative of the effects on reported net +income and earnings per share for future years since options vest over several years and additional awards are made each year. +On +December 16, 2004, the Financial Accounting Standards Board (“FASB”) finalized SFAS No. 123R “Share-Based Payment” (“FAS 123R”) which, after the Securities and Exchange Commission (“SEC”) amended the +compliance dates on April 15, 2005, is effective for the Company’s fiscal year beginning June 1, 2006. The new standard will require the Company to record compensation expense for stock options using a fair value method. On +March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the Staff’s views regarding interactions between FAS 123R and certain SEC rules and regulations and provides interpretations of the +valuation of share-based payments for public companies. +The Company plans to adopt the new requirements under FAS 123R and SAB 107 +beginning in its quarter ending August 31, 2006 using the modified prospective transition method and the Black-Scholes fair value model. As a result of the adoption of FAS 123R the Company will recognize additional compensation expense of +approximately $0.36 per diluted share in the fiscal year ending May 31, 2007. The amount of expense that will be recognized is largely dependent on several variables, including the level of share-based payments that will be granted during the +fiscal year in addition to the assumptions used in the valuation model. Accordingly, the actual effect per diluted share could differ from this estimate. The effect on the Company’s results of operations of expensing stock options for the years +ending May 31, 2006, 2005 and 2004 using the Black-Scholes model is presented in the table above. +Under certain conditions, stock +options granted by the Company are eligible for accelerated vesting upon the retirement of the employee. The FASB clarified in FAS 123R that the fair value of such stock options should be expensed based on the applicable accelerated vesting +schedule, rather than ratably over the vesting period stated in the grant. The Company’s pro forma disclosure above currently reflects the expense of such options ratably over the stated vesting period, expensing all unvested shares upon actual +retirement. The SEC clarified that companies should continue to follow the vesting method they have been using until adoption of FAS 123R, then apply the accelerated vesting schedule to all subsequent grants to those employees eligible for +accelerated +53 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +vesting upon retirement. Had the Company been accounting for such stock options using the accelerated vesting schedule for those employees eligible for +accelerated vesting upon retirement, the Company would have recognized additional stock-based compensation expense in the above pro forma of $0.01 per diluted share in the year ended May 31, 2006 and $0.05 per diluted share for the years ended +May 31, 2005 and 2004. The Company usually grants the majority of stock options in a single grant in the first three months of each fiscal year. As a result, accelerated vesting will normally result in higher expense in the first three months +and lower expense in the last nine months of each fiscal year, as compared to the pro forma expense disclosed by the Company under our current policy of expensing such options ratably over the stated vesting period. +Income Taxes +The Company +accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax +basis of other assets and liabilities. United States income taxes are provided currently on financial statement earnings of non-U.S. subsidiaries that are expected to be repatriated. The Company determines annually the amount of undistributed +non-U.S. earnings to invest indefinitely in its non-U.S. operations. See Note 8 for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding +during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. See Note 11 for further discussion. +Management Estimates +The +preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and +disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +Reclassifications +Certain +prior year amounts have been reclassified to conform to fiscal year 2006 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. +Recently Issued Accounting Standards +In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“FAS 151”). FAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess +freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of FAS 151 are effective for the fiscal year beginning June 1, 2006. The Company has evaluated the provisions of +FAS 151 and does not expect that the adoption will have a material impact on the Company’s consolidated financial position or results of operations. +In December 2004, the FASB issued FAS 123R. In March 2005, the SEC issued SAB 107 regarding the SEC Staff’s interpretation of FAS 123R. See the Stock-Based Compensation section within Note 1 above for further +discussion. +54 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in +Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. +The provisions of FIN 48 are effective for the fiscal year beginning June 1, 2007. The Company is currently evaluating the impact of the provisions of FIN 48. +Note 2 — Inventories +Inventory balances of $2,076.7 million and $1,811.1 million at +May 31, 2006 and 2005, respectively, were substantially all finished goods. +Note 3 — Property, Plant and Equipment +Property, plant and equipment includes the following: +May 31, +2006 +2005 +(In millions) +Land +$ +195.9 +$ +185.4 +Buildings +842.6 +823.9 +Machinery and equipment +1,661.7 +1,528.4 +Leasehold improvements +626.7 +568.4 +Construction in process +81.4 +73.1 +3,408.3 +3,179.2 +Less accumulated depreciation +1,750.6 +1,573.4 +$ +1,657.7 +$ +1,605.8 +Capitalized interest was not material for the years ended May 31, 2006, 2005 and 2004. +Note 4 — Identifiable Intangible Assets and Goodwill: +The following table summarizes the Company’s identifiable intangible assets and goodwill balances as of May 31, 2006 and May 31, 2005: +May 31, 2006 +May 31, 2005 +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +Gross +Carrying +Amount +Accumulated +Amortization +Net +Carrying +Amount +(In millions) +Amortized intangible assets: +Patents +$ +34.1 +$ +(10.5 +) +$ +23.6 +$ +29.2 +$ +(10.9 +) +$ +18.3 +Trademarks +46.4 +(11.8 +) +34.6 +54.8 +(16.4 +) +38.4 +Other +21.5 +(15.7 +) +5.8 +21.4 +(13.5 +) +7.9 +Total +$ +102.0 +$ +(38.0 +) +$ +64.0 +$ +105.4 +$ +(40.8 +) +$ +64.6 +Unamortized intangible assets — Trademarks +$ +341.5 +$ +341.5 +Total +$ +405.5 +$ +406.1 +Goodwill +$ +130.8 +$ +135.4 +55 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Amortization expense of identifiable assets with definite lives, which is included in selling and +administrative expense, was $9.8 million, $9.3 million and $12.0 million for the years ended May 31, 2006, 2005, and 2004, respectively. The estimated amortization expense for intangible assets subject to amortization for each of the succeeding +years ending May 31, 2007 through May 31, 2011 is as follows: 2007: $9.5 million; 2008: $8.9 million; 2009: $7.6 million; 2010: $6.7 million; 2011: $6.4 million. +Note 5 — Accrued Liabilities +Accrued liabilities include the following: +May 31, +2006 +2005 +(In millions) +Compensation and benefits, excluding taxes +$ +427.2 +$ +397.2 +Endorser compensation +124.7 +101.9 +Taxes other than income taxes +115.1 +96.8 +Fair value of derivatives +111.2 +61.8 +Dividends payable +79.5 +65.3 +Advertising and marketing +75.4 +76.6 +Converse arbitration (1) +51.9 +— +Other (2) +301.9 +253.6 +$ +1,286.9 +$ +1,053.2 +(1) +The Converse arbitration relates to a charge taken during the fourth quarter ended May 31, 2006 as a result of a contract dispute between NIKE, Inc.’s +Converse subsidiary and a former South American licensee. The arbitrator awarded the former South American licensee $52.5 million in damages, plus legal fees, less amounts previously paid, which resulted in the recording of the $51.9 million charge +in other expense, net during the year ended May 31, 2006. +(2) +Other consists of various accrued expenses and no individual item accounted for more than $50 million of the balance at May 31, 2006 or 2005. +Note 6 — Short-Term Borrowings and Credit Lines +Notes payable to banks and interest-bearing accounts payable to Sojitz America as of May 31, 2006 and 2005, are summarized below: +May 31, +2006 +2005 +Borrowings +Interest +Rate +Borrowings +Interest +Rate +(In millions) +(In millions) +Notes payable: +U.S. operations +$ +21.0 +0.00 +% (1) +$ +37.0 +0.12 +% (1) +Non-U.S. operations +22.4 +7.72 +% +32.8 +6.68 +% +$ +43.4 +$ +69.8 +Sojitz America +69.7 +5.83 +% +53.1 +3.90 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +56 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The carrying amounts reflected in the consolidated balance sheet for notes payable approximate fair +value due to the short maturities. +The Company purchases through Sojitz America certain athletic footwear, apparel and equipment it +acquires from non-U.S. suppliers. These purchases are for the Company’s operations outside of the U.S., Europe, Middle East, Africa and Japan. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the +foreign port. The interest rate on such accounts payable is the 60 day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75%. +The Company had no borrowings outstanding under its commercial paper program at May 31, 2006 and 2005. +The Company has a multi-year $750 million revolving credit facility in place with a group of banks under which no amounts were outstanding as of +May 31, 2006 and 2005. The facility matures on November 20, 2008 and can be extended for one additional year on the anniversary date. Based on the Company’s current long-term senior unsecured debt ratings the interest rate charged on +any outstanding borrowings would be the prevailing LIBOR plus 0.18%. The facility fee is 0.07% of the total commitment. Under this agreement, the Company must maintain, among other things, certain minimum specified financial ratios with which the +Company was in compliance at May 31, 2006. +Note 7 — Long-Term Debt +Long-term debt includes the following: +May 31, +2006 +2005 +(In millions) +5.5% Corporate Bond, payable August 15, 2006 +$ +249.3 +$ +250.6 +4.8% Corporate Bond, payable July 9, 2007 +24.7 +25.2 +5.375% Corporate Bond, payable July 8, 2009 +24.6 +25.7 +5.66% Corporate Bond, payable July 23, 2012 +24.6 +26.4 +5.4% Corporate Bond, payable August 7, 2012 +14.4 +15.5 +4.7% Corporate Bond, payable October 1, 2013 +50.0 +50.0 +5.15% Corporate Bonds, payable October 15, 2015 +98.2 +107.2 +4.3% Japanese yen note, payable June 26, 2011 +93.8 +97.2 +2.6% Japanese yen note, maturing August 20, 2001 through November 20, 2020 +59.7 +66.1 +2.0% Japanese yen note, maturing August 20, 2001 through November 20, 2020 +26.6 +29.5 +Other +0.1 +0.1 +Total +666.0 +693.5 +Less current maturities +255.3 +6.2 +$ +410.7 +$ +687.3 +The fair value of long-term debt is estimated using discounted cash flow analyses, based on the +Company’s incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt, including current portion, is approximately $674.0 million at May 31, 2006 and $721.2 million at +May 31, 2005. +57 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The Company has interest rate swap agreements with the same notional amount and maturity dates as the +$250.0 million corporate bond maturing August 15, 2006, whereby the Company receives fixed interest payments at the same rate as the bond and pays variable interest payments based on the three-month LIBOR plus a spread. The interest rates +payable on these swap agreements were approximately 6.6% and 4.7% at May 31, 2006 and 2005, respectively. +The Company has an +effective shelf registration statement with the Securities and Exchange Commission for $1 billion of debt securities. The Company has a medium-term note program under the shelf registration that allows the Company to issue up to $500 million in +medium-term notes and has issued $240 million in medium term notes under this program. During the years ended May 31, 2006 and 2005, there were no notes issued under the medium-term note program of the shelf registration. The issued notes have +coupon rates that range from 4.70% to 5.66%. The maturities range from July 9, 2007 to October 15, 2015. For each of these notes, the Company has entered into interest rate swap agreements whereby the Company receives fixed interest +payments at the same rate as the notes and pays variable interest payments based on the three-month or six-month LIBOR plus a spread. Each swap has the same notional amount and maturity date as the corresponding note, except for the swap for the $50 +million note maturing October 1, 2013, which expires October 2, 2006. At May 31, 2006, the interest rates payable on these swap agreements range from approximately 4.9% to 7.2%. +In June 1996, one of the Company’s Japanese subsidiaries borrowed 10,500 million Japanese yen in a private placement with a maturity of +June 26, 2011. Interest is paid semi-annually. The agreement provides for early retirement after year ten. +In July 1999, another of +the Company’s Japanese subsidiaries assumed 13,000 million in Japanese yen loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly +installments during the period August 20, 2001 through November 20, 2020. Interest is also paid quarterly. +Amounts of long-term +debt maturities in each of the years ending May 31, 2007 through 2011 are $255.9 million, $31.0 million, $6.0 million, $30.9 million and $6.0 million, respectively. +Note 8 — Income Taxes +Income before income taxes is as follows: +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Income before income taxes: +United States +$ +838.6 +$ +755.5 +$ +607.7 +Foreign +1,303.0 +1,104.3 +842.3 +$ +2,141.6 +$ +1,859.8 +$ +1,450.0 +58 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The provision for income taxes is as follows: +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Current: +United States +Federal +$ +359.0 +$ +279.6 +$ +185.3 +State +60.6 +50.7 +43.3 +Foreign +356.0 +292.5 +266.8 +775.6 +622.8 +495.4 +Deferred: +United States +Federal +(4.2 +) +21.9 +3.9 +State +(6.8 +) +(5.3 +) +2.4 +Foreign +(15.0 +) +8.8 +2.7 +(26.0 +) +25.4 +9.0 +$ +749.6 +$ +648.2 +$ +504.4 +Deferred tax (assets) and liabilities are comprised of the following: +May 31, +2006 +2005 +(In millions) +Deferred tax assets: +Allowance for doubtful accounts +$ +(10.9 +) +$ +(15.7 +) +Inventories +(43.9 +) +(29.7 +) +Sales return reserves +(39.4 +) +(31.5 +) +Deferred compensation +(110.6 +) +(89.2 +) +Reserves and accrued liabilities +(50.6 +) +(20.2 +) +Property, plant, and equipment +(28.6 +) +(26.4 +) +Foreign loss carryforwards +(29.2 +) +(28.9 +) +Foreign tax credit carryforwards +(9.5 +) +(34.4 +) +Hedges +(25.5 +) +(3.7 +) +Other +(29.1 +) +(22.7 +) +Total deferred tax assets +(377.3 +) +(302.4 +) +Valuation allowance +36.6 +29.1 +Total deferred tax assets after valuation allowance +(340.7 +) +(273.3 +) +Deferred tax liabilities: +Undistributed earnings of foreign subsidiaries +135.3 +130.0 +Property, plant and equipment +91.4 +94.9 +Intangibles +96.8 +101.6 +Hedges +7.8 +4.0 +Other +12.5 +13.1 +Total deferred tax liabilities +343.8 +343.6 +Net deferred tax liability +$ +3.1 +$ +70.3 +59 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate +follows: +Year Ended May 31, +2006 +2005 +2004 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +1.5 +1.8 +2.1 +Foreign earnings +(1.5 +) +(2.8 +) +(0.6 +) +Other, net +— +0.9 +(1.7 +) +Effective income tax rate +35.0 +% +34.9 +% +34.8 +% +During the quarter ending November 30, 2005, the Company’s CEO and Board of Directors +approved a domestic reinvestment plan as required by the American Jobs Creation Act of 2004 (the “Act”) to repatriate $500 million of foreign earnings in fiscal 2006. The Act creates a temporary incentive for U.S. multinational +corporations to repatriate accumulated income earned outside the U.S. by providing an 85% dividend received deduction for certain dividends from controlled foreign corporations. A $500 million repatriation was made during the quarter ending +May 31, 2006 comprised of both foreign earnings for which U.S. taxes has previously been provided and foreign earnings that had been designated as permanently reinvested. Accordingly, the provisions made did not have a material impact on the +Company’s income tax expense or effective tax rate for the years ended May 31, 2006 and 2005. +The Company has indefinitely reinvested +approximately $850.0 million of the cumulative undistributed earnings of certain foreign subsidiaries. Such earnings would be subject to U.S. taxation if repatriated to the U.S. The amount of unrecognized deferred tax liability associated with the +permanently reinvested cumulative undistributed earnings was approximately $154.6 million. +Deferred tax assets at May 31, 2006 and +2005 were reduced by a valuation allowance relating to tax benefits of certain foreign subsidiaries with operating losses where it is more likely than not that the deferred tax assets will not be realized. +A deferred tax asset has been recorded for foreign tax credit carryforwards of $9.5 million at May 31, 2006 which expire by the year ended +May 31, 2016. +During the years ended May 31, 2006, 2005, and 2004, income tax benefits attributable to employee stock option +transactions of $54.2 million, $63.1 million, and $47.2 million, respectively, were allocated to shareholders’ equity. +Note 9 — Redeemable +Preferred Stock +Sojitz America is the sole owner of the Company’s authorized Redeemable Preferred Stock, $1 par value, which is +redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million. A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company +unless dividends on the Redeemable Preferred Stock have been declared and paid in full. There have been no changes in the Redeemable Preferred Stock in the three years ended May 31, 2006, 2005 and 2004. As the holder of the Redeemable Preferred +Stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or +dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. +60 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Note 10 — Common Stock +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 175 million and 750 million, respectively. Included in these figures are +65 million of Class A Common Stock, no par value, and 400 million shares of Class B Common Stock, no par value, which were authorized and approved by the Board of Directors and shareholders during the year ended May 31, 2006. +Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. +In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The 1990 +Plan provides for the issuance of up to 66 million shares of Class B Common Stock in connection with stock options and other awards granted under such plan, included is 16 million shares of Class B Common Stock approved by the Board of +Directors and shareholders during the year ended May 31, 2006. The 1990 Plan authorizes the grant of incentive stock options, non-statutory stock options, stock appreciation rights, stock bonuses and the sale of restricted stock. The exercise +price for incentive stock options may not be less than the fair market value of the underlying shares on the date of grant and substantially all grants vest ratably over four years and expire 10 years from the date of grant. The exercise price for +non-statutory stock options, stock appreciation rights and the purchase price of restricted stock may not be less than 75% of the fair market value of the underlying shares on the date of grant. No consideration will be paid for stock bonuses +awarded under the 1990 Plan. A committee of the Board of Directors administers the 1990 Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards, and the other terms and conditions of the +awards. As of May 31, 2006 the committee has granted substantially all non- statutory stock options at 100% of fair market value on the date of grant under the 1990 Plan. +From time to time, the Company grants restricted stock and unrestricted stock to key employees under the 1990 Plan. The number of shares granted to +employees during the years ended May 31, 2006, 2005 and 2004 were 71,000, 114,000 and 148,000 with weighted average prices of $86.75, $89.29 and $52.32, respectively. Recipients of restricted shares are entitled to cash dividends and to vote +their respective shares throughout the period of restriction. The value of all of the granted shares was established by the market price on the date of grant. Unearned compensation was charged for the market value of the restricted shares. The +unearned compensation is shown as a reduction of shareholders’ equity and is being amortized ratably over the vesting period. During the years ended May 31, 2006, 2005, and 2004, respectively, the Company recognized $11.5 million, $3.9 +million and $2.4 million in selling and administrative expense related to the grants, net of forfeitures. +During the years ended +May 31, 2006, 2005 and 2004, the Company also granted shares of stock under the Long-Term Incentive Plan (“LTIP”), adopted by the Board of Directors and approved by shareholders in September 1997. The LTIP provides for the issuance of +up to 1.0 million shares of Class B Common Stock. Under the LTIP, awards are made to certain executives in their choice of either cash or stock, based on performance targets established over three year time periods. Once performance targets are +achieved, cash or shares of stock are issued. The shares are immediately vested upon grant. The value of the shares is established by the market price on the date of issuance. Under the LTIP 3,000, 4,000 and 8,000 shares with a price of $81.58, +$69.69 and $54.80, respectively, were issued during the years ended May 31, 2006, May 31, 2005 and May 31, 2004 for the plan years ended May 31, 2005, May 31, 2004 and May 31, 2003, respectively. Related to +the LTIP the Company recognized $21.7 million, $22.2 million and $18.9 million of selling and administrative expense in the years ending May 31, 2006, 2005 and 2004, respectively, net of forfeitures. +61 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The following summarizes the stock option transactions under plans discussed above: +Shares +Weighted +Average +Option +Price +(In thousands) +Options outstanding May 31, 2003 +19,699 +$ +44.82 +Exercised +(5,526 +) +42.67 +Forfeited +(579 +) +47.14 +Granted +5,215 +52.14 +Options outstanding May 31, 2004 +18,809 +47.42 +Exercised +(4,438 +) +46.34 +Forfeited +(435 +) +52.65 +Granted +5,424 +73.92 +Options outstanding May 31, 2005 +19,360 +54.98 +Exercised +(4,026 +) +49.35 +Forfeited +(892 +) +71.49 +Granted +5,774 +87.36 +Options outstanding May 31, 2006 +20,216 +$ +64.62 +Options exercisable at May 31, +2004 +8,177 +$ +45.00 +2005 +7,339 +46.02 +2006 +8,301 +51.35 +The following table sets forth the exercise prices, the number of options outstanding and +exercisable and the remaining contractual lives of the Company’s stock options at May 31, 2006: +Options Outstanding +Exercise Price +Number of +Options +Outstanding +Weighted +Average +Exercise Price +Weighted +Average +Contractual Life +Remaining +Options Exercisable +Number of +Options +Exercisable +Weighted +Average +Exercise Price +(In thousands) +(Years) +(In thousands) +$27.69-$48.65 +2,850 +$ +39.31 +4.24 +2,839 +$ +39.30 +48.98- 54.05 +6,181 +50.81 +6.64 +3,108 +50.46 +54.25- 71.92 +1,167 +56.67 +3.24 +1,111 +56.08 +73.21- 73.21 +4,319 +73.21 +8.13 +937 +73.21 +74.88- 90.85 +5,699 +87.38 +8.85 +306 +88.20 +In September 2001, the Company’s shareholders approved the establishment of an Employee Stock +Purchase Plan (“ESPP”) under which 3.0 million shares of Class B Common Stock are provided for issuance to employees. The plan qualifies as a noncompensatory employee stock purchase plan under Section 423 of the Internal Revenue +Code. In February 2003, the Company’s Board of Directors approved a Foreign Subsidiary ESPP under which 1.0 million shares of Class B Common Stock are provided for issuance to employees. Employees are eligible to participate through +payroll deductions in amounts ranging from 1% to 10% of their compensation not to exceed limitations set out under Section 423. At the end of each six-month offering period, shares are purchased by the participants at 85% of the lower of the +fair market value at the beginning or the end of the offering period. Under the ESPPs 0.4 million, 0.3 million, and 0.3 million shares were issued during the years ended May 31, 2006, 2005, and 2004, respectively. +62 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Note 11 — Earnings Per Share +The following represents a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase 5.6 million and +0.2 million shares of common stock were outstanding at May 31, 2006 and May 31, 2005, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the +average market price of the common shares and, therefore, the effect would be antidilutive. There were no such antidilutive options outstanding at May 31, 2004. +Year Ended May 31, +2006 +2005 +2004 +(In millions, +except per share data) +Determination of shares: +Average common shares outstanding +259.0 +262.6 +263.2 +Assumed conversion of dilutive stock options and awards +4.8 +7.7 +6.5 +Diluted average common shares outstanding +263.8 +270.3 +269.7 +Basic earnings per common share +$ +5.37 +$ +4.61 +$ +3.59 +Diluted earnings per common share +$ +5.28 +$ +4.48 +$ +3.51 +Note 12 — Benefit Plans +The Company has a profit sharing plan available to most U.S.-based employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors. A subsidiary of the Company +also has a profit sharing plan available to its U.S.-based employees. The terms of the plan call for annual contributions as determined by the subsidiary’s executive management. Contributions of $33.2 million, $29.1 million, and $23.0 million +were made to the plans and are included in selling and administrative expenses in the consolidated financial statements for the years ended May 31, 2006, 2005 and 2004, respectively. The Company has various 401(k) employee savings plans +available to U.S.-based employees. The Company matches a portion of employee contributions with common stock or cash. Company contributions to the savings plans were $22.5 million, $20.3 million, and $17.0 million for the years ended May 31, +2006, 2005 and 2004, respectively, and are included in selling and administrative expenses. +63 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Note 13 — Comprehensive Income +Comprehensive income is as follows: +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Net income +$ +1,392.0 +$ +1,211.6 +$ +945.6 +Other comprehensive income: +Change in cumulative translation adjustment and other (net of tax benefit (expense) of $19.7 in 2006, $3.9 in 2005, and ($4.7) in +2004) +87.1 +70.1 +27.5 +Changes due to cash flow hedging instruments (Note 16): +Net (loss) gain on hedge derivatives (net of tax benefit of $2.8 in 2006, $28.7 in 2005 and $33.5 in 2004) +(5.6 +) +(54.0 +) +(72.9 +) +Reclassification to net income of previously deferred (gains) and losses related to hedge derivatives (net of tax expense (benefit) of $15.3 +in 2006, ($72.8) in 2005 and ($97.8) in 2004) +(33.2 +) +143.6 +198.8 +Other comprehensive income +48.3 +159.7 +153.4 +Total comprehensive income +$ +1,440.3 +$ +1,371.3 +$ +1,099.0 +The components of accumulated other comprehensive income are as follows: +May 31, +2006 +2005 +(In millions) +Cumulative translation adjustment and other +$ +161.9 +$ +74.8 +Net deferred loss on hedge derivatives +(40.2 +) +(1.4 +) +$ +121.7 +$ +73.4 +Note 14 — Commitments and Contingencies +The Company leases space for certain of its offices, warehouses and retail stores under leases expiring from one to twenty-eight years after May 31, +2006. Rent expense was $252.0 million, $232.6 million and $206.7 million for the years ended May 31, 2006, 2005 and 2004, respectively. Amounts of minimum future annual rental commitments under non-cancelable operating leases in each of the +five years ending May 31, 2007 through 2011 are $229.0 million, $190.6 million, $158.8 million, $129.9 million, $116.9 million, respectively, and $599.3 million in later years. +As of May 31, 2006 and 2005, the Company had letters of credit outstanding totaling $347.6 million and $555.0 million, respectively. These letters +of credit were generally issued for the purchase of inventory. +In connection with various contracts and agreements, the Company provides +routine indemnifications relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items that fall under the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and +Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated +probability of future loss, the Company has determined that the fair value of such indemnifications is not material to the Company’s financial position or results of operations. +64 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +In the ordinary course of its business, the Company is involved in various legal proceedings +involving contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the +Company’s financial position or results of operations. +Note 15 — Acquisitions +In September 2003, the Company acquired 100 percent of the equity shares of Converse. Converse designs, distributes, and markets high performance and +casual athletic footwear and apparel. The acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations” (“FAS 141”). The cash purchase price, including +acquisition costs, was approximately $310 million. All assets and liabilities of Converse were initially recorded in the Company’s Consolidated Balance Sheet based on their estimated fair values at the date of acquisition. The results of +Converse’s operations have been included in the consolidated financial statements since the date of the acquisition as part of the Company’s Other operating segment. The pro forma effect of the acquisition on the combined results of +operations was not significant. +In August 2004, the Company acquired 100 percent of the equity interests in Official Starter LLC and +Official Starter Properties LLC (collectively “Official Starter”). The Exeter Brands Group LLC, a wholly-owned subsidiary of the Company, was formed soon thereafter to develop the Company’s business in retail channels serving +value-conscious consumers and to operate the Official Starter business. The acquisition was accounted for under the purchase method of accounting in accordance with FAS 141. The cash purchase price, including acquisition costs net of cash acquired, +was $47.2 million. All assets and liabilities of Exeter Brands Group were initially recorded in the Company’s Consolidated Balance Sheet based on their estimated fair values at the date of acquisition. The results of Exeter Brands Group’s +operations have been included in the consolidated financial statements since the date of acquisition as part of the Company’s Other operating segment. The pro forma effect of the acquisition on the combined results of operations was not +significant. +Note 16 — Risk Management and Derivatives +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates. The Company uses derivatives to manage financial exposures that occur in the normal +course of business. The Company does not hold or issue derivatives for trading purposes. +The Company formally documents all relationships +between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to either specific assets and liabilities on the balance sheet or +specific firm commitments or forecasted transactions. +Substantially all derivatives outstanding as of May 31, 2006 and 2005 are +designated as either cash flow or fair value hedges. All derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as other current assets or other non-current assets, depending on the +instrument’s maturity date. Unrealized loss positions are recorded as accrued liabilities or other non-current liabilities. All changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in +other comprehensive income, until net income is affected by the variability of cash flows of the hedged transaction. Fair value hedges are recorded in net income and are offset by the change in fair value of the underlying asset or liability being +hedged. +65 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Cash Flow Hedges +The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from +transactions in foreign currencies, including revenues, product costs, selling and administrative expenses, investments in U.S. dollar-denominated available-for-sale debt securities and intercompany transactions, including intercompany borrowings, +will be adversely affected by changes in exchange rates. It is the Company’s policy to utilize derivatives to reduce foreign exchange risks where internal netting strategies cannot be effectively employed. +Derivatives used by the Company to hedge foreign currency exchange risks are forward exchange contracts, options and cross-currency swaps. The +cross-currency swaps are used to hedge foreign currency denominated payments related to intercompany loan agreements. There are currently no cross-currency swaps outstanding. Hedged transactions are denominated primarily in euros, Japanese yen, +Korean won, Canadian dollars and Mexican pesos. The Company hedges up to 100% of anticipated exposures typically twelve months in advance but has hedged as much as 32 months in advance. When intercompany loans are hedged, it is typically for their +expected duration. +Substantially all foreign currency derivatives outstanding as of May 31, 2006 and 2005 qualify for and are +designated as foreign-currency cash flow hedges, including those hedging foreign currency denominated firm commitments. +Changes in fair +values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income, until net income is affected by the variability of cash flows of the hedged transaction. In most cases amounts recorded in +other comprehensive income will be released to net income some time after the maturity of the related derivative. The consolidated statement of income classification of effective hedge results is the same as that of the underlying exposure. Results +of hedges of revenue and product costs are recorded in revenue and cost of sales, respectively, when the underlying hedged transaction affects net income. Results of hedges of selling and administrative expense are recorded together with those costs +when the related expense is recorded. Results of hedges of anticipated purchases and sales of U.S. dollar-denominated available-for-sale securities are recorded in other expense, net when the securities are sold. Results of hedges of anticipated +intercompany transactions are recorded in other expense, net when the transaction occurs. Hedges of recorded balance sheet positions are recorded in other expense, net currently together with the transaction gain or loss from the hedged balance +sheet position. Net foreign currency transaction gains and losses, which includes hedge results captured in revenues, cost of sales, selling and administrative expense and other expense, net, were a $49.9 million gain, a $217.8 million loss, and a +$304.3 million loss for the years ended May 31, 2006, 2005, and 2004, respectively. +Premiums paid on options are initially recorded +as deferred charges. The Company assesses effectiveness on options based on the total cash flows method and records total changes in the options’ fair value to other comprehensive income to the degree they are effective. +As of May 31, 2006, $39.0 million of deferred net losses (net of tax) on both outstanding and matured derivatives accumulated in other comprehensive +income are expected to be reclassified to net income during the next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on the exchange +rates in effect when derivative contracts that are currently outstanding mature. As of May 31, 2006, the maximum term over which the Company is hedging exposures to the variability of cash flows for all forecasted and recorded transactions is +18 months. +The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used +in the hedging transaction have been highly effective in offsetting changes in the cash +66 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is +not, or has ceased to be, highly effective as a hedge, the Company discontinues hedge accounting prospectively. +The Company discontinues +hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); +(2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no +longer appropriate. +When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will +occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net income when the forecasted transaction affects net income. However, if it is probable that a +forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized +immediately in net income. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing future changes in the fair value +in other expense, net. Any hedge ineffectiveness is recorded in other expense, net. Effectiveness for cash flow hedges is assessed based on forward rates. +For each of the years ended May 31, 2006, 2005 and 2004, the Company recorded in other expense, net an insignificant loss representing the total ineffectiveness of all derivatives. Net income for each of the +years ended May 31, 2006, 2005 and 2004 was not materially affected due to discontinued hedge accounting. +Fair Value Hedges +The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest +rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. +Substantially all +interest rate swap agreements are designated as fair value hedges of the related long-term debt and meet the shortcut method requirements under FAS 133. Accordingly, changes in the fair values of the interest rate swap agreements are exactly offset +by changes in the fair value of the underlying long-term debt. No ineffectiveness has been recorded to net income related to interest rate swaps designated as fair value hedges for the years ended May 31, 2006, 2005 and 2004. +As discussed in Note 7, during the year ended May 31, 2004, the Company issued a $50 million medium-term note maturing October 1, 2013 and +simultaneously entered into a receive-fixed, pay-variable interest rate swap with the same notional amount and fixed interest rate as the note. However, the swap expires October 2, 2006. This interest rate swap is not accounted for as a fair +value hedge, accordingly changes in the fair value of the swap are recorded to net income each period as a component of other expense, net. The change in the fair value of the swap was not material for the years ended May 31, 2006, 2005 and +2004. +In fiscal 2003, the Company entered into an interest rate swap agreement related to a Japanese yen denominated intercompany loan +with one of the Company’s Japanese subsidiaries. The Japanese subsidiary pays variable interest on the intercompany loan based on 3-month LIBOR plus a spread. Under the interest rate swap agreement, the subsidiary pays fixed interest payments +at 0.8% and receives variable interest payments based on 3-month LIBOR plus a spread based on a notional amount of 8 billion Japanese yen. This interest rate swap is not accounted for as a fair value hedge, accordingly changes in the fair value of +the swap are recorded to net income each period as a component of other expense, net. The change in the fair value of the swap was not material for the years ended May 31, 2006, 2005 and 2004. +67 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +The fair values of all derivatives recorded on the consolidated balance sheet are as follows: +May 31, +2006 +2005 +(In millions) +Unrealized Gains: +Foreign currency exchange contracts and options +$ +75.7 +$ +113.2 +Interest rate swaps +0.9 +9.0 +Unrealized (Losses): +Foreign currency exchange contracts and options +(122.2 +) +(62.9 +) +Interest rate swaps +(6.0 +) +(1.3 +) +Concentration of Credit Risk +The Company is exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to all +derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is generally limited to the +unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored and reported to senior +management according to prescribed guidelines. The Company utilizes a portfolio of financial institutions either headquartered or operating in the same countries the Company conducts its business. As a result of the above considerations, the Company +considers the risk of counterparty default to be minimal. +In addition to hedging instruments, the Company is subject to concentrations of +credit risk associated with cash and equivalents and accounts receivable. The Company places cash and equivalents with financial institutions with investment grade credit ratings and, by policy, limits the amount of credit exposure to any one +financial institution. The Company considers its concentration risk related to accounts receivable to be mitigated by the Company’s credit policy, the significance of outstanding balances owed by each individual customer at any point in time +and the geographic dispersion of these customers. +Note 17 — Operating Segments and Related Information +Operating Segments. The Company’s operating segments are evidence of the structure of the Company’s internal +organization. The major segments are defined by geographic regions for operations participating in NIKE brand sales activity excluding NIKE Golf and NIKE Bauer Hockey. Each NIKE brand geographic segment operates predominantly in one industry: the +design, production, marketing and selling of sports and fitness footwear, apparel, and equipment. The “Other” category shown below represents activities of Cole Haan, Converse (beginning September 4, 2003), Exeter Brands Group +(beginning August 11, 2004), Hurley, NIKE Bauer Hockey, and NIKE Golf, which are considered immaterial for individual disclosure based on the aggregation criteria in SFAS No. 131 “Disclosures about Segments of an Enterprise and +Related Information”. +Where applicable, “Corporate” represents items necessary to reconcile to the consolidated financial +statements, which generally include corporate activity and corporate eliminations. +Net revenues as shown below represent sales to external +customers for each segment. Intercompany revenues have been eliminated and are immaterial for separate disclosure. The Company evaluates performance of individual operating segments based on pre-tax income. On a consolidated basis, this amount +represents income before income taxes as shown in the Consolidated Statements of Income. Reconciling items for pre-tax +68 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +income represent corporate costs that are not allocated to the operating segments for management reporting including corporate activity, certain currency +exchange rate gains and losses on transactions, and intercompany eliminations for specific income statement items in the Consolidated Statements of Income. +Additions to long-lived assets as presented in the following table represent capital expenditures. +Accounts receivable, inventories and property, plant and equipment for operating segments are regularly reviewed by management and are therefore provided below. +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Net Revenue +United States +$ +5,722.5 +$ +5,129.3 +$ +4,781.8 +Europe, Middle East and Africa +4,326.6 +4,281.6 +3,827.7 +Asia Pacific +2,053.8 +1,897.3 +1,610.8 +Americas +904.9 +695.8 +604.5 +Other +1,947.1 +1,735.7 +1,428.3 +$ +14,954.9 +$ +13,739.7 +$ +12,253.1 +Pre-tax Income +United States +$ +1,244.5 +$ +1,127.9 +$ +1,007.3 +Europe, Middle East and Africa +960.7 +917.5 +744.0 +Asia Pacific +412.5 +399.8 +352.3 +Americas +172.6 +116.5 +97.4 +Other +151.6 +151.4 +75.3 +Corporate +(800.3 +) +(853.3 +) +(826.3 +) +$ +2,141.6 +$ +1,859.8 +$ +1,450.0 +Additions to Long-lived Assets +United States +$ +59.8 +$ +54.8 +$ +30.8 +Europe, Middle East and Africa +73.6 +38.8 +28.9 +Asia Pacific +16.8 +22.0 +19.9 +Americas +6.9 +6.8 +5.8 +Other +33.2 +31.3 +25.2 +Corporate +143.4 +103.4 +104.2 +$ +333.7 +$ +257.1 +$ +214.8 +Depreciation +United States +$ +68.8 +$ +49.0 +$ +52.1 +Europe, Middle East and Africa +46.9 +45.2 +43.6 +Asia Pacific +28.4 +28.3 +38.5 +Americas +6.4 +4.0 +3.9 +Other +29.0 +28.5 +22.2 +Corporate +102.5 +102.2 +94.9 +$ +282.0 +$ +257.2 +$ +255.2 +69 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Accounts Receivable, net +United States +$ +717.2 +$ +627.0 +$ +616.6 +Europe, Middle East and Africa +716.3 +723.6 +724.1 +Asia Pacific +319.7 +309.8 +249.4 +Americas +174.5 +168.7 +132.1 +Other +410.0 +394.0 +351.3 +Corporate +58.2 +39.0 +46.7 +$ +2,395.9 +$ +2,262.1 +$ +2,120.2 +Inventories +United States +$ +725.9 +$ +639.9 +$ +579.4 +Europe, Middle East and Africa +590.1 +496.5 +485.7 +Asia Pacific +238.3 +228.9 +163.9 +Americas +147.6 +96.8 +78.3 +Other +330.5 +316.2 +305.5 +Corporate +44.3 +32.8 +37.4 +$ +2,076.7 +$ +1,811.1 +$ +1,650.2 +Property, Plant and Equipment, net +United States +$ +219.3 +$ +216.0 +$ +213.0 +Europe, Middle East and Africa +266.6 +230.0 +232.0 +Asia Pacific +354.8 +380.4 +379.7 +Americas +17.0 +15.7 +12.7 +Other +98.2 +93.4 +91.8 +Corporate +701.8 +670.3 +682.6 +$ +1,657.7 +$ +1,605.8 +$ +1,611.8 +Revenues by Major Product Lines. Revenues to external customers for +NIKE brand products are attributable to sales of footwear, apparel and equipment. Other revenues to external customers primarily include external sales by Cole Haan Holdings Incorporated, Converse Inc. (beginning September 4, 2003), Exeter +Brands Group LLC (beginning August 11, 2004), Hurley International LLC, NIKE Bauer Hockey Inc., and NIKE Golf. +Year Ended May 31, +2006 +2005 +2004 +(In millions) +Footwear +$ +7,965.9 +$ +7,299.7 +$ +6,566.1 +Apparel +4,168.0 +3,879.4 +3,539.1 +Equipment +873.9 +824.9 +719.6 +Other +1,947.1 +1,735.7 +1,428.3 +$ +14,954.9 +$ +13,739.7 +$ +12,253.1 +Revenues and Long-Lived Assets by Geographic Area. Geographical area +information is similar to that shown previously under operating segments with the exception of the Other activity, which has been allocated to the geographical areas based on the location where the sales originated. Revenues derived in the U.S. were +$7,019.0 million, $6,284.5 million, and $5,781.0 million, for the years ended May 31, 2006, 2005, and 2004, +70 +Table of Contents +NIKE, INC. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) +respectively. The Company’s largest concentrations of long-lived assets are in the U.S. and Japan. Long-lived assets attributable to operations in the +U.S., which are comprised of net property, plant & equipment were $998.2 million, $956.6 million, and $957.0 million at May 31, 2006, 2005, and 2004, respectively. Long-lived assets attributable to operations in Japan were $296.3 +million, $321.0 million, and $328.0 million at May 31, 2006, 2005, and 2004, respectively. +Major +Customers. During the year ended May 31, 2006 and May 31, 2005, revenues derived from Foot Locker, Inc. represented 10 percent and 11 percent of the Company’s consolidated revenues, respectively. Sales to +this customer are included in all segments of the Company. During the year ended May 31, 2004 the Company did not have a significant customer that accounted for more than 10 percent of consolidated revenues. +Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +Item 9A. Controls and Procedures +We maintain disclosure +controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange +Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required +disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control +objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of on-going procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation +of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, +2006. +“Management’s Report on Internal Control Over Financial Reporting” and the related attestation report of +PricewaterhouseCoopers LLP are included in Item 8 on pages 43-45 of this Report. +There has been no change in our internal control +over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +No disclosure is required under +this Item. +71 +Table of Contents +PART III +Item 10. Directors and Executive Officers of the Registrant +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by +reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in Item 1 of this Report. The information required by Item 405 of +Regulation S-K is included under “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by +Item 406 of Regulation S-K is included under “Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 11. Executive Compensation +The information required by +this Item is included under “Director Compensation and Retirement Plan,” “Executive Compensation” (but excluding the Performance Graph), “Compensation Committee Interlocks and Insider Participation” and “Employment +Contracts and Termination of Employment and Change-in-Control Arrangements” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this Item is included under “Stock Holdings of Certain Owners and Management” and under “Equity Compensation +Plans” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions +The +information required by this Item is included under “Certain Transactions and Business Relationships” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. +Item 14. Principal Accountant Fees and Services +The +information required by this Item is included under “Ratification Of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. +72 +Table of Contents +PART IV +Item 15. Exhibits and Financial Statement Schedules +(a) The +following documents are filed as part of this report: +Form 10-K +Page No. +1. +FINANCIAL STATEMENTS: +Report of Independent Registered Public Accounting Firm +44 +Consolidated Statements of Income for each of the three years ended May 31, 2006, May 31, 2005 and May 31, 2004 +46 +Consolidated Balance Sheets at May 31, 2006 and 2005 +47 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2006, May 31, 2005 and May 31, 2004 +48 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2006, May 31, 2005 and May 31, 2004 +49 +Notes to Consolidated Financial Statements +50 +2. +FINANCIAL STATEMENT SCHEDULE: +II — Valuation and Qualifying Accounts +F-1 +All other schedules are omitted because they are not applicable or the required information is +shown in the financial statements or notes thereto. +3. EXHIBITS: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, +2005). +3.2 +Third Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 18, 2004). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Third Restated Bylaws, as amended (see Exhibit 3.2). +4.3 +Indenture dated as of December 13, 1996 between the Company and Bank One Trust Company, National Association (successor in interest to The First National Bank of Chicago), as Trustee +(incorporated by reference to Exhibit 4.01 to Amendment No. 1 to Registration Statement No. 333-15953 filed by the Company on November 26, 1996). +4.4 +Form of Officers’ Certificate relating to the Company’s 5.5% Notes and form of 5.5% Note (incorporated by reference to Exhibits 4.2 and 4.3 of the Company’s Current Report on +Form 8-K dated August 17, 2001). +4.5 +Form of Officers’ Certificate relating to the Company’s Fixed Rate Medium-Term Notes and the Company’s Floating Rate Medium-Term Notes, form of Fixed Rate Note and form of +Floating Rate Note (incorporated by reference to Exhibits 4.2, 4.3 and 4.4 of the Company’s Current Report on Form 8-K dated May 29, 2002). +4.6 +Credit Agreement dated as of November 20, 2003 among NIKE, Inc., Bank of America, N.A., individually and as Agent, and the other banks party thereto (incorporated by reference to Exhibit 4.3 +to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2003). +73 +Table of Contents +10.1 +Form of Non-statutory Stock Option Agreement for options granted to non-employee directors under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s +Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to the Company’s definitive proxy statement filed in +connection with its annual meeting of shareholders held on September 21, 1987). +10.3 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s current report on 8-K filed on September 26, 2005)* +10.4 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to the Company’s current report on 8-K filed on September 26, 2005).* +10.5 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to the Company’s definitive proxy statement filed in connection with its annual meeting of shareholders held on September +18, 2002).* +10.6 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal +year ended May 31, 2004).* +10.7 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February +28, 2003).* +10.8 +Covenant Not To Compete And Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated February 28, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current +Report on Form 8-K/A filed March 6, 2006).* +10.9 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Charles D. Denson dated December 28, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s Current +Report on Form 8-K filed December 30, 2004).* +10.10 +Form of Non-Statutory Stock Option Agreement for options granted to executives under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current +Report on Form 8-K filed November 18, 2004).* +10.11 +Form of Long-Term Incentive Award Agreement under the Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 21, +2005).* +10.12 +Form of Restricted Stock Bonus Agreement under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 21, +2005).* +10.13 +Form of Aircraft Time-Sharing Agreement between the Company and directors or executive officers of the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report +on Form 8-K filed January 26, 2006). +10.14 +Employment Offer Letter between NIKE, Inc. and Donald W. Blair dated November 1, 1999.* +10.15 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Donald W. Blair dated November 10, 1999.* +10.16 +Terms of Employment between NIKE, Inc. and William D. Perez (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 18, +2004)* +10.17 +Resignation Letter Agreement between William D. Perez and NIKE, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 23, +2006)* +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +74 +Table of Contents +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (set forth on page F-2 of this Annual Report on Form 10-K). +31 +Rule 13a-14(a) Certifications. +32 +Section 1350 Certifications. +* +Management contract or compensatory plan or arrangement. +The exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total +assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of +any Exhibit upon payment of $.10 per page, which represents our reasonable expenses in furnishing Exhibits. +75 +Table of Contents +SCHEDULE II +VALUATION AND QUALIFYING ACCOUNTS +Description +Balance at +Beginning +of +Period +Charged to +Costs and +Expenses +Charged to +Other +Accounts +Write-Offs +Net of +Recoveries +Balance at +End of +Period +(In millions) +For the year ended May 31, 2004 +Allowance for doubtful accounts +$ +81.9 +$ +36.4 +$ +0.1 +$ +(23.1 +) +$ +95.3 +For the year ended May 31, 2005 +Allowance for doubtful accounts +$ +95.3 +$ +33.5 +$ +1.8 +$ +(50.2 +) +$ +80.4 +For the year ended May 31, 2006 +Allowance for doubtful accounts +$ +80.4 +$ +13.6 +$ +1.8 +$ +(28.2 +) +$ +67.6 +F-1 +Table of Contents +CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (333-71324) and Form S-8 (Nos. 033-63995, 333-63581, +333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-104824, 333-117059, and 333-133360) of NIKE, Inc. of our report dated July 27, 2006 relating to the financial statements, financial statement schedule, management’s assessment of +the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ P RICEWATERHOUSE C OOPERS LLP +P RICEWATERHOUSE C OOPERS LLP +Portland, Oregon +July 27, 2006 +F-2 +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) 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. +NIKE, INC. +By: +/s/ M ARK G. +P ARKER +Mark G. Parker +Chief Executive Officer and President +Date: July 28, 2006 +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the +registrant and in the capacities and on the dates indicated. +Signature +Title +Date +Principal Executive Officer and Director: +/s/ M ARK G. +P ARKER +Mark G. Parker +Director, Chief Executive Officer +and President +July 28, 2006 +Principal Financial and Accounting Officer: +/s/ D ONALD W. +B LAIR +Donald W. Blair +Chief Financial Officer +July 28, 2006 +Directors: +/s/ P HILIP H. +K NIGHT +Philip H. Knight +Director +July 28, 2006 +/s/ J OHN G. +C ONNORS +John G. Connors +Director +July 28, 2006 +/s/ J ILL K. +C ONWAY +Jill K. Conway +Director +July 28, 2006 +/s/ T IMOTHY D. +C OOK +Timothy D. Cook +Director +July 28, 2006 +/s/ R ALPH D. +D E N UNZIO +Ralph D. DeNunzio +Director +July 28, 2006 +/s/ A LAN B. G RAF , +J R . +Alan B. Graf, Jr. +Director +July 28, 2006 +S-1 +Table of Contents +Signature +Title +Date +/s/ D OUGLAS G. +H OUSER +Douglas G. Houser +Director +July 28, 2006 +/s/ J EANNE P. +J ACKSON +Jeanne P. Jackson +Director +July 28, 2006 +/s/ O RIN C. +S MITH +Orin C. Smith +Director +July 28, 2006 +/s/ J OHN R. T HOMPSON , +J R . +John R. Thompson, Jr. +Director +July 28, 2006 +S-2 \ No newline at end of file diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/filing_metadata.csv b/raw/filings/0000320187/2005/0001193125-06-156152/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..ce7089ab58f0a52a026303c0e910f03561f3cee8 --- /dev/null +++ b/raw/filings/0000320187/2005/0001193125-06-156152/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2006-07-28,2006-05-31,2006-07-29T01:04:57.000Z,0001193125-06-156152,d10k.htm,FORM 10-K,1265560,0,0,https://www.sec.gov/Archives/edgar/data/320187/000119312506156152/d10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000119312506156152/,2005,2005,1 diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/item1.txt b/raw/filings/0000320187/2005/0001193125-06-156152/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c4f48b48de2a6c27667108bd4bfd4e2f6d4061fa --- /dev/null +++ b/raw/filings/0000320187/2005/0001193125-06-156152/item1.txt @@ -0,0 +1,267 @@ +Item 1. Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon. As used in this report, the +terms “we”, “us”, “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. Our Internet address is www.nike.com. On our +NIKE Corporate web site, located at www.nikebiz.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form +10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934. All such filings on our NIKE +Corporate web site are available free of charge. Also available on the NIKE Corporate web site are the charters of the committees of our board of directors, as well as our corporate governance guidelines and code of ethics; copies of any of these +documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic +apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores, and through a mix of independent distributors and licensees, in over 160 countries around the world. Virtually all of our products are manufactured by +independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a +large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovation in products designed for men, women and children. Running, cross-training, basketball, soccer, +sport-inspired urban shoes, and children’s shoes are currently our top-selling product categories and we expect them to continue to lead in product sales in the near future. We also market shoes designed for tennis, golf, baseball, football, +walking, hiking, outdoor activities, skateboarding, bicycling, volleyball, wrestling, cheerleading, aquatic activities and other athletic and recreational uses. +We sell sports apparel and accessories covering most of the above categories, sports inspired lifestyle apparel, as well as athletic bags and accessory items. NIKE apparel and accessories are designed to complement +our athletic footwear products, feature the same trademarks and are sold through the same marketing and distribution channels. We often market footwear, apparel and accessories in “collections” of similar design or for specific purposes. +We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the +NIKE brand name, including golf clubs and balls, sport balls, eyewear, timepieces, electronic devices, bats, gloves, protective equipment, and other equipment designed for sports activities. We also have agreements for licensees to produce and sell +NIKE brand swimwear, cycling apparel, children’s clothing, school supplies, electronic devices, eyewear, golf accessories, and belts. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned +subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary Converse Inc. (“Converse”), headquartered in North Andover, +Massachusetts, designs and distributes athletic and casual footwear, apparel and accessories under the Converse ® , Chuck Taylor ® , All Star ® , One +Star ® and Jack Purcell ® trademarks, and footwear under the Hurley ® trademark. +We sell a line of dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan ® , G Series ® and Bragano ® through our wholly-owned subsidiary, Cole Haan Holdings Incorporated (“Cole Haan”), headquartered in Yarmouth, Maine. +2 +Table of Contents +Our wholly-owned subsidiary Hurley International LLC (“Hurley”), headquartered in Costa Mesa, +California, designs and distributes a line of action sports apparel for surfing, skateboarding, and snowboarding, and youth lifestyle apparel, and accessories under the Hurley ® trademark. +Our wholly-owned subsidiary, NIKE Bauer Hockey Inc. (“NIKE Bauer Hockey”), headquartered in Greenland, New Hampshire, manufactures and distributes ice skates, skate blades, protective gear, hockey sticks, licensed apparel and +accessories under the NIKE Bauer ® , Bauer ® , and NIKE ® trademarks. NIKE Bauer ™ also offers a full selection of products for street and roller hockey. +Our wholly-owned subsidiary, Exeter Brands Group LLC (“Exeter Brands Group”), headquartered in New York City, New York, sells athletic footwear +and apparel in retail channels for value-conscious consumers, and markets and licenses athletic footwear and apparel under the Starter logo ® and Shaq ® brand names. +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 of the +consolidated financial statements on page 68. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, +revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for +particular types of footwear, apparel and equipment. +Because NIKE is a consumer products company, the relative popularity of various +sports and fitness activities and changing design trends affect the demand for our products. We must therefore respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles +and categories, and influencing sports and fitness preferences through aggressive marketing. This is a continuing risk. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. +United States Market +In fiscal 2006, sales in the United States (including U.S. sales of Cole Haan, Converse, +Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf) accounted for approximately 47 percent of total revenues, compared to 46 percent in fiscal 2005 and 47 percent in fiscal 2004. We sell to approximately 24,000 retail accounts in the +United States. The NIKE brand domestic retail account base includes a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts. During fiscal year 2006, our +three largest customers accounted for approximately 30 percent of NIKE brand sales in the United States excluding sales from NIKE Bauer Hockey and NIKE Golf, and 25 percent of total sales in the United States. +We make substantial use of our “futures” ordering program, which allows retailers to order five to six months in advance of delivery with the +commitment that 90 percent of their orders will be delivered within a set time period at a fixed price. In fiscal year 2006, 90 percent of our U.S. wholesale footwear shipments (excluding Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer +Hockey and NIKE Golf) were made under the futures program, compared to 91 percent in fiscal 2005 and 90 percent in fiscal 2004. In fiscal 2006, 69 percent of our U.S. wholesale apparel shipments (excluding U.S. licensed team apparel, Cole Haan, +Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf) were made under the futures program, compared to 71 percent in fiscal 2005, and 67 percent in fiscal 2004. +3 +Table of Contents +We utilize 20 NIKE sales offices to solicit sales in the United States. We also utilize 10 independent +sales representatives to sell specialty products for golf and outdoor activities. In addition, we sell NIKE brand products through our internet website, www.niketown.com , and we operate the following retail outlets in the United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily overstock and closeout merchandise) +87 +NIKE stores (including NIKE Women Stores) +14 +NIKETOWNs (designed to showcase NIKE products) +12 +NIKE employee-only stores +4 +Cole Haan stores (including factory and employee stores) +83 +Converse stores (including factory and employee stores) +9 +Hurley stores +3 +Total +212 +NIKE’s domestic distribution centers for footwear are located in Wilsonville, Oregon, and +Memphis, Tennessee. Apparel and equipment products are shipped from our Memphis, Tennessee, Tigard, Oregon, and Foothill Ranch, California distribution centers. Cole Haan and NIKE Bauer Hockey products are distributed primarily from Greenland, New +Hampshire, Converse products are shipped from Ontario and Fontana, California, and Hurley products are shipped from Irvine, California. +International Markets +We sell our products to retail accounts, through NIKE-owned retail stores, and through a +mix of independent distributors and licensees, in over 160 countries around the world. Non-U.S. sales (including non-U.S. sales of Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE Golf) accounted for 53 percent of total +revenues in fiscal 2006, compared to 54 percent in fiscal 2005 and 53 percent in fiscal 2004. We estimate that we sell to more than 27,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. We +operate 21 distribution centers in Europe, Asia, Australia, Africa and Canada. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United +States futures program described above. NIKE’s three largest customers outside of the U.S. accounted for approximately 11 percent of NIKE brand sales outside the United States excluding sales from NIKE Bauer Hockey and NIKE Golf, and +approximately 10 percent of total non-U.S. sales. +We operate the following retail outlets outside the United States: +Non-U.S. Retail Stores +Number +NIKE factory stores +106 +NIKE stores and employee-only stores +38 +NIKETOWNs +2 +Cole Haan stores (including factory and employee stores) +59 +Hurley stores +1 +Total +206 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, +Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Malaysia, Mexico, New Zealand, The +Netherlands, Norway, People’s Republic of China, The Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, Uruguay and Vietnam. +4 +Table of Contents +Significant Customer +Foot Locker Inc., which operates a chain of retail stores specializing in athletic +footwear and apparel, accounted for approximately 10 percent of global net sales of NIKE, Inc. during fiscal 2006. No other customer accounted for 10 percent or more of our net sales during fiscal 2006. +Orders +Worldwide futures and advance orders for NIKE brand athletic footwear and apparel, scheduled for +delivery from June through November 2006, were $6.6 billion compared to $6.3 billion for the same period last year. This futures and advance order amount is calculated based upon our forecast of the actual exchange rates under which our revenues +will be translated during this period, which approximate current spot rates. Based upon historical data, we expect that approximately 95 percent of these orders will be filled in that time period, although some orders may be cancelled. Reported +futures and advance orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, foreign currency exchange rate +fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between futures and advance orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures +and advance orders, including at-once and closeout sales of NIKE footwear and apparel, wholesale sales of equipment, U.S. licensed team apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey, NIKE Golf, and retail sales across +all brands. +Product Research and Development +We believe that our research and development efforts are a key factor in our +past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce products that help to reduce injury, enhance athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, exercise physiology, engineering, industrial design and +related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials and concepts for +product improvement. Employee athletes and other athletes wear-test and evaluate products during the design and development process. +Manufacturing +Virtually all of our footwear is produced outside of the United States. In fiscal 2006, contract +suppliers in China, Vietnam, Indonesia and Thailand manufactured 35 percent, 29 percent, 21 percent and 13 percent of total NIKE brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, +India, Italy, and South Africa to manufacture footwear for sale primarily within those countries. Our largest single footwear factory accounted for approximately 6 percent of total fiscal 2006 footwear production. +Almost all of NIKE brand apparel production for sale to the United States market, and all of our apparel production for sale to the international market, +was manufactured outside of the United States by independent contract manufacturers located in 40 countries. Most of this apparel production occurred in Bangladesh, China, Honduras, India, Indonesia, Malaysia, Mexico, Pakistan, Sri Lanka, Taiwan, +Thailand, Turkey and Vietnam. Our largest single apparel factory accounted for approximately 5 percent of total fiscal 2006 apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films used to make Air-Sole cushioning components. NIKE IHM, Inc. +and NIKE (Suzhou) Sports Company, Ltd., wholly-owned subsidiaries of NIKE, are our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and +threads, plastic and metal hardware, and specialized +5 +Table of Contents +performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture. NIKE and its contractors and suppliers buy raw materials in +bulk. Most raw materials are available in the countries where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”) and its predecessor, Nissho Iwai American Corporation, a subsidiary of Nissho Iwai +Corporation, a large Japanese trading company, have performed significant import-export financing services for us. During fiscal 2006, Sojitz America provided such financing services for most of the NIKE brand products sold outside of the United +States, Europe, Middle East, Africa and Japan, excluding products produced and sold in the same country. However, less than 13 percent of NIKE brand products, excluding products produced and sold in the same country, were sold outside of the United +States, Europe, Middle East, Africa and Japan in fiscal 2006. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver +products to our customers outside of the United States, Europe, Middle East, Africa and Japan. Such a disruption could result in cancelled orders that would adversely affect sales and profitability. However, we believe that any such disruption would +be short term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2008. +International Operations and Trade +Our international operations and sources of supply are subject to the usual +risks of doing business abroad, such as possible revaluation of currencies, export duties, anti-dumping duties, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political +instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring. We believe that we have the ability to develop, over a period of time, adequate alternative +sources of supply for the products obtained from our present suppliers outside of the United States. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we +could experience an adverse financial impact. However, we believe that we could abate any such disruption within a period of no more than 12 months, and that much of the adverse impact on supply would, therefore, be of a short-term nature. We +believe that our principal competitors are subject to similar risks. +As a result of the Trade Act of 2003, the United States implemented +significant new Federal requirements for cargo security, focused on imports of containerized cargo. We are a significant importer of containerized cargo. Accordingly, we participate actively in appropriate governmental programs, such as the Customs +Trade Partnership Against Terrorism, to reduce risks of possible supply disruptions caused by U.S. and international cargo security mandates and terrorism. Additionally in 2006, we and a broad coalition of businesses have been actively working with +the United States Congress as it considers legislation to make U.S. ports more secure. We are actively following this proposed legislation and believe that any legislation, if passed, will not have a significant impact on our supply chain. We +believe that our major competitors stand in much the same position of risk regarding this potential legislation. +All of our products +manufactured overseas and imported into the United States, the European Union and other countries are subject to customs duties collected by customs authorities. Customs information submitted by us is routinely subject to review by customs +authorities. We are unable to predict whether additional customs duties, anti-dumping duties, quotas, safeguard measures, or other trade restrictions may be imposed on the importation of our products in the future. Such actions could result in +increases in the cost of our products generally and might adversely affect the sales or profitability of NIKE and the imported footwear and apparel industry as a whole. Accordingly, we are actively monitoring the developments described below. +Footwear Imports into the European Union +From 1994 through January 1, 2005, the European Union (“EU”) imposed limits (or “quotas”) on the import of certain types of footwear manufactured in China. Footwear designed for use in +sporting activities, meeting +6 +Table of Contents +certain technical criteria and having a CIF (cost, insurance and freight) price above nine euros (“Special Technology Athletic Footwear” or +“STAF”), was excluded from the quotas. As a result of the STAF exclusion, and the amount of quota made available to us, the quotas did not have a material effect on our business. However, as part of China’s 2001 accession to the World +Trade Organization (“WTO”), China entered into an agreement with the EU and other WTO members to abide by a special safeguard arrangement whereby quotas could be imposed on any product sourced in China, including footwear, if there was a +surge in imports from China into another WTO country, and after a legal proceeding it was determined that such imports were injuring a domestic producer. Additionally, under longstanding WTO rules, all WTO member countries reserved the right to +impose (1) safeguard measures (temporary quotas) if it can be demonstrated in a legal proceeding that increased imports are injuring another WTO member’s domestic industry; and (2) anti-dumping measures if it can be demonstrated in a +legal proceeding that imports are being sold at an unfair low price in another WTO member’s home market, and those imports were causing or threatening to cause material injury to the domestic industry. +Accordingly, with the phase-out of the quotas at the beginning of 2005, and the expiration of a separate EU anti-dumping case in 2003 against footwear +made in China, Indonesia, and Thailand, there has been renewed pressure from some parts of the EU footwear manufacturing sector to re-impose some level of trade protection on imported footwear from China, India, Vietnam, and other exporting +countries. In July 2005, the European Commission, at the request of the European domestic footwear industry, initiated investigations into leather footwear imported from China and Vietnam. NIKE and all other major athletic footwear manufacturers are +currently participating actively as respondents in this investigation and are taking the position that athletic footwear (i) should not be within the product scope of this investigation and (ii) does not meet the legal requirements of +injury and price in an anti-dumping investigation. The EU agreed on provisional anti-dumping duties in March 2006 but excluded STAF from the measures. We anticipate that the definitive anti-dumping duties will be adopted by early October 2006 and we +expect STAF to be excluded from the final measures. We believe that our major competitors stand in much the same position regarding these potential trade measures. +Vietnam Imports into the United States +We currently source a portion of our footwear and apparel +products from factories in Vietnam. In 2001, the United States Congress and the Vietnamese National Assembly approved a comprehensive bilateral trade agreement, which, among other things, provides reciprocal, non-discriminatory Normal Trade +Relations (“NTR”) between the U.S. and Vietnam. Following that approval, the U.S. granted an annual extension of NTR to Vietnam. The U.S. President must renew this grant annually with the opportunity for review by Congress. In June 2006, +President Bush renewed NTR for Vietnam for an additional year and we anticipate Congress will support this decision, as it has done for the past five years. Additionally, in the spring of 2006 Vietnam finished its WTO accession negotiations with +several WTO countries and has embarked on entering the WTO as a full member. Legislation has been introduced within Congress to provide Vietnam Permanent Normal Trade Relations (“PNTR”) and we anticipate Congressional approval of this +legislation in 2006. Vietnam’s entry into the WTO and the U.S. providing Vietnam PNTR will provide us greater certainty about our business within Vietnam. It will likewise enable us to further expand our production and marketing opportunities +in Vietnam and allow for Vietnamese-sourced products to continue to enter the United States at NTR tariff rates. +Competition +The athletic footwear, apparel and equipment industry is keenly competitive in the United States +and on a worldwide basis. We compete internationally with an increasing number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and +leisure shoes, apparel and equipment, including Adidas and others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute +significant risk factors in our operations. +7 +Table of Contents +NIKE is the largest seller of athletic footwear and athletic apparel in the world. Performance and +reliability of shoes, apparel, and equipment, new product development, price, product identity through marketing and promotion, and customer support and service are important aspects of competition in the athletic footwear, apparel and equipment +industry. To help market our products, we contract with prominent and influential athletes, coaches, teams, colleges and sports leagues to endorse our brands and use our products, and we actively sponsor sporting events and clinics. We believe that +we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe that having distinctive +marks that are readily identifiable is an important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We consider our NIKE ® and Swoosh Design ® trademarks to be among our most valuable assets and we have registered these trademarks in over 100 countries. In +addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR ® patents have expired, which may enable competitors to +use certain types of similar technology. Subsequent NIKE AIR ® patents will not expire for several years. We also have hundreds of U.S. and foreign patents covering components, features, and designs used in various athletic and leisure shoes, apparel and equipment. These patents +expire at various times, and have a remaining duration of from now to at least 2026, although the duration of patents varies by country. We believe that our success depends primarily upon skills in design, research and development, production and +marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on inventions, designs and improvements that we deem valuable. +Employees +We had approximately 28,000 employees at May 31, 2006. Management considers its relationship +with employees to be excellent. None of our employees is represented by a union, with the exception of NIKE Bauer Hockey Inc. Of NIKE Bauer Hockey’s employees, approximately 37 percent, or approximately 183, are covered by three union +collective bargaining agreements with three separate bargaining units. The collective bargaining agreements expire on various dates from 2007 through 2008. There has never been a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE as of July 25, 2006 are as follows: +Philip H. Knight, Chairman of the Board — Mr. Knight, 68, a director since 1968, is a co-founder of NIKE and, except for +the period from June 1983 through September 1984, served as its President from 1968 to 1990, and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand +and was an Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, Chief Executive Officer and +President — Mr. Parker, 50, was appointed CEO and President in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management. +Mr. Parker was appointed divisional Vice President in charge of development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in 2001. +Lewis L. Bird III, President, Subsidiaries — Mr. Bird, 42, joined NIKE as President, Subsidiaries in July 2006. Prior to joining NIKE, +he held a number of management positions within multinational companies with +8 +Table of Contents +diverse brand portfolios. He was Executive Vice President of New Business Development for Gap Inc. from September 2005 to March 2006. Prior to that, +Mr. Bird served as Chief Operating Officer of Gap Inc.’s North American division from March 2003 to September 2005, Chief Financial Officer of Gap Inc.’s Old Navy division from 2001 to 2003, Vice President Finance & +Operations of Gateway, Inc. from 1999 to 2001, Director of business Analysis & Planning at AlliedSignal Inc. from 1998 to 1999, and prior to that held financial management positions with AlliedSignal, Ford Motor Company and BayBanks, Inc. +Donald W. Blair, Vice President and Chief Financial Officer — Mr. Blair, 48, joined NIKE in November 1999. Prior to +joining NIKE, he held a number of financial management positions with Pepsico, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi +Bottling Group, Inc. Prior to joining Pepsico, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Mary +Kate Buckley, Vice President/General Manager, Americas and NIKE Bauer Hockey — Ms. Buckley, 46, has been employed by NIKE since 1998. She was appointed Director of New Business Development in 1998, Director of nike.com in 1998, +divisional Vice President of nike.com in 1999, and divisional Vice President and General Manger, Americas Region in 2001. Ms. Buckley was appointed corporate Vice President and General Manager, Americas and NIKE Bauer Hockey in July 2006. Prior +to joining NIKE, Ms. Buckley worked in several positions in finance, marketing and strategic planning for The Walt Disney Company. +Thomas E. Clarke, President of New Ventures — Dr. Clarke, 55, a director from 1994 to 2004, joined NIKE in 1980. He was appointed divisional Vice President in charge of marketing in 1987, elected corporate Vice President in +1989, appointed General Manager in 1990, and served as President and Chief Operating Officer from 1994 to 2000. Dr. Clarke previously held various positions with the Company, primarily in research, design, development and marketing. +Dr. Clarke holds a doctorate degree in biomechanics. +Wesley A. Coleman, Vice President, Global Human Resources — +Mr. Coleman, 56, has been employed by NIKE since 2002 in his current role. Prior to joining NIKE, he held a number of Human Resource positions over a 20-year period with S. C. Johnson & Son, Inc., including Vice President HR, North +America and Vice President HR, Asia/Pacific. +Charles D. Denson, President of the NIKE Brand — Mr. Denson, 50, has been +employed by NIKE since 1979. Mr. Denson held several management positions within the Company, including his appointments as Director of USA Apparel Sales in 1994, divisional Vice President, U.S. Sales in 1994, divisional Vice President European +Sales in 1997, divisional Vice President and General Manager, NIKE Europe in 1998, Vice President and General Manager of NIKE USA in 2000, and President of the NIKE Brand in 2001. +Gary M. DeStefano, President of USA Operations — Mr. DeStefano, 49, has been employed by NIKE since 1982, with primary responsibilities +in sales and regional administration. Mr. DeStefano was appointed Director of Domestic Sales in 1990, divisional Vice President in charge of domestic sales in 1992, Vice President of Global Sales in 1996, Vice President and General Manager of +Asia Pacific in 1997, and President of USA Operations in 2001. +Trevor Edwards, Vice President, Global Brand Management — +Mr. Edwards, 43, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts, Foot Locker in 1993, Director of Marketing, the Americas in 1995, Director of Marketing, Europe in 1997, Vice President, Marketing for Europe, Middle +East and Africa in 1999, and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002. +Adam S. Helfant, Vice President, Global Sports Marketing — Mr. Helfant, 41, joined NIKE in 1995 in the Company’s legal department, and was appointed Director of Business Affairs for Global Sports +Marketing in 1997, Director of Global Sports Marketing in 1998, Director of U.S. Sports Marketing in 2001, Vice President of U.S. Sports Marketing in 2003, and corporate Vice President, Global Sports Marketing in August 2004. Prior to joining NIKE, +he was in private practice and an attorney for NHL Enterprises, Inc. +9 +Table of Contents +P. Eunan McLaughlin, Vice President, Europe, Middle East & Africa — +Mr. McLaughlin, 48, joined NIKE as Director of Sales, NIKE Europe in 1999, and was appointed Vice President Commercial Sales and Retail in 2000, Vice President, Asia Pacific in 2001, and Vice President, Europe, Middle East & Africa in +May 2004. Prior to joining NIKE, he was Partner and Vice President of Consumer & Retail Practices Division, Korn/Ferry International from 1996 to 1999. From 1983 to 1996 Mr. McLaughlin held various positions with Mars, Inc. in finance, +sales, marketing and general management. +Eric D. Sprunk, Vice President, Global Footwear — Mr. Sprunk, 42, joined NIKE in +1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director, NIKE Europe in 1995, Regional General Manager, NIKE Europe Footwear in 1998, and Vice President & General Manager of the Americas in +2000. Mr. Sprunk was appointed corporate Vice President, Global Footwear in 2001. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +Lindsay D. Stewart, Vice President and Chief of Staff — Mr. Stewart, 59, joined NIKE as Assistant Corporate Counsel in 1981. +Mr. Stewart became Corporate Counsel in 1983. He was appointed Vice President and General Counsel in 1991, and Chief of Staff in 2001. Prior to joining NIKE, Mr. Stewart was in private practice and an attorney for Georgia-Pacific +Corporation. +Hans van Alebeek, Vice President, Global Operations & Technology — Mr. van Alebeek, 40, joined NIKE +as Director of Operations of Europe in 1999, and was appointed Vice President, Operations & Administration in EMEA in 2001, Vice President, Global Operations in 2003, Vice President, Global Operations & Technology in 2004, and +Corporate Vice President in November 2005. Prior to joining NIKE, Mr. van Alebeek worked for McKinsey & Company as a management consultant, and at N.V. Indivers in business development. +Roland P. Wolfram, Vice President and General Manager, Asia Pacific — Mr. Wolfram, 46, joined NIKE as Vice President, Strategic Planning +in 1998, and was appointed Vice President, Global Operations & Technology in 2002, and Corporate Vice President, Asia Pacific in April 2004. Prior to NIKE, Mr. Wolfram was Vice President and General Manager at Pacific Bell Video +Services. +Roger S. Wyett, Vice President, Global Apparel — Mr. Wyett, 49, returned to NIKE in April 2005 as President and +Chief Operating Officer of the Company’s Hurley brand and was appointed Vice President, Global Apparel in 2006. Mr. Wyett first joined NIKE in 1994, holding a number of management positions in soccer and NIKE Team Sports. In 2000, +Mr. Wyett joined The Walt Disney Company where he was Senior Vice President for Global Apparel, Accessories and Footwear, and later promoted to Executive Vice President for Global Sales and Marketing for Consumer Products. \ No newline at end of file diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/item13.txt b/raw/filings/0000320187/2005/0001193125-06-156152/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..a3d67e0d4f016fd6931ac51f74ebbfaf271181a2 --- /dev/null +++ b/raw/filings/0000320187/2005/0001193125-06-156152/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related Transactions +The +information required by this Item is included under “Certain Transactions and Business Relationships” in the definitive Proxy Statement for our 2006 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/item9a.txt b/raw/filings/0000320187/2005/0001193125-06-156152/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..35515792b1d4cf971e1ea5f04d31472dce5d63d6 --- /dev/null +++ b/raw/filings/0000320187/2005/0001193125-06-156152/item9a.txt @@ -0,0 +1,13 @@ +Item 9A. Controls and Procedures +We maintain disclosure +controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange +Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required +disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control +objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of on-going procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation +of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, +2006. +“Management’s Report on Internal Control Over Financial Reporting” and the related attestation report of +PricewaterhouseCoopers LLP are included in Item 8 on pages 43-45 of this Report. +There has been no change in our internal control +over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/rp_note.txt b/raw/filings/0000320187/2005/0001193125-06-156152/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2005/0001193125-06-156152/rpt_disclosure.txt b/raw/filings/0000320187/2005/0001193125-06-156152/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2007/0001193125-08-159004/filing_metadata.csv b/raw/filings/0000320187/2007/0001193125-08-159004/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b00a14d96e2c144054b13590bf92bde8c69a6239 --- /dev/null +++ b/raw/filings/0000320187/2007/0001193125-08-159004/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2008-07-28,2008-05-31,2008-07-29T00:08:06.000Z,0001193125-08-159004,d10k.htm,FORM 10-K,1502118,0,0,https://www.sec.gov/Archives/edgar/data/320187/000119312508159004/d10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000119312508159004/,2007,2007,1 diff --git a/raw/filings/0000320187/2007/0001193125-08-159004/item1.txt b/raw/filings/0000320187/2007/0001193125-08-159004/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..53ec1b158ae72afcb974d0c021fc0104ef7a8627 --- /dev/null +++ b/raw/filings/0000320187/2007/0001193125-08-159004/item1.txt @@ -0,0 +1,259 @@ +Item 1. Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon. As used in this +report, the terms “we”, “us”, “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. Our Internet address is +www.nike.com. On our NIKE Corporate web site, located at www.nikebiz.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: +our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as +amended. All such filings on our NIKE Corporate web site are available free of charge. Also available on the NIKE Corporate web site are the charters of the committees of our board of directors, as well as our corporate governance guidelines and +code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. +NIKE is the largest seller of athletic footwear and athletic apparel in the world. We sell our products to retail accounts, through NIKE-owned retail including stores and internet sales, and through a mix of independent distributors and licensees, +in over 180 countries around the world. Virtually all of our products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the +United States and abroad. +Products +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high +quality construction and innovation in products designed for men, women and children. Running, training, basketball, soccer, sport-inspired urban shoes, and children’s shoes are currently our top-selling footwear categories and we expect them +to continue to lead in product sales in the near future. We also market shoes designed for aquatic activities, baseball, bicycling, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, +and other athletic and recreational uses. +We sell sports apparel and accessories covering most of the above categories, sports-inspired +lifestyle apparel, as well as athletic bags and accessory items. NIKE apparel and accessories are designed to complement our athletic footwear products, feature the same trademarks and are sold through the same marketing and distribution channels. +We often market footwear, apparel and accessories in “collections” of similar design or for specific purposes. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the NIKE brand name, including bags, socks, sport balls, eyewear, timepieces, electronic devices, bats, +gloves, protective equipment, golf clubs, and other equipment designed for sports activities. We also have agreements for licensees to produce and sell NIKE brand swimwear, team sports apparel, training equipment, children’s clothing, +electronic devices, eyewear, golf accessories, and belts. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary, Cole Haan (“Cole Haan”), headquartered in Yarmouth, Maine, +designs and distributes dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan ® and Bragano ® . +2 +Table of Contents +Our wholly-owned subsidiary, Converse Inc. +(“Converse”), headquartered in North Andover, Massachusetts, designs, distributes, and licenses athletic and casual footwear, apparel and accessories under the Converse ® , Chuck +Taylor ® , All Star ® , One Star ® , John Varvatos ® , and Jack Purcell ® trademarks and footwear under the Hurley ® trademark. +Our wholly-owned subsidiary, Hurley International LLC (“Hurley”), +headquartered in Costa Mesa, California, designs and distributes a line of action sports apparel for surfing, skateboarding, and snowboarding, youth lifestyle apparel, and accessories under the Hurley ® trademark. +On March 3, 2008, we acquired all of the capital stock of Umbro Ltd. (“Umbro”). +Headquartered in Manchester, England. Umbro designs, distributes, and licenses athletic and casual footwear, apparel and equipment, primarily for the sport of soccer, under the Umbro trademarks. +Sales and Marketing +Financial information about geographic and segment operations appears in Note 17 of the consolidated financial statements on page 75. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales +may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must therefore respond to trends and +shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories, and influencing sports and fitness preferences through aggressive marketing. Failure to respond in a timely and +adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. +United States +Market +In fiscal 2008, sales in the United States including U.S. sales of Cole Haan, Converse, Exeter Brands Group (which we sold +in December, 2007), Hurley, Umbro, NIKE Bauer Hockey (which we sold in April, 2008) and NIKE Golf accounted for approximately 43 percent of total revenues, compared to 47 percent in fiscal 2007 and 47 percent in fiscal 2006. We estimate that we sell +to more than 25,000 retail accounts in the United States. The NIKE brand domestic retail account base includes a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other +retail accounts. During fiscal year 2008, our three largest customers accounted for approximately 24 percent of NIKE brand sales in the United States. +We make substantial use of our “futures” ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set +time period at a fixed price. In fiscal year 2008, 86 percent of our U.S. wholesale footwear shipments (excluding Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Golf, Umbro, and NIKE Bauer Hockey) were made under the futures program, +compared to 94 percent in fiscal 2007 and 90 percent in fiscal 2006. In fiscal 2008, 62 percent of our U.S. wholesale apparel shipments (excluding Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Golf, Umbro, and NIKE Bauer Hockey) were made +under the futures program, compared to 65 percent in fiscal 2007 and 2006. +3 +Table of Contents +We utilize 18 NIKE sales offices to solicit sales in the United States. We also utilize 4 independent +sales representatives to sell specialty products for golf, and 2 for skating and outdoor products. In addition, we sell NIKE brand products through our internet website, www.nikestore.com , and we operate the following retail outlets in the +United States: +U.S. Retail Stores +Number +NIKE factory stores (which carry primarily overstock and close-out merchandise) +121 +NIKE stores (including one NIKE Women store) +14 +NIKETOWNs (designed to showcase NIKE products) +12 +NIKE employee-only stores +3 +Cole Haan stores (including factory and employee stores) +102 +Converse stores (including factory and employee stores) +35 +Hurley stores +9 +Total +296 +NIKE’s United States distribution centers for footwear are located in Wilsonville, Oregon, +and Memphis, Tennessee. Apparel and equipment products are shipped from our Memphis, Tennessee, Tigard, Oregon, and Foothill Ranch, California distribution centers. Cole Haan products are distributed primarily from Greenland, New Hampshire, Converse +products are shipped from Ontario, California, and Hurley products are distributed from Irvine, California. +International +Markets +In fiscal 2008, non-U.S. sales (including non-U.S. sales of Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer +Hockey, Umbro, and NIKE Golf) accounted for 57 percent of total revenues, compared to 53 percent in fiscal 2007 and 53 percent in fiscal 2006. We sell our products to retail accounts, through NIKE-owned retail stores, and through a mix of +independent distributors and licensees around the world. We estimate that we sell to more than 27,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. We operate 11 distribution centers outside of +the United States. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United States futures program described above. NIKE’s three +largest customers outside of the U.S. accounted for approximately 9 percent of total non-U.S. sales. +We operate the following retail +outlets outside the United States: +Non-U.S. Retail Stores +Number +NIKE factory stores +141 +NIKE stores +46 +NIKETOWNs +3 +NIKE employee-only stores +12 +Cole Haan stores +57 +Hurley stores +1 +Total +260 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, +Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Macau, Malaysia, Mexico, +New Zealand, the Netherlands, Norway, People’s Republic of China, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab +Emirates, the United Kingdom, Uruguay and Vietnam. +4 +Table of Contents +Significant Customer +No customer accounted for 10 percent or more of our net sales during fiscal 2008. +Orders +Worldwide futures and advance orders for NIKE brand athletic footwear +and apparel, scheduled for delivery from June through November 2008, were $8.8 billion compared to $7.7 billion for the same period last year. This futures and advance order amount is calculated based upon our forecast of the actual exchange rates +under which our revenues will be translated during this period, which approximate current spot rates. Based upon historical data, we expect that approximately 95 percent of these orders will be filled in that time period, although some orders may be +cancelled. Reported futures and advance orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, foreign currency +exchange rate fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between futures and advance orders and actual revenues. Moreover, a significant portion of our revenue is not +derived from futures and advance orders, including at-once and close-out sales of NIKE footwear and apparel, wholesale sales of equipment, Cole Haan, Converse, Hurley, Umbro, NIKE Golf, and retail sales across all brands. +Product Research and Development +We believe that our research and development efforts are a key factor in our past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce +products that help to reduce injury, enhance athletic performance and maximize comfort. +In addition to NIKE’s own staff of +specialists in the areas of biomechanics, exercise physiology, engineering, industrial design and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, +podiatrists and other experts who consult with us and review designs, materials and concepts for product improvement. Employee athletes and other athletes wear-test and evaluate products during the design and development process. +Manufacturing +Virtually all +of our footwear is produced outside of the United States. In fiscal 2008, contract suppliers in China, Vietnam, Indonesia and Thailand manufactured 36 percent, 33 percent, 21 percent and 9 percent of total NIKE brand footwear, respectively. We also +have manufacturing agreements with independent factories in Argentina, Brazil, India, Italy, and South Africa to manufacture footwear for sale primarily within those countries. Our largest single footwear factory accounted for approximately 6 +percent of total fiscal 2008 footwear production. +Almost all of NIKE brand apparel production was manufactured outside of the United +States by independent contract manufacturers located in 34 countries. Most of this apparel production occurred in China, Thailand, Indonesia, Malaysia, Vietnam, Turkey, Sri Lanka, Honduras, Mexico, Taiwan, Israel, Cambodia, India and Bangladesh. Our +largest single apparel factory accounted for approximately 8 percent of total fiscal 2008 apparel production. +The principal materials used +in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films used to make Air-Sole cushioning components. NIKE IHM, Inc., and NIKE (Suzhou) Sports Company, +Ltd., both wholly-owned subsidiaries of NIKE, and independent contractors in China and Taiwan, are our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and +synthetic +5 +Table of Contents +fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body +moisture. NIKE’s contractors and suppliers buy raw materials in bulk. Most raw materials are available in the countries where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company, has performed significant +import-export financing services for us. During fiscal 2008, Sojitz America provided financing and purchasing services for NIKE Brand products sold in Argentina, Uruguay, Canada, Chile, Brazil, India, Indonesia, The Philippines, Malaysia, South +Africa, China, Korea, and Thailand excluding products produced and sold in the same country. Approximately 14 percent of NIKE brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz +America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers outside of the United States, Europe, Middle East, Africa and Japan. Such a disruption could result in cancelled orders +that would adversely affect sales and profitability. However, we believe that any such disruption would be short term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with +Sojitz America expire in 2011. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, +export duties, anti-dumping duties, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any +such risk, but cannot predict the likelihood of such developments occurring. We believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers outside +of the United States. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe that we could +abate any such disruption within a period of no more than 12 months, and that much of the adverse impact on supply would, therefore, be of a short-term nature. We believe that our principal competitors are subject to similar risks. +All of our products manufactured overseas and imported into the United States, the European Union (“EU”) and other countries are subject to +customs duties collected by customs authorities. Customs information submitted by us is routinely subject to review by customs authorities. We are unable to predict whether additional customs duties, anti-dumping duties, quotas, safeguard measures, +or other trade restrictions may be imposed on the importation of our products in the future. Such actions could result in increases in the cost of our products generally which might adversely affect the sales or profitability of NIKE and the +imported footwear and apparel industry as a whole. Accordingly, we are actively monitoring the developments described below. +Footwear +Imports into the European Union +From 1994 through January 1, 2005, the EU imposed limits (or “quotas”) on the import of +certain types of footwear manufactured in China. Footwear designed for use in sporting activities, meeting certain technical criteria and having a CIF (cost, insurance and freight) price above nine euros (“Special Technology Athletic +Footwear” or “STAF”), was excluded from the quotas. As a result of the STAF exclusion, and the amount of quota made available to us, the quotas did not have a material effect on our business. However, as part of China’s 2001 +accession to the World Trade Organization (“WTO”), China entered into an agreement with the EU and other WTO members to abide by a special safeguard arrangement whereby quotas could be imposed on any product sourced in China, including +footwear, if there was a surge in imports from China into another WTO country, and after a legal proceeding it was determined that such imports were injuring a domestic producer. Additionally, under longstanding WTO rules, all WTO member countries +reserved the right to impose (1) safeguard measures (temporary quotas) if it can be demonstrated in a legal proceeding that increased imports +6 +Table of Contents +are injuring another WTO member’s domestic industry; and (2) anti-dumping measures if it can be demonstrated in a legal proceeding that imports are +being sold at an unfair low price in another WTO member’s home market, and those imports were causing or threatening to cause material injury to the domestic industry. +Accordingly, with the phase-out of the quotas at the beginning of 2005, and the expiration of a separate EU anti-dumping case in 2003 against footwear +made in China, Indonesia, and Thailand, there has been renewed pressure from some parts of the EU footwear manufacturing sector to re-impose some level of trade protection on imported footwear from China, India, Vietnam, and other exporting +countries. In July 2005, the European Commission (“EC”), at the request of the European domestic footwear industry, initiated investigations into leather footwear imported from China and Vietnam. NIKE and all other major athletic footwear +manufacturers participated actively as respondents in this investigation and took the position that athletic footwear (i) should not be within the product scope of the investigation, and (ii) does not meet the legal requirements of injury +and price in an anti-dumping investigation. Our arguments were successful and the EU agreed in October 2006 on definitive duties of 16.5% for China and 10% for Vietnam, but excluded STAF from the measures, and also agreed to implement the duties for +two years rather than the normal five-year period. As a result, these measures did not significantly impact our business and we believe that our major competitors stand in much the same position regarding these trade measures. +We understand that since the anti-dumping duties on non-STAF leather footwear imposed in 2006 will expire on October 8, 2008 the EU domestic +footwear industry has requested that the EC initiate a review of those measures. The EC will scrutinize the request closely, and make a decision by early October 2008 whether to initiate a review, and if so, the scope of that review. If the EC +conducts a review, the current definitive anti-dumping duties will remain in force for an additional 15 months until the conclusion of the review in late 2009 or early 2010. It is also possible that the EC could initiate a so-called +“interim” review of the anti-dumping measures, in which case the EC may review the scope of the STAF exemption and the level of the duties, among other things. +Trade Relations with China +China represents an important sourcing and marketing country for us. Many +governments around the world are concerned about China’s growing and fast-paced economy, compliance with WTO rules, currency valuation, and high trade deficits. As a result there is a wide range of legislative proposals that have been +introduced to address these concerns. While some of these concerns are justified, we are working with broad coalitions of global businesses and trade associations representing a wide variety of sectors (e.g. services, manufacturing, agriculture) to +help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) is reflective and considerate of China’s domestic economy and +important role in the global economic community. We believe that our major competitors as well as most other multi-national companies stand in much the same position regarding these trade measures. +Competition +The athletic +footwear, apparel and equipment industry is keenly competitive in the United States and on a worldwide basis. We compete internationally with an increasing number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports +equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel and equipment, including Adidas, Puma, and others. The intense competition and the rapid changes in technology and consumer preferences in the +markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE +is the largest seller of athletic footwear and athletic apparel in the world. Performance and reliability of shoes, apparel, and equipment, new product development, price, product identity through marketing and promotion, and customer support and +service are important aspects of competition in the athletic footwear, apparel and equipment industry. To help market our products, we contract with prominent and influential athletes, coaches, teams, colleges and sports leagues to endorse our +brands and use our products, and we actively sponsor sporting events and clinics. We believe that we are competitive in all of these areas. +7 +Table of Contents +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe that having distinctive marks that +are readily identifiable is an important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We consider our NIKE ® and Swoosh Design ® trademarks to be among our most valuable assets and we have registered these trademarks in over 100 countries. In addition, we own many +other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” +technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR ® patents have expired, which may enable competitors to use certain types of similar +technology. Subsequent NIKE AIR ® patents will not expire for several years. We also have hundreds of U.S. and foreign utility patents, and thousands of U.S. and foreign design patents +covering components and features used in various athletic and leisure shoes, apparel, and equipment. These patents expire at various times, and patents issued for applications filed this year will have a remaining duration of from now to 2022 for +design patents, and from now to 2028 for utility patents. We believe that our success depends primarily upon skills in design, research and development, production and marketing rather than upon our patent position. However, we have followed a +policy of filing applications for United States and foreign patents on inventions, designs and improvements that we deem valuable. +Employees +We had approximately 32,500 employees at May 31, 2008. Management considers its relationship with employees to be +excellent. None of our employees is represented by a union, with the exception of 23 employees in Mexico, the collective bargaining agreement for which expires in 2009. Also, in some countries outside of the United States, local laws require +representation for employees by works councils (such as in the EU, in which they are entitled to information and consultation on certain Company decisions) or other representation by an organization similar to a union, although collective bargaining +agreements are not involved. There has never been a material interruption of operations due to labor disagreements. +Executive +Officers of the Registrant +The executive officers of NIKE as of July 25, 2008 are as follows: +Philip H. Knight, Chairman of the Board — Mr. Knight, 70, a director since 1968, is a co-founder of NIKE and, except for the period from +June 1983 through September 1984, served as its President from 1968 to 1990, and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an +Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, Chief Executive Officer and President +— Mr. Parker, 52, was appointed CEO and President in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management. Mr. Parker was +appointed divisional Vice President in charge of development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in 2001. +David J. Ayre, Vice President, Global Human Resources — Mr. Ayre, 48, joined NIKE as Vice President, Global Human Resources in July +2007. Prior to joining NIKE, he held a number of senior human resource positions with Pepsico, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Lewis L. Bird III, President, Affliates — Mr. Bird, 44, joined NIKE in July 2006 as President, Affiliates, which currently includes the businesses of Cole Haan, Converse, Hurley, and Umbro. Prior to +joining NIKE, he held a number of management positions within multinational companies with diverse brand portfolios. He was +8 +Table of Contents +Executive Vice President of New Business Development for Gap Inc. from September 2005 to March 2006. Prior to that, Mr. Bird served as Chief Operating +Officer of Gap Inc.’s North American division from March 2003 to September 2005, Chief Financial Officer of Gap Inc.’s Old Navy division from 2001 to 2003, Vice President Finance & Operations of Gateway, Inc. from 1999 to +2001, Director of Business Analysis & Planning at AlliedSignal Inc. from 1998 to 1999, and prior to that held financial management positions with AlliedSignal, Ford Motor Company and BayBanks, Inc. +Donald W. Blair, Vice President and Chief Financial Officer — Mr. Blair, 50, joined NIKE in November 1999. Prior to joining NIKE, he +held a number of financial management positions with Pepsico, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi Bottling Group, +Inc. Prior to joining Pepsico, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Charles D. Denson, +President of the NIKE Brand — Mr. Denson, 52, has been employed by NIKE since 1979. Mr. Denson held several management positions within the Company, including his appointments as Director of USA Apparel Sales in 1994, divisional +Vice President, U.S. Sales in 1994, divisional Vice President European Sales in 1997, divisional Vice President and General Manager, NIKE Europe in 1998, Vice President and General Manager of NIKE USA in 2000, and President of the NIKE Brand in +2001. +Gary M. DeStefano, President of Global Operations — Mr. DeStefano, 51, has been employed by NIKE since 1982, with +primary responsibilities in sales and regional administration. Mr. DeStefano was appointed Director of Domestic Sales in 1990, divisional Vice President in charge of domestic sales in 1992, Vice President of Global Sales in 1996, Vice President +and General Manager of Asia Pacific in 1997, President of USA Operations in 2001 and President of Global Operations in 2006. +Trevor +Edwards, Vice President, Global Brand and Category Management — Mr. Edwards, 45, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts, Foot Locker in 1993, Director of Marketing, the Americas in 1995, Director of +Marketing, Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999, and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002 and Vice +President, Global Brand and Category Management in 2006. +Ronald D. McCray, Vice President, Chief Administrative Officer — +Mr. McCray, 51, joined NIKE as Vice President, Chief Administrative Officer in August 2007. Prior to joining NIKE, he held a number of positions at Kimberly-Clark Corporation since 1987, most recently as Senior Vice President, Law and +Government Affairs and Chief Compliance Officer. Mr. McCray is a member of the Council of Foreign Relations. +Bernard F. +Pliska, Vice President, Corporate Controller — Mr. Pliska, 46, joined NIKE as Corporate Controller in 1995. He was appointed Vice President, Corporate Controller in 2003. Prior to NIKE, Mr. Pliska was with Price Waterhouse from +1984 to 1995. Mr. Pliska is a certified public accountant. +John F. Slusher, Vice President, Global Sports Marketing — +Mr. Slusher, 39, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas regions in 2006, divisional Vice +President, Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers +from 1995 to 1998. +Eric D. Sprunk, Vice President, Global Footwear — Mr. Sprunk, 44, joined NIKE in 1993. He was +appointed Finance Director and General Manager of the Americas in 1994, Finance Director, NIKE Europe in 1995, Regional General Manager, NIKE Europe Footwear in 1998, and Vice President & General Manager of the Americas in 2000. +Mr. Sprunk was appointed corporate Vice President, Global Footwear in 2001. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +9 +Table of Contents +Hans van Alebeek, Vice President, Global Operations & Technology — Mr. van +Alebeek, 42, joined NIKE as Director of Operations of Europe in 1999, and was appointed Vice President, Operations & Administration in EMEA in 2001, Vice President, Global Operations in 2003, Vice President, Global Operations & +Technology in 2004, and Corporate Vice President in November 2005. Prior to joining NIKE, Mr. van Alebeek worked for McKinsey & Company as a management consultant, and at N.V. Indivers in business development. \ No newline at end of file diff --git a/raw/filings/0000320187/2007/0001193125-08-159004/item13.txt b/raw/filings/0000320187/2007/0001193125-08-159004/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..7fe23cd2e12b92dbf232d32bf09f2639a8d2e7dd --- /dev/null +++ b/raw/filings/0000320187/2007/0001193125-08-159004/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence +The information required by Item 404 and 407(a) of Regulation S-K is included under “Transactions with Related Persons” and “Board of Directors and Committees” in the definitive Proxy Statement for our 2008 Annual +Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2007/0001193125-08-159004/item9a.txt b/raw/filings/0000320187/2007/0001193125-08-159004/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..32a9d137f13eee0101edd366aceb4c9f9bef6feb --- /dev/null +++ b/raw/filings/0000320187/2007/0001193125-08-159004/item9a.txt @@ -0,0 +1,13 @@ +Item 9A. Controls and Procedures +We maintain +disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange +Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required +disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control +objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of on-going procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation +of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, +2008. +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 on pages 45-48 +of this Report. +There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has +materially affected, or is reasonable likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/filing.txt b/raw/filings/0000320187/2012/0000320187-13-000092/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..c5c5c3196b4e25c0ff240180e5bd63cf010a3d91 --- /dev/null +++ b/raw/filings/0000320187/2012/0000320187-13-000092/filing.txt @@ -0,0 +1,6213 @@ +10-K +1 +nke-5312013x10k.htm +10-K +NKE - 5.31.2013 - 10K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED May 31, 2013 +OR +¨ 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. 1-10635 +(Exact name of Registrant as specified in its charter) +OREGON +93-0584541 +(State or other jurisdiction of incorporation) +(IRS Employer Identification No.) +One Bowerman Drive Beaverton, Oregon +97005-6453 +(Address of principal executive offices) +(Zip Code) +(503) 671-6453 +(Registrant’s Telephone Number, Including Area Code) +SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: +Class B Common Stock +New York Stock Exchange +(Title of Each Class) +(Name of Each Exchange on Which Registered) +SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: +NONE +Indicate by check mark +YES +NO +• +if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. +þ +¨ +• +if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. +¨ +þ +• +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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. +þ +¨ +• +whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). +þ +¨ +• +if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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. +¨ +þ +• +whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated filer ¨ +Non-accelerated file ¨ +Smaller Reporting Company ¨ +• +whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). +¨ +þ +As of November 30, 2012, the aggregate market values of the Registrant’s Common Stock held by non-affiliates were: +Class A +$ +2,206,464,966 +Class B +$ +34,773,165,371 +$ +36,979,630,337 +As of July 19, 2013, the number of shares of the Registrant’s Common Stock outstanding were: +Class A +177,957,876 +Class B +712,394,590 +890,352,466 +DOCUMENTS INCORPORATED BY REFERENCE: +Parts of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 19, 2013 are incorporated by reference into Part III of this Report. +Table of Contents +NIKE, INC. +ANNUAL REPORT ON FORM 10-K +Table of Contents +Page +PART I +1 +ITEM 1. +Business +1 +General +1 +Products +1 +Sales and Marketing +1 +United States Market +2 +International Markets +2 +Significant Customer +2 +Orders +2 +Product Research and Development +2 +Manufacturing +2 +International Operations and Trade +2 +Competition +3 +Trademarks and Patents +3 +Employees +3 +Executive Officers of the Registrant +3 +ITEM 1A. +Risk Factors +5 +ITEM 1B. +Unresolved Staff Comments +12 +ITEM 2. +Properties +12 +ITEM 3. +Legal Proceedings +12 +ITEM 4. +Mine Safety Disclosures +12 +PART II +13 +ITEM 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +13 +ITEM 6. +Selected Financial Data +15 +ITEM 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +17 +ITEM 7A. +Quantitative and Qualitative Disclosures about Market Risk +38 +ITEM 8. +Financial Statements and Supplemental Data +39 +ITEM 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +69 +ITEM 9A. +Controls and Procedures +69 +ITEM 9B. +Other Information +69 +PART III +70 +(Except for the information set forth under “Executive Officers of the Registrant” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2012 Annual Meeting of Shareholders.) +ITEM 10. +Directors, Executive Officers and Corporate Governance +70 +ITEM 11. +Executive Compensation +70 +ITEM 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +70 +ITEM 13. +Certain Relationships and Related Transactions, and Director Independence +70 +ITEM 14. +Principal Accountant Fees and Services +70 +PART IV +71 +ITEM 15. +Exhibits and Financial Statement Schedules +71 +Signatures +75 +Table of Contents +PART I +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our internet address is www.nike.com. On our NIKE Corporate website, located at www.nikeinc.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. All such filings on our NIKE Corporate website are available free of charge. Also available on the NIKE Corporate website are the charters of the committees of our board of directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and athletic apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites (which we refer to as our “Direct to Consumer” operations) and through a mix of independent distributors and licensees, in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand and Brand Jordan product offerings in seven key categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, NIKE Sportswear (our sports-inspired lifestyle products), and Action Sports. We also market products designed for kids, as well as for other athletic and recreational uses such as baseball, cricket, golf, lacrosse, outdoor activities, football, tennis, volleyball, walking, and wrestling. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovation in our products. NIKE Sportswear, Running, Basketball, Football (Soccer), and kids’ shoes are currently our top-selling footwear categories and we expect them to continue to lead in product sales in the near future. +We sell sports apparel and accessories covering most of the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary, Converse Inc. (“Converse”), headquartered in North Andover, Massachusetts, designs, distributes and licenses athletic and casual footwear, apparel and accessories under the Converse ® , Chuck Taylor ® , All Star ® , One Star ® , Star Chevron ® and Jack Purcell ® trademarks. +Our wholly-owned subsidiary, Hurley International LLC (“Hurley”), headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley ® trademark. +In addition to the products we sell to our wholesale customers and directly to consumers through our Direct to Consumer operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell certain apparel, digital devices and applications and other equipment designed for sports activities. +As part of our long-term growth strategy, we continually evaluate our portfolio of businesses to ensure we are investing in those businesses that are accretive to the NIKE Brand with the largest growth potential and highest returns. On February 1, 2013, and November 30, 2012, we completed the divestitures of the Cole Haan and Umbro businesses, respectively, allowing us to better focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. +Sales and Marketing +Financial information about geographic and segment operations appears in Note 18 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel, and equipment. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories, and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories, and services. Our reportable operating +1 +Table of Contents +segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic segment. +United States Market +In fiscal 2013, sales in the United States, including U.S. sales of our Other Businesses, accounted for approximately 45% of total revenues, compared to 42% in both fiscal 2012 and fiscal 2011. Converse and Hurley, our affiliate brands, and NIKE Golf comprise our Other Businesses. We sell to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts. During fiscal 2013, our three largest customers accounted for approximately 25% of sales in the United States. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2013, 87% of our U.S. wholesale footwear shipments (excluding our Other Businesses) were made under the futures program, compared to 86% in fiscal 2012 and 87% in fiscal 2011. In fiscal 2013, 67% of our U.S. wholesale apparel shipments (excluding our Other Businesses) were made under the futures program, compared to 64% in fiscal 2012 and 60% in fiscal 2011. +We utilize NIKE sales offices to solicit sales in the United States as well as independent sales representatives to sell specialty products for golf, skateboarding, and snowboarding. In addition, our Direct to Consumer operations sell NIKE Brand products to consumers through our internet website, www.nike.com , and through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +171 +NIKE Brand in-line stores, including NIKETOWNs and employee-only stores +33 +Converse stores (including factory stores) +72 +Hurley stores (including factory and employee stores) +27 +TOTAL +303 +NIKE has five primary distribution centers in the United States located in Memphis, Tennessee, three of which are leased. NIKE Brand apparel and equipment products are also shipped from our Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from Ontario, California. +International Markets +In fiscal 2013, non-U.S. sales including non-U.S. sales of our Other Businesses accounted for 55% of total revenues, compared to 58% in both fiscal 2012 and fiscal 2011. We sell our products to retail accounts, through our own Direct to Consumer operations, and through a mix of independent distributors, licensees, and sales representatives around the world. We sell to thousands of retail accounts and operate 16 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2013, NIKE’s three largest customers outside of the U.S. accounted for approximately 6% of total non-U.S. sales. +Our Direct to Consumer business operates the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +388 +NIKE Brand in-line stores, including NIKETOWNs and employee-only stores +59 +Converse stores (including factory stores) +3 +TOTAL +450 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Costa Rica, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, New Zealand, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net sales during fiscal 2013. +Orders +Worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2013, were $12.1 billion compared to $11.2 billion for the same period last year. This futures orders amount is calculated based upon our forecast of the actual exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures and at-once orders and the fulfillment of certain of these futures orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of discounts, order cancellations and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses. +Product Research and Development +We believe our research and development efforts are a key factor in our success. Technical innovation in the design and manufacturing process of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce products that help to reduce injury, enhance athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability, and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +Manufacturing +Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers. In fiscal 2013, contract factories in Vietnam, China and Indonesia manufactured approximately 42%, 30%, and 26% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture footwear for sale primarily within those countries. The largest single footwear factory with which we have contracted accounted for approximately 6% of total fiscal 2013 NIKE Brand footwear production. Almost all of NIKE Brand apparel is manufactured outside of the United States by independent contract manufacturers located in 28 countries. Most of this apparel production occurred in China, Vietnam, Thailand, Indonesia, Sri Lanka, Pakistan, Malaysia, Turkey, Mexico, and Cambodia. The largest single apparel factory that we have contracted with accounted for approximately 6% of total fiscal 2013 apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas, and polyurethane films used to make Air-Sole cushioning components. During fiscal 2013, NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, Inc., with facilities in Beaverton, Oregon and St. Louis, Missouri, as well as independent contractors in China and Vietnam, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain and snow, retain heat, or efficiently wick moisture away from the body. NIKE’s independent contractors and suppliers buy raw materials in bulk for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2013, Sojitz America provided financing and purchasing services for NIKE Brand products sold in Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines, Malaysia, South Africa, Korea, and Thailand, excluding products produced and sold in the same country. Approximately 13% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2014. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export and import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, such protectionist measures, if implemented, could result in increases in the cost of our products, which may in turn adversely affect our sales or profitability as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry and engage in administrative and judicial processes to mitigate trade restrictions. In Brazil, we are actively monitoring for dumping investigations against products from China and other countries that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may increase customs clearance times for imports of footwear, apparel and equipment. Moreover, with respect to trade restrictions targeting China, which represents an important sourcing and consumer marketing country for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost effective and could have an ongoing adverse impact on profitability. +2 +Table of Contents +Competition +The athletic footwear, apparel, and equipment industry is highly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure footwear, apparel, and equipment, including adidas, V.F. Corp., Puma, Li Ning and Under Armour, among others. We also compete with a number of vertical retailers such as Lululemon and Uniqlo. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear, apparel, and equipment in the world. Important aspects of competition in this industry are: +• +Product quality; performance and reliability; new product innovation and development; and consumer price/value; +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products; and active engagement through sponsored sporting events and clinics; and +• +Effective distribution of products, with attractive merchandising and presentation at retail, in store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE® and Swoosh Design® trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions. In addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR® patents have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE AIR® patents will not expire for several years. +We also file and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents covering components, manufacturing techniques and features used in various athletic and leisure footwear, apparel, athletic equipment, digital devices and golf products. These patents expire at various times, and patents issued for applications filed this year in the U.S. will last until 2027 for design patents and until 2033 for utility patents. +We believe our success depends primarily upon our capabilities in design, research and development, production, and marketing rather than exclusively upon our patent position. However, we have followed a policy of filing patent applications for the United States and foreign patents on inventions, designs, and improvements that we deem valuable. +Employees +As of May 31, 2013, we had approximately 48,000 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 19, 2013 are as follows: +Philip H. Knight, Chairman of the Board of Directors — Mr. Knight, 75, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September 1984, served as its President from 1968 to 1990 and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, President and Chief Executive Officer — Mr. Parker, 57, was appointed President and Chief Executive Officer in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in 2001. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 53, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Donald W. Blair, Executive Vice President and Chief Financial Officer — Mr. Blair, 55, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with PepsiCo, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining PepsiCo, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 50, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas Region in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for the Europe, Middle East and Africa Region in 1999, and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate +3 +Table of Contents +Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Jeanne P. Jackson, President, Product and Merchandising — Ms. Jackson, 61, joined NIKE in 2009. She was appointed President, Direct to Consumer in 2009 and President, Product and Merchandising in 2013. Ms. Jackson also served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009. She founded and served as Chief Executive Officer of MSP Capital, a private investment company, from 2002 to 2009. Ms. Jackson was Chief Executive Officer of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and Chief Executive Officer of Banana Republic from 1995 to 2000, also serving as Chief Executive Officer of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue, and Federated Department Stores. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 49, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed to Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP. +Bernard F. Pliska, Vice President, Corporate Controller — Mr. Pliska, 51, joined NIKE as Corporate Controller in 1995. He was appointed Vice President, Corporate Controller in 2003. Prior to NIKE, Mr. Pliska was with Price Waterhouse from 1984 to 1995. Mr. Pliska is a certified public accountant. +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 44, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas Regions in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 49, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas Region in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998, and Vice President & General Manager of the Americas Region in 2000. Mr. Sprunk was appointed corporate Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +4 +Table of Contents +ITEM 1A. Risk Factors +Special Note Regarding Forward-Looking Statements and Analyst Reports +Certain written and oral statements, other than purely historical information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the Securities and Exchange Commission, including Forms 8-K, 10-Q, and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel, and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel, and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products, and the various market factors described above; difficulties in implementing, operating, and maintaining NIKE’s increasingly complex information systems and controls, including, without limitation, the systems related to demand and supply planning, and inventory control; interruptions in data and information technology systems; data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance futures orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of futures and at-once orders, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products, new product development and introduction; the ability to secure and protect trademarks, patents, and other intellectual property; product performance and quality; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in our debt ratings; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas, political and economic instability, and terrorism; changes in government regulations; the impact of, including business and legal developments relating to, climate change; natural disasters; liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; the effects of our decision to invest in or divest of businesses; and other factors referenced or incorporated by reference in this report and other reports. +The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on NIKE’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. +Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. +Our products face intense competition. +NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel, and equipment industry is highly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure footwear, apparel, and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products and for import quota capacity. +Our competitors’ product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, and customer service are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly. +Failure to maintain our reputation and brand image could negatively impact our business. +Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. We could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. +In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. Negative posts or comments about us on social networking websites could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected. +5 +Table of Contents +If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our net revenues and profits. +Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, long lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing, we could experience lower sales, excess inventories and lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operation. +We rely on technical innovation and high quality products to compete in the market for our products. +Technical innovation and quality control in the design and manufacturing process of footwear, apparel, and athletic equipment is essential to the commercial success of our products. Research and development plays a key role in technical innovation. We rely upon specialists in the fields of biomechanics, exercise physiology, engineering, industrial design and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, and other experts to develop and test cutting edge performance products. While we strive to produce products that help to reduce injury, enhance athletic performance and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems. +Failure to continue to obtain high quality endorsers of our products could harm our business. +We establish relationships with professional athletes, sports teams and leagues to evaluate, promote, and establish product authenticity with consumers. If certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues, or negative posts or comments about our sports marketing endorsements on social networking websites, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes to use and endorse our products, or a failure to enter into cost effective endorsement arrangements with prominent athletes and sports organizations could adversely affect our brand and result in decreased sales of our products. +Global capital and credit market conditions, and resulting declines in consumer confidence and spending, could have a material adverse effect on our business, operating results, and financial condition. +The uncertain state of the global economy continues to impact businesses around the world. Continuing volatility and disruption in the global capital and credit markets have led to fluctuations in the availability of business credit and capital liquidity, a contraction of consumer credit, business failures, higher unemployment, and declines in consumer confidence and spending in many parts of the world. If global economic and financial market conditions deteriorate or remain weak for an extended period of time, the following factors could have a material adverse effect on our business, operating results, and financial condition: +• +Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories, and lower gross margins. +• +We may be unable to find suitable investments that are safe, liquid, and provide a reasonable return. This could result in lower interest income or longer investment horizons. Disruptions to capital markets or the banking system may also impair the value of investments or bank deposits we currently consider safe or liquid. +• +In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. +• +The failure of financial institution counterparties to honor their obligations to us under credit and derivative instruments could jeopardize our ability to rely on and benefit from those instruments. Our ability to replace those instruments on the same or similar terms may be limited under poor market conditions. +• +We conduct transactions in various currencies, which increase our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported financial results and condition. +• +Continued volatility and availability in the markets and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins, and profitability. +• +If retailers of our products experience declining revenues, or retailers experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, inability of retailers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts, and increased bad debt expense. +• +If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could reduce the availability of our products to consumers. +• +If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delays or non-delivery of shipments of our products. +6 +Table of Contents +Our business is affected by seasonality, which could result in fluctuations in our operating results and stock price. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix, geographic sales trends, and currency exchange rate fluctuations, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period. +Futures orders may not be an accurate indication of our future revenues. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set period of time at a fixed price. Our futures ordering program allows us to minimize the amount of products we hold in inventory, purchasing costs, the time necessary to fill customer orders, and the risk of non-delivery. We report changes in futures orders in our periodic financial reports. Although we believe futures orders are an important indicator of our future revenues, reported futures orders are not necessarily indicative of our expectation of changes in revenues for any future period. This is because the mix of orders can shift between futures and at-once orders. In addition, foreign currency exchange rate fluctuations, order cancellations, shipping timing, returns, and discounts can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses. +Our futures ordering program does not prevent excess inventories or inventory shortages, which could result in decreased operating margins and harm to our business. +We purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty. +The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance. +We may be adversely affected by the financial health of our retailers. +We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of seasonal products, we offer customers the ability to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled, and the risk of cancellation may increase when dealing with financially ailing retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties, which have had an adverse effect on our business. When the retail economy weakens, retailers may be more cautious with orders. A slowing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing store environment to attract consumers, which requires continuing investments by retailers. Retailers who experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products. +Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk, and impair our ability to sell our products. +The athletic footwear, apparel, and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel, and equipment retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues. +Our Direct to Consumer operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties. +Our Direct to Consumer locations have required substantial fixed investment in equipment and leasehold improvements, information systems, inventory and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than certain of our other stores. Due to the high fixed-cost structure associated with our Direct to Consumer operations, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements, and employee-related costs. +Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. Risks specific to our e-commerce business also include diversion of sales from our brick and mortar stores, difficulty in recreating +7 +Table of Contents +the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our e-commerce business, as well as damage our reputation and brands. +Failure to adequately protect or enforce our intellectual property rights could adversely affect our business. +We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying us, and in distinguishing our goods from the goods of others. We consider our NIKE® and Swoosh Design® trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions. In addition, we own many other trademarks that we utilize in marketing our products. In addition, we own many other trademarks that we utilize on or in the marketing of our products. +We believe that our trademarks, patents, trade secrets and other intellectual property rights are important to our brand, our success, and our competitive position. We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging a party’s products on the basis of trade secret misappropriation or trademark, copyright, design patent, utility patent, or other intellectual property infringement, continued sales of these products could adversely affect our sales and our brand and result in the shift of consumer preference away from our products. +The actions we take to establish and protect trademarks, copyrights, trade secrets, patents, and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights. +We may be subject to liability if third parties successfully claim that we infringe on their trademarks, copyrights, patents, or other intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products. +We take various actions to prevent confidential information from unauthorized use and/or disclosure. Such actions include contractual measures such as entering into non-disclosure agreements and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information might not always be effective. Confidential information that is related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely or inadvertently used and/or disclosed resulting in a loss of reputation, a decline in our stock price, a negative impact on our market position, and could lead to damages, fines, penalties, or injunctions. +In addition, the laws of certain foreign countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected. +We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources. +From time to time we are called upon to defend ourselves against lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. +Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws, and other standards could harm our business. +We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our trademarks. We impose, and require the contractors that directly manufacture our products and our licensees the contract with manufacturers to make products bearing our trademarks, a code of conduct and other environmental, health, and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. +Our international operations involve inherent risks which could result in harm to our business. +Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments, and changes in economic conditions in countries in which we manufacture or sell products. In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets, and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs, or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition. +Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability. +We are subject to income taxes in the United States and numerous foreign jurisdictions. Increases in income tax rates could reduce our after-tax income from affected jurisdictions. We earn a substantial portion of our income in foreign countries. If our capital or financing needs in the United States require us to repatriate earnings from foreign jurisdictions above our current levels, our effective income tax rates for the affected periods could be negatively impacted. Current economic and political conditions make tax rules in any jurisdiction, including the United States, subject to +8 +Table of Contents +significant change. There have been proposals to reform U.S. tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals being considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows. +Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. The Company is also subject to the examination of its tax returns by the Internal Revenue Service and other tax authorities. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant discretion. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. +Currency exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings. +A majority of our products are sold outside of the United States. As a result, we conduct transactions in various currencies, which increase our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, including amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations could have an adverse effect on our results of operations and financial condition. +We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar, but they also reduce the positive impact of a weaker U.S. Dollar. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities. +If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses. +As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps, with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition. +Our products are subject to risks associated with overseas sourcing, manufacturing, and financing. +The principal materials used in our apparel products — natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain or snow, retain heat, or efficiently wick moisture away from the body — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers' to locate, train and employ adequate personnel. NIKE contractors and suppliers buy raw materials in bulk and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured. +There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, we might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. Further, there may be wage increases, whether government mandated or otherwise, that affect our unaffiliated contract manufacturers. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance that additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards, and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term. +Because independent manufacturers manufacture a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion, or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. +In addition, Sojitz America performs significant import-export financing services for most of the NIKE Brand products sold outside of the United States, Europe, Middle East, Africa, and Japan, excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers outside of the United States, Europe, Middle East, Africa, and Japan. Such a disruption could result in canceled orders that would adversely affect sales and profitability. +9 +Table of Contents +Our success depends on our global distribution facilities. +We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities, and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects that could be caused by significant disruptions in our distribution facilities. +We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy, breach, interruption or security failure of that technology or any misappropriation of any data could harm our reputation or our ability to effectively operate our business. +We are heavily dependent on information technology systems and networks, including the Internet and third-party hosted services (“information technology systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales, and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these information technology systems. Over a number of years, we have implemented information technology systems in all of the geographical regions in which we operate. Our work to integrate and enhance these systems and related processes in our global operations is ongoing. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem, and may have an adverse effect on our results of operations and financial condition. +We also use information technology systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. +In addition, hackers and data thieves are increasingly sophisticated and operate large scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, our customers’ or employees’ personal information or a disruption of our business, which could give rise to unwanted media attention, damage our customer relationships and reputation and result in lost sales, fines or lawsuits. In addition, we must comply with increasingly complex regulatory standards enacted to protect this business and personal data. An inability to maintain compliance with these regulatory standards could subject us to legal risks. +Furthermore, we depend on information technology systems and personal data collection and use for digital marketing, digital commerce and the marketing and use of our Digital Sport products. We also engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Our information technology systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. Misuse or leakage of personal information could result in a violation of data privacy laws and regulations and damage our reputation and credibility and have a negative impact on revenues and profits. +The market for prime real estate is competitive. +Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics, and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition, or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition. +Additionally, the economic environment may at times make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and the quality of our decisions to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores and could have an adverse effect on our operating results and financial condition. +Natural disasters could negatively impact our operating results and financial condition. +Natural disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including energy shortages and public health issues, could disrupt our operations, or the operations of our vendors and other suppliers, or result in economic instability that may negatively impact our operating results and financial condition. +Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns. +From time to time, we may invest in business infrastructure, acquisitions of new businesses, product offering and manufacturing innovation, and expansion of existing businesses, such as our retail operations, which require substantial cash investments and management attention. We believe cost effective investments are essential to business growth and profitability. However, significant investments are subject to typical risks and uncertainties inherent in acquiring or expanding a business. The failure of any significant investment to provide their expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations. +We depend on key personnel, the loss of whom would harm our business. +Our future success will depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individual could harm our business. Our future success also depends on our ability to recruit, retain and motivate our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. +10 +Table of Contents +The sale of a large number of shares held by our Chairman could depress the market price of our common stock. +Philip H. Knight, Co-founder and Chairman of our Board of Directors, beneficially owns over 75.6% of our Class A Common Stock. If all of his Class A Common Stock were converted into Class B Common Stock, Mr. Knight would own over 15.8% of our Class B Common Stock. These shares are available for resale, subject to the requirements of the U.S. securities laws. The sale or prospect of the sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. +Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. +Our long-term debt is currently rated investment grade by Standard & Poor’s and Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt or obtain additional financing to support operations or to fund new initiatives. +Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock. +There are provisions of our articles of incorporation and Oregon law that are intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company. +We may fail to meet market expectations, which could cause the price of our stock to decline. +Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts’ estimates of our future performance. Analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business. +11 +Table of Contents +ITEM 1B. Unresolved Staff Comments +Not applicable. +ITEM 2. Properties +The following is a summary of principal properties owned or leased by NIKE. +The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is a 250-acre facility of 35 buildings which functions as our world headquarters and is occupied by almost 8,000 employees engaged in management, research, design, development, marketing, finance, and other administrative functions serving nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Western Europe and Central & Eastern Europe geographies. In the United States, there are five significant distribution centers in Memphis, Tennessee; two are owned and three are leased. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased distribution facilities for non-NIKE Brand businesses are located in various parts of the United States. We also own or lease distribution and customer service facilities outside the United States. The most significant are the distribution facilities located in Tomisato, Japan; Laakdal, Belgium; and Taicang, China; all of these facilities are owned. +We manufacture Air-Sole cushioning materials and components at NIKE IHM, Inc. manufacturing facilities located in Beaverton, Oregon and St. Charles, Missouri; these facilities are owned. We also manufacture and sell small amounts of various other plastic products to other manufacturers through NIKE IHM, Inc. +Aside from the principal properties described above, we lease over 110 sales offices and approximately 90 administrative offices worldwide. We lease more than 750 retail stores worldwide, which consist primarily of factory outlet stores. See “United States Market” and “International Markets” in Part 1 of this Report. Our leases expire at various dates through the year 2033. +ITEM 3. Legal Proceedings +There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject. +ITEM 4. Mine Safety Disclosures +Not applicable. +12 +Table of Contents +PART II +ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 19, 2013, there were 30,586 holders of record of our Class B Common Stock and 19 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. The following tables set forth, for each of the quarterly periods indicated, the high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape and dividends declared on the Class A and Class B Common Stock. All share and per share amounts presented are reflective of the two-for-one stock split that began trading at the split adjusted price on December 26, 2012. +Fiscal 2013 (June 1, 2012 — May 31, 2013) +High +Low +Dividends +Declared +First Quarter +$ +54.32 +$ +43.89 +$ +0.18 +Second Quarter +50.42 +45.30 +0.21 +Third Quarter +55.55 +48.46 +0.21 +Fourth Quarter +65.91 +53.49 +0.21 +Fiscal 2012 (June 1, 2011 — May 31, 2012) +High +Low +Dividends +Declared +First Quarter +$ +46.83 +$ +39.29 +$ +0.16 +Second Quarter +48.38 +41.25 +0.18 +Third Quarter +53.96 +46.69 +0.18 +Fourth Quarter +57.20 +52.17 +0.18 +The following table presents a summary of share repurchases made by NIKE during the quarter ended May 31, 2013 . During the second quarter of fiscal 2013, the Company completed the previous four-year, $5 billion share repurchase program approved by our Board of Directors in September 2008. During the prior program, the Company purchased a total of 118.8 million shares at an average price of $42.08 per share. Following the completion of this program, the Company began repurchases under the four-year, $8 billion share repurchase program approved by the Board in September 2012. +Period +Total Number of Shares Purchased +Average Price +Paid per Share +Total Number of Shares +Purchased as Part of +Publicly Announced +Plans or Programs +Maximum Dollar Value +of Shares that May Yet +Be Purchased Under the +Plans or Programs +(In millions) +March 1 — March 31, 2013 +2,198,417 +$ +54.51 +2,198,417 +$ +7,333 +April 1 — April 30, 2013 +1,573,111 +$ +59.30 +1,573,111 +$ +7,239 +May 1 — May 31, 2013 +450,000 +$ +63.18 +450,000 +$ +7,211 +4,221,528 +$ +57.22 +4,221,528 +13 +Table of Contents +Performance Graph +The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index, and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2008 in each of our Class B Common Stock, and the stocks comprising the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index, and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested. +COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX; AND THE DOW JONES U.S. FOOTWEAR INDEX +The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corp., Wolverine World Wide, Inc., Iconix Brand Group, Inc., Crocs, Inc., and Steven Madden, Ltd. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of V.F. Corp., Coach, Inc., Polo Ralph Lauren Corporation, and Fossil Group, Inc. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories, and Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged. +The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make nor endorse any predictions as to future stock performance. +The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. +14 +Table of Contents +ITEM 6. Selected Financial Data +Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations; refer to Note 15 — Discontinued Operations for additional information regarding discontinued operations. All per share amounts are reflective of the two-for-one stock split that began trading at the split-adjusted price on December 26, 2012. +(Dollars in millions, except per share data and financial ratios) +Financial History +2013 +2012 +2011 +2010 +2009 +Year Ended May 31, +Revenues +$ +25,313 +$ +23,331 +$ +20,117 +$ +18,324 +$ +18,528 +Gross profit +11,034 +10,148 +9,202 +8,498 +8,324 +Gross margin % +43.6 +% +43.5 +% +45.7 +% +46.4 +% +44.9 +% +Restructuring charges +— +— +— +— +195 +Net income from continuing operations +2,464 +2,269 +2,172 +1,923 +1,754 +Net income (loss) from discontinued operations +21 +(46 +) +(39 +) +(16 +) +(267 +) +Net income +2,485 +2,223 +2,133 +1,907 +1,487 +Earnings per share from continuing operations: +Basic earnings per common share +2.75 +2.47 +2.28 +1.98 +1.81 +Diluted earnings per common share +2.69 +2.42 +2.24 +1.95 +1.79 +Earnings per share from discontinued operations: +Basic earnings per common share +0.02 +(0.05 +) +(0.04 +) +(0.02 +) +(0.28 +) +Diluted earnings per common share +0.02 +(0.05 +) +(0.04 +) +(0.02 +) +(0.27 +) +Weighted average common shares outstanding +897.3 +920.0 +951.1 +971.0 +969.8 +Diluted weighted average common shares outstanding +916.4 +939.6 +971.3 +987.8 +981.4 +Cash dividends declared per common share +0.81 +0.70 +0.60 +0.53 +0.49 +Cash flow from operations, inclusive of discontinued operations +3,027 +1,899 +1,812 +3,164 +1,736 +Price range of common stock: +High +65.91 +57.20 +46.15 +39.28 +35.14 +Low +43.89 +39.29 +33.61 +25.08 +19.12 +At May 31, +Cash and equivalents +$ +3,337 +$ +2,317 +$ +1,955 +$ +3,079 +$ +2,291 +Short-term investments +2,628 +1,440 +2,583 +2,067 +1,164 +Inventories +3,434 +3,222 +2,611 +1,942 +2,254 +Working capital, excluding assets and liabilities of discontinued operations (1)(2) +9,718 +7,518 +7,266 +7,511 +6,390 +Total assets, excluding assets of discontinued operations (1) +17,584 +14,850 +14,438 +13,889 +12,716 +Long-term debt +1,210 +228 +276 +446 +437 +Capital Lease Obligations +81 +— +— +— +— +Redeemable Preferred Stock +0.3 +0.3 +0.3 +0.3 +0.3 +Shareholders’ equity +11,156 +10,381 +9,843 +9,754 +8,693 +Year-end stock price +61.66 +54.09 +42.23 +36.19 +28.53 +Market capitalization +55,124 +49,546 +39,523 +35,032 +27,698 +Financial Ratios: +Return on equity +22.9 +% +22.4 +% +22.2 +% +20.8 +% +21.2 +% +Return on assets +15.2 +% +15.5 +% +15.3 +% +14.5 +% +14.6 +% +Inventory turns +4.3 +4.5 +4.8 +4.7 +4.5 +Current ratio at May 31 +3.5 +3.0 +2.9 +3.3 +3.0 +Price/Earnings ratio at May 31 +22.9 +22.4 +18.9 +18.6 +15.9 +(1) +Assets of discontinued operations were $0 million, $615 million, $560 million, $530 million, and $534 million for the years ended May 31, 2013, 2012, 2011, 2010, and 2009, respectively. +(2) +Liabilities of discontinued operations were $18 million, $170 million, $184 million, $182 million, and $176 million for the years ended May 31, 2013, 2012, 2011, 2010, and 2009, respectively. +15 +Table of Contents +Selected Quarterly Financial Data +(Unaudited) +(Dollars in millions, except per share data) +1st Quarter (1) +2nd Quarter +3rd Quarter +4th Quarter +2013 +2012 +2013 +2012 +2013 +2012 +2013 +2012 +Revenues +$ +6,474 +$ +5,893 +$ +5,955 +$ +5,546 +$ +6,187 +$ +5,656 +$ +6,697 +$ +6,236 +Gross profit +2,828 +2,618 +2,530 +2,376 +2,736 +2,485 +2,940 +2,669 +Gross margin % +43.7 +% +44.4 +% +42.5 +% +42.8 +% +44.2 +% +43.9 +% +43.9 +% +42.8 +% +Net income from continuing operations +585 +661 +521 +480 +662 +569 +696 +559 +Net income (loss) from discontinued operations +(18 +) +(16 +) +(137 +) +(11 +) +204 +(9 +) +(28 +) +(10 +) +Net income +567 +645 +384 +469 +866 +560 +668 +549 +Earnings per share from continuing operations: +Basic earnings per common share +0.65 +0.72 +0.58 +0.52 +0.74 +0.62 +0.78 +0.61 +Diluted earnings per common share +0.63 +0.70 +0.57 +0.51 +0.73 +0.61 +0.76 +0.60 +Earnings per share from discontinued operations: +Basic earnings per common share +(0.03 +) +(0.02 +) +(0.15 +) +(0.01 +) +0.23 +(0.01 +) +(0.03 +) +(0.01 +) +Diluted earnings per common share +(0.02 +) +(0.02 +) +(0.15 +) +(0.01 +) +0.22 +(0.01 +) +(0.03 +) +(0.01 +) +Weighted average common shares outstanding +905.6 +930.0 +897.0 +918.5 +893.9 +915.1 +892.6 +916.3 +Diluted weighted average common shares outstanding +922.8 +948.6 +913.1 +936.9 +911.7 +934.6 +913.4 +936.3 +Cash dividends declared per common share +0.18 +0.16 +0.21 +0.18 +0.21 +0.18 +0.21 +0.18 +Price range of common stock +High +54.32 +46.83 +50.42 +48.38 +55.55 +53.96 +65.91 +57.20 +Low +43.89 +39.29 +45.30 +41.25 +48.46 +46.69 +53.49 +52.17 +(1) +Amounts presented have been adjusted from what was previously filed in our Form 10-Q to exclude the results of discontinued operations. +16 +Table of Contents +ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations +NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites, which we refer to as our “Direct to Consumer” operations, and through a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment, accessories and service businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must have” products, building deep personal consumer connections with our brands, and delivering compelling consumer experiences at retail and online. +In addition to achieving long-term, sustainable revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas: +• +Expanding gross margin by: +- Making our supply chain a competitive advantage; +- Reducing product costs through a continued focus on manufacturing efficiency, product design and innovation; and +- Delivering innovative, premium products that command higher prices while maintaining a strong consumer price-to-value proposition. +• +Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross profit, and leveraging existing infrastructure across our portfolio of businesses to eliminate duplicative costs; +• +Improving working capital efficiency; and +• +Deploying capital effectively. +Through execution of this strategy, our long-term financial goals continue to be: +• +High single-digit revenue growth, +• +Mid-teens earnings per share growth, +• +Increased return on invested capital and accelerated cash flows, and +• +Consistent results through effective management of our diversified portfolio of businesses. +Over the past ten years, we have achieved or exceeded all of these financial goals. During this time, revenues and earnings per share for NIKE, Inc., inclusive of both continuing and discontinued operations, have grown 9% and 15%, respectively, on an annual compounded basis. Our return on invested capital has increased from 18% to 24% and we expanded gross margins by approximately 260 basis points. +On November 15, 2012, we announced a two-for-one stock split of both Class A and Class B Common shares. The stock split was in the form of a 100 percent stock dividend payable on December 24, 2012 to shareholders of record at the close of business December 10, 2012. Common stock began trading at the split-adjusted price on December 26, 2012. All share numbers and per share amounts presented reflect the stock split. +Our fiscal 2013 results from continuing operations demonstrated the power of the NIKE, Inc. portfolio to deliver consistent growth in revenues, earnings, and cash returns to shareholders, while investing for long-term growth. Despite the ongoing challenges in the global economy, we delivered record revenues and earnings per share in fiscal 2013. Our revenues grew 8% to $25.3 billion, net income from continuing operations increased 9% to $2.5 billion, and we delivered diluted earnings per share of $2.69, an 11% increase from fiscal 2012. +Earnings before interest and income taxes for continuing operations increased 8% for fiscal 2013, driven by revenue growth and improved gross margin, which more than offset higher selling and administrative expense as a percentage of revenue. The increase in revenues was driven by growth across most NIKE Brand geographies, key categories and product types. This growth was primarily fueled by: +• +Innovative performance and sportswear products, incorporating proprietary technology platforms such as NIKE Air, Lunar, Shox, FREE, Flywire, Dri-F.I.T, FlyKnit, NIKE +, and NIKE Fuel; +• +Deep brand connections to consumers through a category lens, reinforced by investments in endorsements by high profile athletes and teams (such as the NFL, FC Barcelona, Michael Jordan), high impact marketing around global sporting events (such as the Olympics, European Football Championships and NBA Finals) and digital marketing; and +• +Strong category retail presentation online and at NIKE owned and retail partner stores. +Revenues also improved for each of our Other Businesses (Converse, NIKE Golf and Hurley). +Our gross margins improved largely due to the positive impact of higher average selling prices, partially offset by higher product input costs, primarily labor cost inflation, and foreign currency headwinds. +For fiscal 2013, the growth of our net income from continuing operations was positively affected by a year-over-year decrease in our effective tax rate. In addition, diluted earnings per share grew at a higher rate than net income due to a 2% decrease in the weighted average number of diluted common shares outstanding, as a result of share repurchases during fiscal 2013. +On May 31, 2012, we announced our intention to divest of the Cole Haan and Umbro businesses, which would allow us to better focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. During the second quarter of fiscal 2013 we completed the sale of certain assets of the Umbro brand and recorded a loss on the sale of these assets of $107 million, net of tax. During the third quarter of fiscal 2013 we completed the sale of Cole Haan and recorded a gain on sale of $231 million, net of tax. As of May 31, 2013 the Company had substantially completed all transition services related to the sale of both businesses. Unless otherwise indicated, the following disclosures reflect the Company's continuing operations; refer to our “Discontinued Operations" section for additional information regarding our discontinued operations. +While we expect to face continued macroeconomic uncertainties in the global economy, we continue to see opportunities to drive future growth and remain committed to effectively managing our business to achieve our financial goals over the long-term, by executing against the operational strategies outlined above. +17 +Table of Contents +Results of Operations +Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations. +(Dollars in millions, except per share data) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +Fiscal 2011 +FY12 vs. FY11 % Change +Revenues +$ +25,313 +$ +23,331 +8 +% +$ +20,117 +16 +% +Cost of sales +14,279 +13,183 +8 +% +10,915 +21 +% +Gross profit +11,034 +10,148 +9 +% +9,202 +10 +% +Gross margin % +43.6 +% +43.5 +% +45.7 +% +Demand creation expense +2,745 +2,607 +5 +% +2,344 +11 +% +Operating overhead expense +5,035 +4,458 +13 +% +4,017 +11 +% +Total selling and administrative expense +7,780 +7,065 +10 +% +6,361 +11 +% +% of Revenues +30.7 +% +30.3 +% +31.6 +% +Interest (income) expense, net +(3 +) +4 +— +4 +— +Other (income) expense, net +(15 +) +54 +— +(25 +) +— +Income before income taxes +3,272 +3,025 +8 +% +2,862 +6 +% +Income tax expense +808 +756 +7 +% +690 +10 +% +Effective tax rate +24.7 +% +25.0 +% +24.1 +% +Net income from continuing operations +2,464 +2,269 +9 +% +2,172 +4 +% +Net income (loss) from discontinued operations +21 +(46 +) +— +(39 +) +— +Net income +$ +2,485 +$ +2,223 +12 +% +$ +2,133 +4 +% +Diluted earnings per share - Continuing Operations +$ +2.69 +$ +2.42 +11 +% +$ +2.24 +8 +% +Diluted earnings per share - Discontinued Operations +$ +0.02 +$ +(0.05 +) +— +$ +(0.04 +) +— +18 +Table of Contents +Consolidated Operating Results +Revenues +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency +Changes (2) +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes (2) +NIKE, Inc. Revenues (1) : +NIKE Brand Revenues by: +Footwear +$ +14,539 +$ +13,428 +8 +% +11 +% +$ +11,519 +17 +% +15 +% +Apparel +6,820 +6,336 +8 +% +10 +% +5,516 +15 +% +13 +% +Equipment +1,405 +1,204 +17 +% +20 +% +1,022 +18 +% +16 +% +Global Brand Divisions +117 +111 +5 +% +8 +% +96 +16 +% +13 +% +Total NIKE Brand +22,881 +21,079 +9 +% +11 +% +18,153 +16 +% +15 +% +Other Businesses +2,500 +2,298 +9 +% +9 +% +2,041 +13 +% +12 +% +Corporate (3) +(68 +) +(46 +) +— +— +(77 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +25,313 +$ +23,331 +8 +% +11 +% +$ +20,117 +16 +% +15 +% +Supplemental NIKE Brand Revenues Details: +NIKE Brand Revenues by: +Sales to Wholesale Customers +$ +18,438 +$ +17,438 +6 +% +8 +% +$ +15,181 +15 +% +14 +% +Sales Direct to Consumer +4,326 +3,530 +23 +% +24 +% +2,876 +23 +% +21 +% +Global Brand Divisions +117 +111 +5 +% +8 +% +96 +16 +% +13 +% +TOTAL NIKE BRAND REVENUES +$ +22,881 +$ +21,079 +9 +% +11 +% +$ +18,153 +16 +% +15 +% +NIKE Brand Revenues on a Wholesale Equivalent Basis: (4) +Sales to Wholesale Customers +$ +18,438 +$ +17,438 +6 +% +8 +% +$ +15,181 +15 +% +14 +% +Sales from our Wholesale Operations to Direct to Consumer Operations +2,450 +1,986 +23 +% +25 +% +1,603 +24 +% +22 +% +NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +20,888 +$ +19,424 +8 +% +10 +% +$ +16,784 +16 +% +14 +% +NIKE Brand Wholesale Equivalent Revenues by Category: (4) +Running +$ +4,274 +$ +3,696 +16 +% +18 +% +$ +2,789 +33 +% +31 +% +Basketball +2,627 +2,169 +21 +% +22 +% +1,863 +16 +% +16 +% +Football (Soccer) +1,931 +1,862 +4 +% +9 +% +1,667 +12 +% +10 +% +Men’s Training +2,380 +2,064 +15 +% +17 +% +1,752 +18 +% +17 +% +Women’s Training +1,067 +1,011 +6 +% +8 +% +840 +20 +% +19 +% +Action Sports +495 +497 +0 +% +2 +% +446 +11 +% +2 +% +Sportswear +5,637 +5,741 +-2 +% +1 +% +5,293 +8 +% +7 +% +Others (5) +2,477 +2,384 +4 +% +6 +% +2,134 +12 +% +11 +% +TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES +$ +20,888 +$ +19,424 +8 +% +10 +% +$ +16,784 +16 +% +14 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. +(2) +Results have been restated using actual exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations. +(3) +Corporate revenues primarily consist of intercompany revenue eliminations and foreign currency revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses through our centrally managed foreign exchange risk management program. +(4) +References to NIKE Brand wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no Direct to Consumer operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our Direct to Consumer operations which are charged at prices that are comparable to prices charged to external wholesale customers. +(5) +Others include all other categories and certain adjustments that are not allocated at the category level. +19 +Table of Contents +Fiscal 2013 Compared to Fiscal 2012 +On a currency neutral basis, revenues from our NIKE, Inc. continuing operations grew 11% for fiscal 2013, driven by increases in revenues for both the NIKE Brand and our Other Businesses. Every NIKE Brand geography except Greater China delivered higher revenues for fiscal 2013. North America contributed 7 percentage points of the increase in NIKE, Inc. revenues, while Emerging Markets contributed 2 percentage points and Western and Central and Eastern Europe each contributed 1 percentage point. Greater China ' s results reduced NIKE, Inc. revenue growth by 1 percentage point. Revenues for our Other Businesses contributed 1 percentage point to our consolidated revenue growth. +Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenue increased 11% and 10%, respectively, while NIKE Brand equipment revenues increased 20% during fiscal 2013. The increase in NIKE Brand footwear revenue for fiscal 2013 was attributable to growth across our Running, Basketball, Football (Soccer), and Sportswear categories. The growth of NIKE footwear revenues continued to be fueled by increased demand for performance products, including Running models with NIKE FREE and Lunar technologies, NIKE and Brand Jordan Basketball styles, and performance Football (soccer) products. In fiscal 2013, unit sales of footwear increased approximately 7% and the average selling price per pair increased approximately 4%, driven equally by price increases and a shift in mix to higher priced products. +For NIKE Brand apparel, the increase in revenue for fiscal 2013 was driven by our Men ' s Training category (which includes the NFL licensed business), in addition to strong demand for Running and Basketball products. Apparel unit sales in fiscal 2013 increased approximately 7% and the average selling price per unit increased approximately 3%, reflecting a favorable mix of higher priced products, such as performance Running, Basketball, and NFL licensed apparel, and to a lesser extent, higher selling prices . +While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand Direct to Consumer revenues. Our NIKE Brand Direct to Consumer operations include NIKE owned in-line and factory stores, as well as online sales through NIKE owned websites. For fiscal 2013, Direct to Consumer revenues represented approximately 19% of our total NIKE Brand revenues compared to 17% in fiscal 2012. On a currency neutral basis, Direct to Consumer revenues grew 24% for fiscal 2013, as comparable store sales grew 14% and we continue to expand our store network and e-commerce business. Comparable store sales include revenues from NIKE owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year, and (3) the store has not been permanently repositioned within the past year. +Revenues for our Other Businesses are comprised of results from Converse, Hurley and NIKE Golf. Excluding the impact of currency changes, revenues for these businesses increased 9% in fiscal 2013, reflecting growth across all businesses. +Fiscal 2012 Compared to Fiscal 2011 +On a currency neutral basis, revenues for NIKE, Inc.'s continuing operations grew 15% for fiscal 2012, driven by increases in revenues for both the NIKE Brand and our Other Businesses. Excluding the effects of changes in currency exchange rates, revenues for the NIKE Brand increased 15%, as every NIKE Brand geography delivered higher revenues for fiscal 2012. North America contributed approximately 7 percentage points to the NIKE Brand revenue increase, while the Emerging Markets and Greater China geographies contributed approximately 4 and 2 percentage points to the NIKE Brand revenue growth, respectively. Revenues for our Other Businesses grew 12% during fiscal 2012, contributing 1 percentage point of our consolidated revenue growth. +Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenue increased 15% and 13%, respectively, while NIKE Brand equipment revenues increased 16% during fiscal 2012. Continuing to fuel the growth of our NIKE Brand footwear business was the increased demand for performance products, including the NIKE Lunar and FREE technologies. The increase in NIKE Brand footwear revenue for fiscal 2012 was attributable to double-digit percentage growth in unit sales along with a low-single-digit percentage increase in average selling price per pair, primarily reflecting the favorable impact from product price increases, partially offset by higher discounts on close-out sales. The overall increase in footwear sales was driven by growth across all key categories, notably Running, Sportswear and Basketball. For NIKE Brand apparel, the increase in revenue for fiscal 2012 was driven by mid-single-digit percentage increases in both unit sales and average selling prices. The increase in average selling prices was primarily driven by product price increases, partially offset by a higher mix of close-out sales. The overall increase in apparel sales was reflective of increased demand across most key categories. +For fiscal 2012, Direct to Consumer channels represented approximately 17% of our total NIKE Brand revenues compared to 16% in fiscal 2011. On a currency neutral basis, Direct to Consumer revenues grew 21% for fiscal 2012, as comparable store sales grew 13% and we continue to expand our store network and e-commerce business. +Revenues for our Other Businesses consisted of results from our affiliate brands; Converse, Hurley and NIKE Golf. Excluding the impact of currency changes, revenues for these businesses increased by 12% in fiscal 2012, reflecting growth across all businesses except Hurley, which was down slightly for the fiscal year. +Futures Orders +Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2013 were 8% higher than the orders reported for the comparable prior year period. The U.S. Dollar futures order amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders also increased 8%, as unit orders contributed approximately 5 percentage points of growth and average selling price per unit contributed approximately 3 percentage points of growth. +20 +Table of Contents +By geography, futures orders growth was as follows: +Reported Futures +Orders Growth +Futures Orders +Excluding Currency Changes (1) +North America +12 +% +12 +% +Western Europe +2 +% +0 +% +Central & Eastern Europe +14 +% +12 +% +Greater China +3 +% +0 +% +Japan +-17 +% +6 +% +Emerging Markets +12 +% +12 +% +Total NIKE Brand Futures Orders +8 +% +8 +% +(1) +Growth rates have been restated using constant exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. +The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing, because the mix of orders can shift between futures and at-once orders, and the fulfillment of certain orders may fall outside of the schedule noted above. In addition, exchange rate fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses. +Gross Margin +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +Fiscal 2011 +FY12 vs. FY11 % Change +Gross Profit +$ +11,034 +$ +10,148 +9 +% +$ +9,202 +10 +% +Gross Margin % +43.6 +% +43.5 +% +10 +bps +45.7 +% +(220) bps +Fiscal 2013 Compared to Fiscal 2012 +For fiscal 2013, our consolidated gross margin was 10 basis points higher than fiscal 2012, primarily driven by higher net average selling prices (approximately 160 basis points) that were attributable to higher prices and a favorable sales mix. The positive benefit of higher net average selling prices was largely offset by higher product costs (approximately 110 basis points), primarily due to higher factory labor costs, and unfavorable foreign currency exchange rate movements (approximately 40 basis points). +In addition, we have seen significant shifts in the mix of revenues from higher to lower margin segments of our business. While growth in these lower gross margin segments delivers incremental revenue and profits, it has a negative effect on our consolidated gross margin. +Fiscal 2012 Compared to Fiscal 2011 +For fiscal 2012, our consolidated gross margin was 220 basis points lower than the prior year period, primarily driven by higher product input costs, including materials and labor, across most businesses. Also contributing to the decrease in gross margin were higher customs duty charges, discounts on close-out sales and an increase in investments in our digital business and infrastructure. Together, these factors decreased consolidated gross margin by approximately 390 basis points. Partially offsetting this decrease were positive impacts from product price increases, lower air freight costs, the growth of our NIKE Brand Direct to Consumer business, and benefits from our ongoing product cost reduction initiatives. +Selling and Administrative Expense +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +Fiscal 2011 +FY12 vs. FY11 % Change +Demand creation expense (1) +$ +2,745 +$ +2,607 +5 +% +$ +2,344 +11 +% +Operating overhead expense +5,035 +4,458 +13 +% +4,017 +11 +% +Selling and administrative expense +$ +7,780 +$ +7,065 +10 +% +$ +6,361 +11 +% +% of Revenues +30.7 +% +30.3 +% +40 +bps +31.6 +% +(130) bps +(1) +Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts. +Fiscal 2013 Compared to Fiscal 2012 +Demand creation expense increased 5% compared to the prior year, mainly driven by an increase in sports marketing expense, marketing support for key product initiatives, including the NIKE Fuelband and NFL launch, as well as an increased level of marketing spending around global sporting events such as the European Football Championships and London Summer Olympics. Excluding the effects of changes in foreign currency exchange rates, demand creation expense increased 8%. +21 +Table of Contents +Compared to the prior year, operating overhead expense increased 13%, primarily attributable to increased investments in our Direct to Consumer operations, higher personnel costs, and corporate initiatives to support the growth of our overall business. Excluding the effects of changes in foreign currency exchange rates, the growth in operating overhead expense was 15%. +Fiscal 2012 Compared to Fiscal 2011 +Overall, selling and administrative expense grew at a slower rate than revenues for fiscal 2012. +Demand creation expense increased 11% compared to the prior year, mainly driven by an increase in sports marketing expense, marketing support for key product initiatives, including the NIKE Fuelband and NFL launch, as well as an increased level of brand event spending in advance of the European Football Championships and London Summer Olympics. For fiscal 2012, changes in currency exchange rates increased the growth of demand creation expense by 1 percentage point. +Compared to the prior year, operating overhead expense increased 11%, primarily attributable to increased investments in our Direct to Consumer operations, higher personnel costs as well as travel expenses to support the growth of our overall business. For fiscal 2012, changes in currency exchange rates increased the growth of operating overhead expense by 1 percentage point. +Other (Income) Expense, net +(In millions) +Fiscal 2013 +Fiscal 2012 +Fiscal 2011 +Other (income) expense, net +$ +(15 +) +$ +54 +$ +(25 +) +Other (income) expense, net is comprised of foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies, the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. +Fiscal 2013 Compared to Fiscal 2012 +For fiscal 2013, other (income), net increased $69 million compared to the prior year. This change was primarily driven by a $48 million decrease in foreign currency net losses in the current year as well as the recognition of a $24 million restructuring charge for NIKE Brand ' s Western Europe operations in the prior year. These positive impacts were partially offset by smaller net gains from non-operating items. +We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in other (income) expense, net had an unfavorable impact on our income before income taxes of $56 million for fiscal 2013. +Fiscal 2012 Compared to Fiscal 2011 +For fiscal 2012, other expense, net increased $79 million compared to the prior year. This change was primarily driven by a $77 million change in foreign currency net gains in the prior year to net losses in the current year. These impacts, together with a $24 million charge recognized during the fourth quarter of fiscal 2012 for the restructuring of NIKE Brand ' s Western Europe operations, were partially offset by certain net gains related to non-operating items. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in other expense, net did not have a significant impact on our income before income taxes for fiscal 2012. +Income Taxes +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +Fiscal 2011 +FY12 vs. FY11 % Change +Effective tax rate +24.7 +% +25.0 +% +(30) bps +24.1 +% +90 +bps +Fiscal 2013 Compared to Fiscal 2012 +The 30 basis point decrease in our effective tax rate for the fiscal year was primarily driven by the U.S. legislative retroactive reinstatement of the research and development tax credit and a reduction of tax reserves on foreign operations, partially offset by an increase in the percentage of earnings in higher tax jurisdictions. +Fiscal 2012 Compared to Fiscal 2011 +Our effective tax rate for fiscal 2012 was 90 basis points higher than the effective tax rate for fiscal 2011 primarily due to changes in estimates of uncertain tax positions. This impact was partially offset by a reduction in the effective tax rate on operations outside of the United States as a result of changes in geographical mix of foreign earnings. +Discontinued Operations +The Company continually evaluates its existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the NIKE Brand and represent the largest growth potential and highest returns. On May 31, 2012, the Company announced its intention to divest of Umbro and Cole Haan, allowing it to focus its resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. +22 +Table of Contents +On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million, net of $137 million in tax expense; this gain is included in the net income (loss) from discontinued operations line item on the consolidated statements of income. +Beginning November 30, 2012, we classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan’s operations in the net income (loss) from discontinued operations line item on the consolidated statements of income. From this date until the sale, the assets and liabilities of Cole Haan were recorded as assets and liabilities of discontinued operations on the consolidated balance sheets of NIKE, Inc. Previously, these amounts were reported in our segment presentation as “Other Businesses.” +Under the sale agreement, we agreed to provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. We will also license NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not expected to be significant to Cole Haan and we will have no significant continuing involvement with Cole Haan beyond the transition services. Additionally, preexisting guarantees of certain Cole Haan lease payments remain in place after the sale; the maximum exposure under the guarantees is $44 million at May 31, 2013. The fair value of these guarantees is not material. +On November 30, 2012, we completed the sale of certain assets of Umbro to Iconix Brand Group (“Iconix”) for $225 million. The results of Umbro’s operations and Umbro’s financial position are presented as discontinued operations on the consolidated statements of income and balance sheets, respectively. Previously, these amounts were reported in our segment presentation as “Other Businesses.” Upon meeting the held-for-sale criteria, we recorded a loss of $107 million, net of tax, on the sale of Umbro. The loss on sale was calculated as the net sales price less the Umbro assets of $248 million, including intangibles, goodwill, and fixed assets, other miscellaneous charges of $22 million, and the release of the associated cumulative translation adjustment of $129 million, offset by a $67 million tax benefit on the loss. +Under the sale agreement, we provided transition services to Iconix while certain markets were transitioned to Iconix-designated licensees. These transition services are substantially complete and we have wound down the remaining operations of Umbro. +For the year ended May 31, 2013 , net income (loss) from discontinued operations included, for both businesses, the net gain or loss on sale, net operating losses, tax expenses, and approximately $ 20 million in wind down costs. +Operating Segments +The Company’s reportable operating segments are based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, and equipment. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic segment. +As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and certain Other Businesses. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and certain Other Businesses reflect use of these standard rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program. +Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. +The breakdown of revenues is as follows: +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 (1) +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes (2) +Fiscal 2011 (1) +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes (2) +North America +$ +10,387 +$ +8,839 +18 +% +18 +% +$ +7,579 +17 +% +17 +% +Western Europe +4,128 +4,144 +0 +% +5 +% +3,868 +7 +% +4 +% +Central & Eastern Europe +1,287 +1,200 +7 +% +12 +% +1,040 +15 +% +17 +% +Greater China +2,453 +2,539 +-3 +% +-5 +% +2,060 +23 +% +18 +% +Japan +791 +835 +-5 +% +1 +% +773 +8 +% +1 +% +Emerging Markets +3,718 +3,411 +9 +% +16 +% +2,737 +25 +% +26 +% +Global Brand Divisions +117 +111 +5 +% +8 +% +96 +16 +% +13 +% +Total NIKE Brand Revenues +22,881 +21,079 +9 +% +11 +% +18,153 +16 +% +15 +% +Other Businesses +2,500 +2,298 +9 +% +9 +% +2,041 +13 +% +12 +% +Corporate (3) +(68 +) +(46 +) +— +— +(77 +) +— +— +TOTAL NIKE, INC. REVENUES +$ +25,313 +$ +23,331 +8 +% +11 +% +$ +20,117 +16 +% +15 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. +(2) +Results have been restated using actual exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations. +23 +Table of Contents +(3) +Corporate revenues primarily consist of certain intercompany revenue eliminations and foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses but managed through our central foreign exchange risk management program. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”) which represents net income before interest (income) expense, net and income taxes in the consolidated statements of income. As discussed in Note 18 — Operating Segments and Related Information in the accompanying notes to the consolidated financial statements, certain corporate costs are not included in EBIT of our operating segments. +The breakdown of earnings before interest and taxes is as follows: +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 (1) +FY13 vs. FY12 % Change +Fiscal 2011 (1) +FY12 vs. FY11 % Change +North America +$ +2,534 +$ +2,030 +25 +% +$ +1,736 +17 +% +Western Europe +640 +597 +7 +% +730 +-18 +% +Central & Eastern Europe +259 +234 +11 +% +244 +-4 +% +Greater China +809 +911 +-11 +% +777 +17 +% +Japan +133 +136 +-2 +% +114 +19 +% +Emerging Markets +1,011 +853 +19 +% +688 +24 +% +Global Brand Divisions +(1,396 +) +(1,200 +) +-16 +% +(971 +) +-24 +% +Total NIKE Brand +3,990 +3,561 +12 +% +3,318 +7 +% +Other Businesses +456 +385 +18 +% +353 +9 +% +Corporate +(1,177 +) +(917 +) +-28 +% +(805 +) +-14 +% +TOTAL CONSOLIDATED EARNINGS +BEFORE INTEREST AND TAXES +$ +3,269 +$ +3,029 +8 +% +$ +2,866 +6 +% +Interest (income) expense, net +(3 +) +4 +— +4 +— +TOTAL CONSOLIDATED INCOME +BEFORE INCOME TAXES +$ +3,272 +$ +3,025 +8 +% +$ +2,862 +6 +% +(1) +Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. +North America +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues by: +Footwear +$ +6,687 +$ +5,887 +14 +% +14 +% +$ +5,111 +15 +% +15 +% +Apparel +3,028 +2,482 +22 +% +22 +% +2,103 +18 +% +18 +% +Equipment +672 +470 +43 +% +43 +% +365 +29 +% +29 +% +TOTAL REVENUES +$ +10,387 +$ +8,839 +18 +% +18 +% +$ +7,579 +17 +% +17 +% +Revenues by: +Sales to Wholesale Customers +$ +7,838 +$ +6,720 +17 +% +17 +% +$ +5,801 +16 +% +16 +% +Sales Direct to Consumer +2,549 +2,119 +20 +% +20 +% +1,778 +19 +% +19 +% +TOTAL REVENUES +$ +10,387 +$ +8,839 +18 +% +18 +% +$ +7,579 +17 +% +17 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +2,534 +$ +2,030 +25 +% +$ +1,736 +17 +% +Fiscal 2013 Compared to Fiscal 2012 +Our category offense continued to deliver innovative products, deep brand connections, and compelling retail experiences to consumers in North America, driving increased demand for NIKE Brand products across all key categories except Action Sports. Our Basketball, Men's Training, Running, and Sportswear categories drove the revenue growth in fiscal 2013. North America ' s Direct to Consumer revenue growth for fiscal 2013 was fueled by 15% growth in comparable store sales as well as the addition of new stores and rapid growth in online sales. +North America footwear revenue growth was driven by higher demand in all seven key categories, most notably Basketball, Running, and Sportswear. Both unit sales and average selling price per pair increased 7% in fiscal 2013. The increase in average selling price per pair was driven approximately equally by price increases and a favorable mix of higher priced products. +Apparel revenue growth in North America was driven by higher demand in our Men ' s Training category, reflecting the addition of the NFL licensed business, as well as Basketball, Women ' s Training, and Running. Unit sales increased 10% while average selling price per unit increased 12%, largely driven by a favorable mix of higher priced products. +24 +Table of Contents +North America EBIT increased faster than revenue due to gross margin expansion and selling and administrative expense leverage. Gross margin increased 50 basis points for fiscal 2013, reflecting the favorable impact of selling price increases, partially offset by higher product costs, an unfavorable mix of lower margin products and royalties for the NFL business. Selling and administrative expenses increased versus fiscal 2012, though at a rate slower than revenue; the growth was largely driven by higher demand creation expense for the Olympics in the first quarter of fiscal 2013 as well as key product initiatives, including the NFL launch, and higher operating overhead costs to support the expansion of our Direct to Consumer business and overall growth of the business. +Fiscal 2012 Compared to Fiscal 2011 +Revenues for North America increased 17% for fiscal 2012, driven by growth in both wholesale and Direct to Consumer revenues. Our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers, driving demand for NIKE Brand products across all seven key categories. North America’s Direct to Consumer revenues grew 19% for fiscal 2012, driven by 15% growth in comparable store sales. +For fiscal 2012, footwear revenue in North America increased 15%, driven by an increase in both unit sales and average selling prices. Unit sales rose at a double-digit rate while average selling price per pair grew at a mid-single-digit rate, reflective of product price increases, partially offset by higher discounts on close-out sales. The overall increase in footwear sales was driven by growth in all key categories, most notably Running, Basketball, Women’s Training and Sportswear. +Compared to the prior year, apparel revenue for North America increased 18%, primarily driven by a low-double-digit percentage growth in average selling price per unit and a mid-single-digit percentage growth in unit sales. The increase in average selling price per unit was reflective of product price increases and a greater mix of higher price point products. The overall increase in apparel sales was driven by double-digit percentage growth across most key categories, including Men’s Training, Running and Basketball. +For fiscal 2012, EBIT for North America increased 17% as revenue growth and improved selling and administrative expense leverage more than offset a decline in gross margin. Gross margin decreased 90 basis points during fiscal 2012, primarily due to higher product input costs and lower gross margins on close-out sales, which more than offset the favorable impact of selling price increases, lower air freight costs and the growth of our Direct to Consumer business. Selling and administrative expense as a percentage of revenue decreased by 70 basis points for fiscal 2012, as both demand creation and operating overhead expense grew at a slower rate than revenues. +Western Europe +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,646 +$ +2,526 +5 +% +10 +% +$ +2,345 +8 +% +5 +% +Apparel +1,261 +1,377 +-8 +% +-4 +% +1,303 +6 +% +2 +% +Equipment +221 +241 +-8 +% +-3 +% +220 +10 +% +5 +% +TOTAL REVENUES +$ +4,128 +$ +4,144 +0 +% +5 +% +$ +3,868 +7 +% +4 +% +Revenues by: +Sales to Wholesale Customers +$ +3,416 +$ +3,556 +-4 +% +1 +% +$ +3,385 +5 +% +2 +% +Sales Direct to Consumer +712 +588 +21 +% +27 +% +483 +22 +% +18 +% +TOTAL REVENUES +$ +4,128 +$ +4,144 +0 +% +5 +% +$ +3,868 +7 +% +4 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +640 +$ +597 +7 +% +$ +730 +-18 +% +Fiscal 2013 Compared to Fiscal 2012 +On a currency neutral basis, most territories in Western Europe reported revenue growth for fiscal 2013, which more than offset revenue declines of 17% and 18% in Italy and Iberia, respectively, reflecting poor economic conditions in Southern Europe. Revenues for the U.K. & Ireland and AGS (Austria, Germany, and Switzerland) territories, the largest markets in Western Europe, increased 8% and 12%, respectively. The growth in Direct to Consumer revenues reflected 17% growth in comparable store sales, the addition of 19 net new factory stores and strong growth in online sales. On a category basis, Western Europe ' s revenue growth was largely driven by growth in our Running and Basketball categories. +Constant currency footwear revenue growth in Western Europe was primarily driven by growth in Running, Sportswear, and Basketball. Unit sales increased 7% and average selling price per pair increased 3%, the latter primarily the result of price increases. +The constant currency decrease in Western Europe apparel revenues was due to a decline in Sportswear, partially offset by growth in Running, Men ' s Training, and Basketball. Unit sales in fiscal 2013 decreased 1% while average selling price per unit decreased 3%, as higher discounts on close-out sales more than offset selling price increases. +The EBIT growth in fiscal 2013 was driven by a 200 basis point increase in gross margin, partially offset by higher selling and administrative expenses. The gross margin increase was primarily driven by favorable standard foreign currency exchange rates; higher net average selling prices were mostly offset by higher product costs. The increase in selling and administrative expense was mainly driven by an increased level of demand creation spending around the European Football Championships and Olympics in the first quarter of fiscal 2013, as well as higher sports marketing expense. Additionally, operating overhead costs increased to support the expansion of our Direct to Consumer business and overall growth of the business. Fiscal 2013 EBIT growth for Western Europe was also increased by a $24 million, one-time restructuring charge that was recorded in other (income) expense, net, in the fourth quarter of fiscal 2012. +25 +Table of Contents +Fiscal 2012 Compared to Fiscal 2011 +On a currency neutral basis, revenues for Western Europe increased 4% for fiscal 2012, as most territories reported revenue growth, which more than offset revenue declines in the U.K. & Ireland and Italy. Revenues for the U.K. & Ireland, the largest market in Western Europe, declined 3% for the fiscal 2012 period. Western Europe’s Direct to Consumer revenues grew 18% for fiscal 2012, including 8% growth in comparable store sales. +Excluding changes in currency exchange rates, footwear revenue in Western Europe increased 5% for fiscal 2012, primarily driven by a low-single-digit percentage growth in both unit sales and average selling price per pair, primarily reflective of product price increases, partially offset by higher discounts on in-line and close-out sales. The overall increase in footwear sales was driven by growth in Running, Basketball and Football (Soccer), which more than offset a decline in Action Sports. +Excluding changes in currency exchange rates, apparel revenue in Western Europe increased 2% for fiscal 2012. The year-over-year change was primarily driven by a mid-single-digit percentage increase in average selling price per unit, reflective of higher product prices. Partially offsetting the increase in average selling price per unit was a mid-single-digit percentage decline in unit sales. The overall increase in apparel sales was driven by growth in Football (Soccer) and Running, which more than offset a decline in Sportswear. +On a reported basis, revenues for Western Europe increased 7% for fiscal 2012. However, EBIT fell 18%, primarily driven by a 350 basis point decline in gross margin and higher selling and administrative expense as a percentage of revenues. The decline in gross margin was driven by higher product input costs and the negative impact from changes in standard currency rates, which more than offset the favorable impact of product price increases and the growth of our Direct to Consumer business. The increase in selling and administrative expense as a percentage of revenues was mainly driven by an increased level of demand creation spending around the European Football Championships and London Summer Olympics. Also reflected in Western Europe’s fiscal 2012 results was a $24 million charge relating to the restructuring of its operations. +Central & Eastern Europe +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues by: +Footwear +$ +714 +$ +671 +6 +% +11 +% +$ +605 +11 +% +13 +% +Apparel +483 +441 +10 +% +14 +% +359 +23 +% +24 +% +Equipment +90 +88 +2 +% +9 +% +76 +16 +% +17 +% +TOTAL REVENUES +$ +1,287 +$ +1,200 +7 +% +12 +% +$ +1,040 +15 +% +17 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +259 +$ +234 +11 +% +$ +244 +-4 +% +Fiscal 2013 Compared to Fiscal 2012 +On a currency neutral basis, Central & Eastern Europe revenues for fiscal 2013 were driven by growth across most territories, particularly Russia and Turkey, which grew 28% and 19%, respectively. Revenue growth in Central & Eastern Europe was driven by growth in all key categories, most notably Running, Football (Soccer), and Sportswear. +Constant currency footwear revenue growth in fiscal 2013 was primarily driven by growth in Running, Football (Soccer), and Basketball, partially offset by lower revenues in Sportswear. Unit sales increased 6% while average selling price per pair increased 5%, primarily driven by price increases. +Constant currency apparel revenue growth in fiscal 2013 was driven by growth in nearly all categories, most notably Sportswear, Football (Soccer), and Running. Unit sales increased 16%, while average selling price per unit decreased 2%, as an unfavorable mix of lower priced products more than off-set higher selling prices. +EBIT for Central & Eastern Europe grew faster than revenue primarily due to gross margin improvement and selling and administrative expense leverage. Gross margin increased 30 basis points, largely driven by price increases and the favorable impact of our higher margin Direct to Consumer business, more than offsetting higher product costs and unfavorable standard foreign currency exchange rates. +Fiscal 2012 Compared to Fiscal 2011 +Excluding the changes in currency exchange rates, revenues for Central & Eastern Europe increased 17% for fiscal 2012, driven by growth across most territories, including double-digit growth in Russia and Turkey, which more than offset lower revenues in Greece. +Excluding changes in currency exchange rates, Central & Eastern Europe’s footwear revenue grew 13%, primarily driven by double-digit percentage growth in unit sales and a low-single-digit percentage increase in average selling price per pair. The increase in average selling price per pair was reflective of product price increases which more than offset the negative impact of higher discounts on in-line and close-out sales. The overall increase in footwear sales was driven by growth across all key categories, most notably Running, Sportswear and Football (Soccer). +Excluding changes in currency exchange rates, Central & Eastern Europe’s apparel revenues grew 24%, mainly driven by double-digit percentage growth in unit sales, offset by a slight decrease in average price per unit, mainly due to less favorable product mix and higher discounts on in-line sales, which more than offset the impact from product price increases. The overall increase in apparel sales was primarily driven by growth in Football (Soccer), Sportswear and Running. +26 +Table of Contents +On a reported basis, revenues for Central & Eastern Europe increased 15% for fiscal 2012. However, EBIT fell 4%, primarily driven by a 420 basis point decline in gross margin. The decline in gross margin was primarily due to higher product input costs as well as higher discounts on in-line and close-out products, which more than offset the favorable impact from product price increases. Selling and administrative expense as a percentage of revenues remained relatively flat compared to the prior period. +Greater China +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues by: +Footwear +$ +1,493 +$ +1,518 +-2 +% +-3 +% +$ +1,164 +30 +% +25 +% +Apparel +829 +896 +-7 +% +-9 +% +789 +14 +% +9 +% +Equipment +131 +125 +5 +% +3 +% +107 +17 +% +12 +% +TOTAL REVENUES +$ +2,453 +$ +2,539 +-3 +% +-5 +% +$ +2,060 +23 +% +18 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +809 +$ +911 +-11 +% +$ +777 +17 +% +Fiscal 2013 Compared to Fiscal 2012 +On a currency neutral basis, Greater China revenue decreased in fiscal 2013, driven by lower futures orders as well as increased discounts, product returns and proactive cancellation of orders to manage inventory levels at retail. These downsides were partially offset by 33% growth in our Direct to Consumer business driven by comparable store sales growth of 13% and the addition of 29 net new factory stores. Fiscal 2013 revenues for most key categories were lower than in fiscal 2012. +For fiscal 2013, constant currency footwear revenue growth for Greater China declined, driven by lower sales across most key categories, most notably Sportswear and Men ' s and Women ' s Training, and increased reserves for product discounts and returns. Unit sales decreased 1%, while average selling price per pair decreased 2%, reflecting a higher mix of close-out sales and higher discounts. +The decrease in constant currency apparel revenue for fiscal 2013 was driven by lower revenues in Sportswear and Men ' s and Women ' s Training, partially offset by higher revenues in Basketball. Apparel unit sales in fiscal 2013 were 3% lower than the prior year while average selling price per unit was down 6%, reflecting a higher mix of close-out sales and higher discounts. +Fiscal 2013 EBIT for Greater China decreased at a faster rate than revenue, driven by lower gross margin and selling and administrative expense deleverage. Fiscal 2013 gross margin decreased 50 basis points due to a lower average selling price per unit driven by higher discounts and close-out mix partially offset by favorable standard foreign currency exchange rates. Selling and administrative expense increased as a percent of revenues, driven primarily by the increased investment in our Direct to Consumer business and the decrease in revenues. +Our results in Greater China have been adversely impacted by sluggish macroeconomic growth and slow product sell-through at retail, leading to high levels of inventory in the marketplace. Our strategy to return to sustained, profitable growth in Greater China focuses on extending our brand leadership position with consumers; expanding the offering of product styles and fits designed for the Chinese consumer; and working with our retail partners to create more differentiated, productive, and profitable retail stores. +Despite the challenges we have seen in China, there are indications that our strategies are taking hold in the marketplace. Comparable store sales are growing in our NIKE-owned Direct to Consumer doors and our wholesale customers are reporting comparable store growth and declining inventory levels. While we are making progress, we will continue to work with our retailers to optimize inventory, accelerate sell-through, and improve retail productivity. While China futures orders for the next six months are in line with last year, we expect revenues for the first half of the fiscal year will be below last year as we continue to manage the amount of product we ship into the market. We believe our revenue in China will stabilize around prior year levels in the second half of this fiscal year. +Fiscal 2012 Compared to Fiscal 2011 +Excluding changes in currency exchange rates, Greater China revenues increased 18% for fiscal 2012, driven by continued expansion in the number of both NIKE mono-branded stores owned by our wholesale customers and NIKE owned stores, as well as higher comparable store sales. +Excluding changes in currency exchange rates, the growth in Greater China’s footwear revenue for fiscal 2012 was primarily driven by double-digit percentage growth in unit sales and a mid-single-digit growth in average unit price per pair, reflective of product price increases. The overall increase in footwear sales was driven by double-digit percentage growth across most key categories, led by Running and Sportswear. +Excluding changes in currency exchange rates, the growth in Greater China’s apparel revenues for fiscal 2012 was mainly driven by a high-single-digit growth in the average selling price per unit and a low-single-digit percentage increase in unit sales. The increase in average selling price was reflective of product price increases, partially offset by higher discounts on in-line and close-out products to accelerate the sales of slower moving apparel inventories. +On a reported basis, revenues for Greater China increased 23% for fiscal 2012, while EBIT grew 17%, as revenue growth was partially offset by a decline in gross margin and an increase in selling and administrative expense as a percentage of revenues. Gross margin decreased 150 basis points for fiscal 2012, primarily attributable to higher product input costs and discounts on close-out products, which more than offset the favorable impact of product price increases. Selling and administrative expense as a percentage of revenues increased 50 basis points, driven by an increase in operating overhead expense. +27 +Table of Contents +Japan +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues by: +Footwear +$ +429 +$ +439 +-2 +% +5 +% +$ +397 +11 +% +3 +% +Apparel +301 +325 +-7 +% +-1 +% +305 +7 +% +-1 +% +Equipment +61 +71 +-14 +% +-9 +% +71 +0 +% +-5 +% +TOTAL REVENUES +$ +791 +$ +835 +-5 +% +1 +% +$ +773 +8 +% +1 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +133 +$ +136 +-2 +% +$ +114 +19 +% +Fiscal 2013 Compared to Fiscal 2012 +Excluding changes in currency exchange rates, the revenue increase for Japan was driven by higher revenues in Running, Football (Soccer) and Basketball, partially offset by lower revenues in Sportswear and Men ' s and Women ' s Training. +Fiscal 2013 EBIT for Japan decreased as a result of lower revenues, partially offset by gross margin improvement and lower selling and administrative expense. The decrease in selling and administrative expense in fiscal 2013 was attributable to lower operating overhead and demand creation spending. +Fiscal 2012 Compared to Fiscal 2011 +During fiscal 2012, the macroeconomic environment in Japan remained uncertain as the market continued to recover from the effects of the earthquake and tsunami that occurred in March 2011. On a currency neutral basis, footwear revenue in Japan increased 3% for fiscal 2012, as growth in Running and Football (Soccer) more than offset a decline in Sportswear. +Excluding changes in currency exchange rates, apparel revenue decreased 1% for fiscal 2012, as the decline in Sportswear more than offset the growth in Running and Football (Soccer). +On a reported basis, EBIT for Japan grew at a faster rate than revenue as a result of improved gross margin and leverage of selling and administrative expenses. The increase in Japan’s gross margin was mainly driven by the favorable impact from the year-over-year change in standard currency rates, a decrease in inventory obsolescence expense as well as a lower mix of close-out sales. These favorable impacts were partially offset by higher product input costs. +Emerging Markets +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues by: +Footwear +$ +2,570 +$ +2,387 +8 +% +15 +% +$ +1,897 +26 +% +27 +% +Apparel +918 +815 +13 +% +19 +% +657 +24 +% +25 +% +Equipment +230 +209 +10 +% +17 +% +183 +14 +% +15 +% +TOTAL REVENUES +$ +3,718 +$ +3,411 +9 +% +16 +% +$ +2,737 +25 +% +26 +% +EARNINGS BEFORE INTEREST +AND TAXES +$ +1,011 +$ +853 +19 +% +$ +688 +24 +% +Fiscal 2013 Compared to Fiscal 2012 +For fiscal 2013, constant currency revenue growth for the Emerging Markets geography was driven by growth in every key category and every territory, led by Argentina, Brazil, and Mexico. +Constant currency footwear revenue growth for fiscal 2013 was driven by growth in most key categories, most notably Running, Football (Soccer), and Women ' s Training. Unit sales increased approximately 9% and average selling price per pair increased 6%, primarily driven by selling price increases. +Fiscal 2013 constant currency apparel revenue was driven by growth in every key category, led by Football (Soccer), Running, Sportswear, and Men ' s Training. Unit sales increased approximately 10% and average selling price per unit increased 9%, largely attributable to price increases. +Fiscal 2013 Emerging Markets EBIT grew faster than revenue primarily driven by gross margin improvement, partially offset by higher selling and administrative expense as a percent of revenue. Gross margin increased 260 basis points due largely to the favorable impact of price increases, the anniversary of a one-time custom duty charge in fiscal 2012, and favorable standard foreign currency exchange rates, which more than offset the unfavorable impact of higher product costs. As a percent of revenue, selling and administrative expense was higher due to higher operating overhead costs to support the expansion of our Direct to Consumer business and overall growth of the business. +28 +Table of Contents +Fiscal 2012 Compared to Fiscal 2011 +Excluding the changes in currency exchange rates, revenues for the Emerging Markets increased 26% for fiscal 2012 as all territories in the geography reported double-digit revenue growth, led by Argentina, Brazil, Mexico and Korea. +For fiscal 2012, revenue growth for both footwear and apparel in the Emerging Markets was driven by double-digit percentage growth in unit sales and mid-single-digit percentage growth in average selling price per unit, primarily reflective of product price increases. The overall increase in Emerging Markets’ footwear and apparel sales was driven by strong demand in nearly all key categories, led by Running and Sportswear. +The increase in Emerging Markets’ EBIT for fiscal 2012 was primarily the result of revenue growth and selling and administrative expense leverage, which more than offset a lower gross margin. Gross margin declined 150 basis points for the fiscal year, primarily due to higher product input costs, customs duty charges and inventory obsolescence expense. These factors were partially offset by the favorable impact of changes in standard currency exchange rates and product price increases. Selling and administrative expense as a percentage of revenues decreased 140 basis points, as both demand creation expense and operating overhead grew at a slower rate than revenues. +Global Brand Divisions +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues +$ +117 +$ +111 +5 +% +8 +% +$ +96 +16 +% +13 +% +(Loss) Before Interest and Taxes +(1,396 +) +(1,200 +) +16 +% +(971 +) +24 +% +Global Brand Divisions primarily represent demand creation, operating overhead, and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for the Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. +Fiscal 2013 Compared to Fiscal 2012 +For fiscal 2013, Global Brand Divisions ' loss before interest and taxes increased $196 million, primarily driven by increased investments and marketing support for our digital business, product creation and design initiatives and higher demand creation spending in the first quarter of fiscal 2013 around the Olympics and European Football Championships. +Fiscal 2012 Compared to Fiscal 2011 +For fiscal 2012, Global Brand Divisions’ loss before interest and taxes increased $229 million, primarily driven by increased investments in our digital business and infrastructure for our Direct to Consumer operations, higher sports marketing expense as well as higher personnel costs to support our global brand functions. +Other Businesses +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +FY13 vs. FY12 % Change Excluding Currency Changes +Fiscal 2011 +FY12 vs. FY11 % Change +FY12 vs. FY11 % Change Excluding Currency Changes +Revenues +Converse +$ +1,449 +$ +1,324 +9 +% +9 +% +$ +1,131 +17 +% +17 +% +NIKE Golf +791 +726 +9 +% +10 +% +658 +10 +% +9 +% +Hurley +260 +248 +5 +% +5 +% +252 +-2 +% +-1 +% +TOTAL REVENUES +$ +2,500 +$ +2,298 +9 +% +9 +% +$ +2,041 +13 +% +12 +% +EARNINGS BEFORE INTEREST AND TAXES +$ +456 +$ +385 +18 +% +$ +353 +9 +% +Fiscal 2013 Compared to Fiscal 2012 +Our Other Businesses are comprised of Converse, NIKE Golf, and Hurley. +Other Businesses revenue growth in fiscal 2013 reflects growth in each of our Other Businesses. Revenue growth at Converse was primarily driven by increased sales in the UK as well as in China, as we transitioned that market to direct distribution in the second half of fiscal 2012. The increase in fiscal 2013 revenue for NIKE Golf was driven by double-digit growth in each of our apparel, footwear, and club businesses. +The fiscal 2013 increase in EBIT for our Other Businesses was driven by improved profits for all of our Other Businesses. +29 +Table of Contents +Fiscal 2012 Compared to Fiscal 2011 +For fiscal 2012, revenues for our Other Businesses increased 12%, reflecting growth across most businesses, led by Converse. The revenue growth at Converse was primarily driven by increased sales in North America and China, as well as increased revenues in the U.K. as we transitioned that market to direct distribution in the second half of fiscal 2011. Excluding changes in currency exchange rates, revenues for NIKE Golf increased 9% for fiscal 2012, driven by double-digit percentage growth in our apparel business, partially offset by a single-digit percentage decline in our club business. +On a reported basis, revenues for our Other Businesses increased 13% for fiscal 2012, while EBIT grew 9%, as earnings growth at Converse was partially off-set by losses at Hurley. Higher selling and administrative expense as a percentage of revenues negatively affected profitability and lower gross margins contributed to the decline in Hurley's earnings. +Corporate +(Dollars in millions) +Fiscal 2013 +Fiscal 2012 +FY13 vs. FY12 % Change +Fiscal 2011 +FY12 vs. FY11 % Change +Revenues +$ +(68 +) +$ +(46 +) +— +$ +(77 +) +— +(Loss) Before Interest and Taxes +(1,177 +) +(917 +) +28 +% +(805 +) +14 +% +Corporate revenues primarily consist of certain intercompany revenue eliminations and foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses but managed through our central foreign exchange risk management program. +Corporate loss before interest and taxes consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; certain foreign currency gains and losses, including certain hedge gains and losses; certain intercompany eliminations and other items. +In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results included in gross margin are gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and certain Other Businesses and related foreign currency hedge results. All other foreign currency related results, including conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies and certain foreign currency derivative instruments, are included in other (income) expense, net. +Fiscal 2013 Compared to Fiscal 2012 +For fiscal 2013, Corporate's loss before interest and taxes increased by $260 million primarily due to the following: +• +A $165 million increase in foreign exchange losses related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and certain Other Businesses, net of hedge gains; these losses are reported as a component of consolidated gross margin. +• +A $48 million decrease in foreign currency net losses, reported as a component of consolidated other (income) expense, net. +• +A $143 million increase in corporate overhead expense related to corporate initiatives to support the growth of the business and performance-based compensation . +Fiscal 2012 Compared to Fiscal 2011 +For fiscal 2012, Corporate's loss before interest and taxes grew $112 million, mainly due to an increase of $49 million in performance-based compensation and a year-over-year net increase of $73 million from foreign currency impacts. These foreign currency impacts were driven by a year-over-year increase in foreign currency net losses, arising from certain Euro/U.S. Dollar foreign currency hedges and the re-measurement of monetary assets and liabilities in various non-functional currencies, net of related undesignated forward instruments, as a variety of foreign currencies weakened against the U.S. Dollar year-over-year. The above impacts were partially offset by a slight decrease in centrally managed operating overhead expenses. +Foreign Currency Exposures and Hedging Practices +Overview +As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars. +Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks that are material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits that exist within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes +30 +Table of Contents +on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our consolidated financial statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. +Transactional exposures +We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: +• +Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways: +1. +Product purchases denominated in currencies other than the functional currency of the transacting entity: +a. +Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. +b. +Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In both purchasing scenarios, a weaker U.S. Dollar reduces the inventory cost incurred by NIKE whereas a stronger U.S. Dollar increases its cost. +2. +Factory input costs: In January 2012, NIKE implemented a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. +For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within inventories and is recognized in cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through other (income) expense, net . Refer to Note 17 — Risk Management and Derivatives for additional detail. +As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost. +• +Non-Functional Currency Denominated External Sales — A portion of our Western Europe and Central & Eastern Europe geography revenues are earned in currencies other than the Euro (e.g. British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. +• +Other Costs — Non-functional currency denominated costs, such as endorsement contracts, intercompany royalties and other intercompany charges, also generate foreign currency risk though to a lesser extent. +• +Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement, which may create fluctuations in other (income) expense, net within our consolidated results of operations. +Managing transactional exposures +Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with the accounting standards for derivatives and hedging, except for hedges of the embedded derivatives component of the product cost exposures as discussed below.. +Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and the embedded derivative contracts discussed above are not formally designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, changes in fair value of these instruments are immediately recognized in other (income) expense, net and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. +Refer to Note 6 — Fair Value Measurements and Note 17 – Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at period end. +Translational exposures +Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to OCI within shareholders’ equity. In the translation of our consolidated statements of income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated revenues was a benefit (detriment) of approximately $(605) million and $268 million for the years ended May 31, 2013 and 2012, respectively. The impact of foreign exchange rate +31 +Table of Contents +fluctuations on the translation of our income before income taxes was a benefit (detriment) of approximately $(104) million and $74 million for the years ended May 31, 2013 and 2012, respectively. +Managing translational exposures +To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated securities at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges. +Refer to Note 6 — Fair Value Measurements and Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at period end. +We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in other (income) expense, net had an unfavorable impact of approximately $56 million on our income before income taxes for the year ended May 31, 2013 and had an insignificant impact for the year ended May 31, 2012. +Net investments in foreign subsidiaries +We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. In accordance with the accounting standards for derivatives and hedging, the effective portion of the change in fair value of the forward contracts designated as net investment hedges is recorded in the cumulative translation adjustment component of accumulated other comprehensive income. Any ineffective portion is immediately recognized in earnings as a component of other (income) expense, net . The impact of ineffective hedges was not material for any period presented. To minimize credit risk, we have structured these net investment hedges to be generally less than six months in duration. Upon maturity, the hedges are settled based on the current fair value of the forward contracts with the realized gain or loss remaining in OCI. There were no outstanding net investment hedges as of May 31, 2013 and 2012. Cash flows from net investment hedge settlements totaled $22 million for the year ended May 31, 2012. +Liquidity and Capital Resources +Cash Flow Activity +Cash provided by operations was $3.0 billion for fiscal 2013 compared to $1.9 billion for fiscal 2012 . Our primary source of operating cash flow for fiscal 2013 was net income of $2.5 billion . Our fiscal 2013 change in working capital was a net cash outflow of $42 million , which is exclusive of working capital amounts sold as part of the divestitures of Umbro and Cole Haan, as compared to a net cash outflow of $799 million for fiscal 2012 . Our investments in working capital decreased due to slowing growth in inventory and reductions in accounts receivable compared to the prior year. During fiscal 2013 , inventory for continuing operations increased 7% compared to a 23% increase for fiscal 2012 ; the slowing growth was driven by our continued focus on increasing inventory productivity. The reduction in accounts receivable was primarily driven by the collection of receivables related to discontinued operations. +Cash used by investing activities was $1,067 million during fiscal 2013 , compared to a $514 million source of cash for fiscal 2012 . A major driver of the change was the swing from net sales/maturities of short-term investments in fiscal 2012 to net purchases of short-term investments in fiscal 2013, reflective of the additional purchases of short-term investments made with the proceeds from the issuance of long term debt in April 2013. In fiscal 2012, there were $1,124 million of net sales/maturities of short-term investments (net of purchases), while in fiscal 2013 we made $1,203 million in net purchases of short-term investments (net of sales/maturities). This impact was partially offset by $786 million in proceeds from the sale of Umbro and Cole Haan in fiscal 2013. +Cash used by financing activities was $1,040 million for fiscal 2013 compared to $2,118 million for fiscal 2012 . The decrease in cash used by financing activities was primarily due to $986 million in proceeds from the issuance of long-term debt in April 2013. Also contributing to the decrease were lower payments of long-term debt and notes payable and lower repurchases of common stock, which were partially offset by a reduction in the proceeds from the exercise of stock options. +In fiscal 2013 , we purchased 33.5 million shares of NIKE’s class B common stock for $1.7 billion , an average price of $49.50. During the year, we completed the four-year, $5 billion share repurchase program approved by our Board of Directors in September 2008. Under that program, we purchased a total of 118.8 million shares at an average price of $42.08 . Subsequently, we began repurchases under a four-year, $8 billion program approved by the Board in September 2012. As of the end of fiscal 2013 , we had repurchased 15.3 million shares at a cost of $789 million under this current program. We continue to expect funding of share repurchases will come from operating cash flow, excess cash, and/or debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions. +Capital Resources +On April 23, 2013, we filed a shelf registration statement (the "Shelf") with the SEC which permits us to issue an unlimited amount of debt securities. The Shelf expires on April 23, 2017. On April 23, 2013, we issued $1.0 billion of senior notes with tranches maturing in 2023 and 2043. The 2023 senior notes were issued in an initial aggregate principal amount of $500 million at a 2.25% fixed, annual interest rate and will mature on May 1, 2023. The 2043 senior notes were issued in an initial aggregate principal amount of $500 million at a 3.625% fixed, annual interest rate and will mature on May 1, 2043. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in gross proceeds before expenses of $998 million. We will use the net proceeds for general corporate purposes, which may include, but are not +32 +Table of Contents +limited to, discharging or refinancing debt, working capital, capital expenditures, share repurchases, as yet unplanned acquisitions of assets or businesses and investments in subsidiaries. +On November 1, 2011, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings with the option to increase borrowings to $1.5 billion with lender approval. The facility matures November 1, 2016, with a one-year extension option prior to both the second and third anniversary of the closing date, provided that extensions shall not extend beyond November 1, 2018. As of and for the year ended May 31, 2013 , we had no amounts outstanding under our committed credit facility. +We currently have long-term debt ratings of A+ and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt rating were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this committed revolving credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets, the amount of debt secured by liens we may incur, as well as a minimum capitalization ratio. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of May 31, 2013 , we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. +Liquidity is also provided by our $1 billion commercial paper program. During the year ended May 31, 2013 , we issued and subsequently repaid commercial paper borrowings of $505 million . As of May 31, 2013 , there were no outstanding borrowings under this program. We may continue to issue commercial paper or other debt securities during fiscal 2014 depending on general corporate needs. We currently have short-term debt ratings of A1 and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. +As of May 31, 2013 , we had cash, cash equivalents and short-term investments totaling $6.0 billion , of which $3.5 billion was held by our foreign subsidiaries. Cash equivalents and short-term investments consist primarily of deposits held at major banks, money market funds, Tier-1 commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations, and other investment grade fixed income securities. Our fixed income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2013 the average duration of our short-term investments and cash equivalents portfolio is 98 days. +Despite recent uncertainties in the financial markets, to date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future. +We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We routinely repatriate a portion of our foreign earnings for which U.S. taxes have previously been provided. We also indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the U.S., we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the U.S. through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits. If we elect to raise capital in the U.S. through debt, we would incur additional interest expense . +Off-Balance Sheet Arrangements +In connection with various contracts and agreements, we routinely provide indemnifications relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnifications is not material to our financial position or results of operations. +Contractual Obligations +Our significant long-term contractual obligations as of May 31, 2013 and significant endorsement contracts entered into through the date of this report are as follows: +Description of Commitment +Cash Payments Due During the Year Ending May 31, +(In millions) +2014 +2015 +2016 +2017 +2018 +Thereafter +Total +Operating Leases +$ +403 +$ +340 +$ +304 +$ +272 +$ +225 +$ +816 +$ +2,360 +Capital Leases +23 +28 +21 +9 +— +— +81 +Long-term Debt +98 +46 +145 +79 +56 +1,525 +1,949 +Endorsement Contracts (1) +909 +790 +586 +450 +309 +559 +3,603 +Product Purchase Obligations (2) +3,273 +— +— +— +— +— +3,273 +Other (3) +304 +89 +52 +82 +4 +18 +549 +TOTAL +$ +5,010 +$ +1,293 +$ +1,108 +$ +892 +$ +594 +$ +2,918 +$ +11,815 +(1) +The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete and sport team endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. +In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number +33 +Table of Contents +of sporting events in which they participate, and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source, and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers. +(2) +We generally order product at least 4 to 5 months in advance of sale based primarily on futures orders received from customers. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. The reported amounts exclude product purchase liabilities included in accounts payable on the consolidated balance sheet as of May 31, 2013 . +(3) +Other amounts primarily include service and marketing commitments made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. The reported amounts exclude those liabilities included in accounts payable or accrued liabilities on the consolidated balance sheet as of May 31, 2013 . +The total liability for uncertain tax positions was $447 million , excluding related interest and penalties, at May 31, 2013 . We are not able to reasonably estimate when or if cash payments of the long-term liability for uncertain tax positions will occur. +We also have the following outstanding short-term debt obligations as of May 31, 2013 . Refer to Note 7 — Short-Term Borrowings and Credit Lines for further description and interest rates related to the short-term debt obligations listed below. +(In millions) +Outstanding as of May 31, 2013 +Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand +$ +121 +Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port +55 +As of May 31, 2013 , letters of credit of $149 million were outstanding, which were generally issued for the purchase of inventory and as guarantees of the Company’s performance under certain self-insurance and other programs. +Recently Adopted Accounting Standards +In July 2012, the Financial Accounting Standards Board ("FASB") issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for us beginning June 1, 2013, and early adoption is permitted. We early adopted this standard and the adoption did not have a material impact on our consolidated financial position or results of operations. +In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance was effective for us beginning June 1, 2012. The adoption did not have a material effect on our consolidated financial position or results of operations. +In June 2011, the FASB issued guidance on the presentation of comprehensive income. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity. Companies are now required to present the components of net income and other comprehensive income in either one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This requirement was effective for us beginning June 1, 2012. As this guidance only amended the presentation of the components of comprehensive income, the adoption did not have an impact on our consolidated financial position or results of operations. Further, this guidance required companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This requirement will be effective for us beginning June 1, 2013. As this guidance only amends the presentation of the components of comprehensive income, we do not anticipate the adoption will have an impact on our consolidated financial position or results of operations. +Recently Issued Accounting Standards +In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. This new guidance is effective for us beginning June 1, 2013. As this guidance only requires expanded disclosures, we do not anticipate the adoption will have an impact on our consolidated financial position or results of operations. +Critical Accounting Policies +Our previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. +We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the allowance for uncollectible accounts receivable, inventory reserves, and contingent payments under endorsement contracts. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the +34 +Table of Contents +six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters. +Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. +Revenue Recognition +We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale. +In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods of up to several weeks. +In certain countries outside of the U.S., precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically. +As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. Our post invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. We base our estimates on historical rates of product returns, discounts and claims, specific identification of outstanding claims and outstanding returns not yet received from customers, and estimated returns, discounts and claims expected but not yet finalized with our customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims were significantly greater or lower than the reserves we had established, we would record a reduction or increase to net revenues in the period in which we made such determination. +Allowance for Uncollectible Accounts Receivable +We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to selling and administrative expense in the period in which such a determination is made. +Inventory Reserves +We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of sales. +Contingent Payments under Endorsement Contracts +A significant portion of our demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract. +Some of the contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record selling and administrative expense for these amounts when the endorser achieves the specific goal. +Some of the contracts provide for payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts are reported in selling and administrative expense when we determine that it is probable that the specified level of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or decreased selling and administrative expense may be reported in a future period. +Some of the contracts provide for royalty payments to endorsers based upon a predetermined percentage of sales of particular products. We expense these payments in cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contractual obligations for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in selling and administrative expense uniformly over the remaining guarantee period. +Property, Plant and Equipment and Definite-Lived Assets +Property, plant and equipment, including buildings, equipment, and computer hardware and software are recorded at cost (including, in some cases, the cost of internal labor) and are depreciated over the estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value. +We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant +35 +Table of Contents +adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Goodwill and Indefinite-Lived Intangible Assets +We perform annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. We may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, we utilize the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Fair Value Measurements +For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair values of our financial instruments. This pricing methodology applies to our Level 1 investments, including U.S. Treasury securities. +In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. This pricing methodology applies to our Level 2 investments such as commercial paper and bonds, U.S. agency securities and money market funds. Level 3 investments are valued using internally developed models with unobservable inputs. Assets and liabilities measured using unobservable inputs are an immaterial portion of our portfolio. +A majority of our available-for-sale securities are priced by pricing vendors and are generally Level 1 or Level 2 investments, as these vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor. +Hedge Accounting for Derivatives +We use forward and option contracts to hedge certain anticipated foreign currency exchange transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in other comprehensive income, rather than net income, until the underlying hedged transaction affects net income. In most cases, this results in gains and losses on hedge derivatives being released from other comprehensive income into net income some time after the maturity of the derivative. One of the criteria for this accounting treatment is that the forward and option contracts amount should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative changes in fair values of the over-hedged portion of the related hedge contract from other comprehensive income to other (income) expense, net during the quarter in which such changes occur. +We have used and may, in the future, use forward contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation related to our net investment in those subsidiaries. The change in fair value of the forward contracts hedging our net investments is reported in the cumulative translation adjustment component of accumulated other comprehensive income within shareholders’ equity, to the extent effective, to offset the foreign currency translation adjustments on those investments. As the value of our underlying net +36 +Table of Contents +investments in wholly-owned international subsidiaries is known at the time a hedge is placed, the designated hedge is matched to the portion of our net investment at risk. Accordingly, the variability involved in net investment hedges is substantially less than that of other types of hedge transactions and we do not expect any material ineffectiveness. We consider, on a quarterly basis, the need to redesignate existing hedge relationships based on changes in the underlying net investment. Should the level of our net investment decrease below hedged levels, the cumulative change in fair value of the over-hedged portion of the related hedge contract would be reported directly to earnings in the period in which changes occur. +Stock-based Compensation +We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period. +Taxes +We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our income tax expense in the period when such determination is made. +In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the U.S., thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore. +We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our income tax expense would be reduced in the year of such determination. +On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date pre-tax income excluding infrequently occurring or unusual items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. +On a quarterly basis, we reevaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in income tax expense. +Other Contingencies +In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges as other (income) expense, net during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows. +37 +Table of Contents +ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk +In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for trading or speculative purposes. +We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward exchange contracts and options to hedge certain anticipated but not yet firmly committed transactions as well as certain firm commitments and the related receivables and payables, including third-party and intercompany transactions. We have, and may in the future, also use forward contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our consolidated financial statements. +The timing for hedging exposures, as well as the type and duration of the hedge instruments employed, are guided by our hedging policies and determined based upon the nature of the exposure and prevailing market conditions. Generally, hedged transactions are expected to be recognized within 12 to 18 months. When intercompany loans are hedged, it is typically for their expected duration. Hedged transactions are principally denominated in Euros, British Pounds and Japanese Yen. See section “Foreign Currency Exposures and Hedging Practices” under Item 7 for additional detail. +Our earnings are also exposed to movements in short- and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans and fixed rate debt of varying maturities and have entered into receive-fixed, pay-variable interest rate swaps for a portion of our fixed rate debt. +Market Risk Measurement +We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis, and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. Dollar denominated debt, and fixed interest rate Japanese Yen denominated debt. +We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes and interest rate changes over the preceding one year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjust the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances, and accounts and loans receivable and payable), including those which are hedged by these instruments. +The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. +The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $34 million and $21 million at May 31, 2013 and 2012, respectively. The VaR increased year-over-year as a result of an increase in the total notional value of our foreign currency derivative portfolio combined with a longer average duration on our outstanding trades at May 31, 2013. Such a hypothetical loss in the fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $49 million and $87 million during fiscal 2013 and fiscal 2012, respectively. +The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. Dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. Therefore, we consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows. +Details of third-party debt and interest rate swaps are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average interest rates for the fixed rate swapped to floating rate debt reflect the effective interest rates at May 31, 2013. +38 +Table of Contents +Expected Maturity Date +Year Ending May 31, +(Dollars in millions) +2014 +2015 +2016 +2017 +2018 +Thereafter +Total +Fair Value +Foreign Exchange Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +7 +$ +7 +$ +7 +$ +7 +$ +7 +$ +14 +$ +49 +$ +52 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +Interest Rate Risk +Japanese Yen Functional Currency +Long-term Japanese Yen debt — Fixed rate +Principal payments +$ +7 +$ +7 +$ +7 +$ +7 +$ +7 +$ +14 +$ +49 +$ +52 +Average interest rate +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +2.4 +% +U.S. Dollar Functional Currency +Long-term U.S. Dollar debt — Fixed rate swapped to Floating rate +Principal payments +$ +— +$ +— +$ +100 +$ +— +$ +— +$ +— +$ +100 +$ +110 +Average interest rate +0.0 +% +0.0 +% +0.4 +% +0.0 +% +0.0 +% +0.0 +% +0.4 +% +Long-term U.S. Dollar debt — Fixed rate +Principal payments +$ +51 +$ +1 +$ +1 +$ +38 +$ +18 +$ +1,000 +$ +1,109 +$ +1,057 +Average interest rate +4.7 +% +6.4 +% +6.4 +% +6.2 +% +6.8 +% +2.9 +% +3.2 +% +The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in accumulated other comprehensive income upon the consolidation of this subsidiary. +ITEM 8. Financial Statements and Supplemental Data +Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with the generally accepted accounting principles we considered appropriate in the circumstances and include some amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements. +Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with generally accepted accounting principles. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties. +An Internal Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently consisting of three outside directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews with the independent registered public accounting firm, management and the internal audit staff, the scope and the results of the annual examination, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit Committee deems appropriate. The independent registered public accounting firm and the internal auditors have full access to the Committee, with and without the presence of management, to discuss any appropriate matters. +39 +Table of Contents +Management’s Annual Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. +While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2013 . +PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the consolidated financial statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2013 , as stated in their report herein. +Mark G. Parker +Donald W. Blair +President and Chief Executive Officer +Chief Financial Officer +40 +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of NIKE, Inc.: +In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries at May 31, 2013 and 2012 , and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2013 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 appendix appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2013 , based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/S/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 23, 2013 +41 +Table of Contents +NIKE, Inc. Consolidated Statements Of Income +Year Ended May 31, +(In millions, except per share data) +2013 +2012 +2011 +Income from continuing operations: +Revenues +$ +25,313 +$ +23,331 +$ +20,117 +Cost of sales +14,279 +13,183 +10,915 +Gross profit +11,034 +10,148 +9,202 +Demand creation expense +2,745 +2,607 +2,344 +Operating overhead expense +5,035 +4,458 +4,017 +Total selling and administrative expense +7,780 +7,065 +6,361 +Interest (income) expense, net (Notes 6, 7 and 8) +(3 +) +4 +4 +Other (income) expense, net (Note 17) +(15 +) +54 +(25 +) +Income before income taxes +3,272 +3,025 +2,862 +Income tax expense (Note 9) +808 +756 +690 +NET INCOME FROM CONTINUING OPERATIONS +2,464 +2,269 +2,172 +NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS +21 +(46 +) +(39 +) +NET INCOME +$ +2,485 +$ +2,223 +$ +2,133 +Earnings per share from continuing operations: +Basic earnings per common share (Notes 1 and 12) +$ +2.75 +$ +2.47 +$ +2.28 +Diluted earnings per common share (Notes 1 and 12) +$ +2.69 +$ +2.42 +$ +2.24 +Earnings per share from discontinued operations: +Basic earnings per common share (Notes 1 and 12) +$ +0.02 +$ +(0.05 +) +$ +(0.04 +) +Diluted earnings per common share (Notes 1 and 12) +$ +0.02 +$ +(0.05 +) +$ +(0.04 +) +Dividends declared per common share +$ +0.81 +$ +0.70 +$ +0.60 +The accompanying notes to consolidated financial statements are an integral part of this statement. +42 +Table of Contents +NIKE, Inc. Consolidated Statements of Comprehensive Income +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Net income +$ +2,485 +$ +2,223 +$ +2,133 +Other comprehensive income (loss), net of tax: +Foreign currency translation and other (1) +30 +(295 +) +263 +Net gain (loss) on cash flow hedges (2) +117 +255 +(242 +) +Net gain (loss) on net investment hedges (3) +— +45 +(57 +) +Reclassification to net income of previously deferred (gains) losses related to hedge derivative instruments (4) +(105 +) +49 +(84 +) +Release of cumulative translation loss related to Umbro (5) (Notes 14 and 15) +83 +— +— +Total other comprehensive income, net of tax +125 +54 +(120 +) +TOTAL COMPREHENSIVE INCOME +$ +2,610 +$ +2,277 +$ +2,013 +(1) +Net of tax (expense) benefit of $(12) million , $0 million , and $(121) million , respectively. +(2) +Net of tax (expense) benefit of $(22) million , $(8) million , and $66 million , respectively. +(3) +Net of tax benefit of $0 million , $0 million , and $28 million , respectively. +(4) +Net of tax (benefit) expense of $0 million , $(14) million , and $24 million , respectively. +(5) +Net of tax (benefit) of $(47) million , $0 million , and $0 million , respectively. +The accompanying notes to consolidated financial statements are an integral part of this statement. +43 +Table of Contents +NIKE, Inc. Consolidated Balance Sheets +May 31, +(In millions) +2013 +2012 +ASSETS +Current assets: +Cash and equivalents +$ +3,337 +$ +2,317 +Short-term investments (Note 6) +2,628 +1,440 +Accounts receivable, net (Note 1) +3,117 +3,132 +Inventories (Notes 1 and 2) +3,434 +3,222 +Deferred income taxes (Note 9) +308 +262 +Prepaid expenses and other current assets (Notes 6 and 17) +802 +857 +Assets of discontinued operations (Note 15) +— +615 +Total current assets +13,626 +11,845 +Property, plant and equipment, net (Note 3) +2,452 +2,209 +Identifiable intangible assets, net (Note 4) +382 +370 +Goodwill (Note 4) +131 +131 +Deferred income taxes and other assets (Notes 6, 9 and 17) +993 +910 +TOTAL ASSETS +$ +17,584 +$ +15,465 +LIABILITIES AND SHAREHOLDERS’ EQUITY +Current liabilities: +Current portion of long-term debt (Note 8) +$ +57 +$ +49 +Notes payable (Note 7) +121 +108 +Accounts payable (Note 7) +1,646 +1,549 +Accrued liabilities (Notes 5, 6 and 17) +1,986 +1,941 +Income taxes payable (Note 9) +98 +65 +Liabilities of discontinued operations (Note 15) +18 +170 +Total current liabilities +3,926 +3,882 +Long-term debt (Note 8) +1,210 +228 +Deferred income taxes and other liabilities (Notes 6, 9 and 17) +1,292 +974 +Commitments and contingencies (Note 16) +— +— +Redeemable Preferred Stock (Note 10) +— +— +Shareholders’ equity: +Common stock at stated value (Note 11): +Class A convertible — 178 and 180 shares outstanding +— +— +Class B — 716 and 736 shares outstanding +3 +3 +Capital in excess of stated value +5,184 +4,641 +Accumulated other comprehensive income (Note 14) +274 +149 +Retained earnings +5,695 +5,588 +Total shareholders’ equity +11,156 +10,381 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +17,584 +$ +15,465 +The accompanying notes to consolidated financial statements are an integral part of this statement. +44 +Table of Contents +NIKE, Inc. Consolidated Statements of Cash Flows +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Cash provided by operations: +Net income +$ +2,485 +$ +2,223 +$ +2,133 +Income charges (credits) not affecting cash: +Depreciation +438 +373 +335 +Deferred income taxes +21 +(60 +) +(76 +) +Stock-based compensation (Note 11) +174 +130 +105 +Amortization and other +75 +32 +23 +Net gain on divestitures +(124 +) +— +— +Changes in certain working capital components and other assets and liabilities: +Decrease (increase) in accounts receivable +142 +(323 +) +(273 +) +(Increase) in inventories +(197 +) +(805 +) +(551 +) +(Increase) in prepaid expenses and other current assets +(28 +) +(141 +) +(35 +) +Increase in accounts payable, accrued liabilities and income taxes payable +41 +470 +151 +Cash provided by operations +3,027 +1,899 +1,812 +Cash (used) provided by investing activities: +Purchases of short-term investments +(3,702 +) +(2,705 +) +(7,616 +) +Maturities of short-term investments +1,501 +2,585 +4,313 +Sales of short-term investments +998 +1,244 +2,766 +Additions to property, plant and equipment +(636 +) +(597 +) +(432 +) +Disposals of property, plant and equipment +14 +2 +1 +Proceeds from divestitures +786 +— +— +Increase in other assets, net of other liabilities +(28 +) +(37 +) +(30 +) +Settlement of net investment hedges +— +22 +(23 +) +Cash (used) provided by investing activities +(1,067 +) +514 +(1,021 +) +Cash used by financing activities: +Net proceeds from long-term debt issuance +986 +— +— +Long-term debt payments, including current portion +(49 +) +(203 +) +(8 +) +Increase (decrease) in notes payable +15 +(65 +) +41 +Proceeds from exercise of stock options and other stock issuances +313 +468 +345 +Excess tax benefits from share-based payment arrangements +72 +115 +64 +Repurchase of common stock +(1,674 +) +(1,814 +) +(1,859 +) +Dividends — common and preferred +(703 +) +(619 +) +(555 +) +Cash used by financing activities +(1,040 +) +(2,118 +) +(1,972 +) +Effect of exchange rate changes +100 +67 +57 +Net increase (decrease) in cash and equivalents +1,020 +362 +(1,124 +) +Cash and equivalents, beginning of year +2,317 +1,955 +3,079 +CASH AND EQUIVALENTS, END OF YEAR +$ +3,337 +$ +2,317 +$ +1,955 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest, net of capitalized interest +$ +20 +$ +29 +$ +32 +Income taxes +702 +638 +736 +Dividends declared and not paid +188 +165 +145 +The accompanying notes to consolidated financial statements are an integral part of this statement. +45 +Table of Contents +NIKE, Inc. Consolidated Statements of Shareholders’ Equity +Common Stock +Capital in +Excess +of Stated +Value +Accumulated +Other +Comprehensive +Income +Retained +Earnings +Total +Class A +Class B +(In millions, except per share data) +Shares +Amount +Shares +Amount +Balance at May 31, 2010 +180 +$ +— +788 +$ +3 +$ +3,441 +$ +215 +$ +6,095 +$ +9,754 +Stock options exercised +14 +368 +368 +Repurchase of Class B Common Stock +(48 +) +(14 +) +(1,857 +) +(1,871 +) +Dividends on Common stock ($0.60 per share) +(569 +) +(569 +) +Issuance of shares to employees +2 +49 +49 +Stock-based compensation (Note 11) +105 +105 +Forfeiture of shares from employees +— +(5 +) +(1 +) +(6 +) +Net income +2,133 +2,133 +Other Comprehensive Income +(120 +) +(120 +) +Balance at May 31, 2011 +180 +$ +— +756 +$ +3 +$ +3,944 +$ +95 +$ +5,801 +$ +9,843 +Stock options exercised +18 +528 +528 +Repurchase of Class B Common Stock +(40 +) +(12 +) +(1,793 +) +(1,805 +) +Dividends on Common stock ($0.70 per share) +(639 +) +(639 +) +Issuance of shares to employees +2 +57 +57 +Stock-based compensation (Note 11) +130 +130 +Forfeiture of shares from employees +— +(6 +) +(4 +) +(10 +) +Net income +2,223 +2,223 +Other comprehensive income +54 +54 +Balance at May 31, 2012 +180 +$ +— +736 +$ +3 +$ +4,641 +$ +149 +$ +5,588 +$ +10,381 +Stock options exercised +10 +322 +322 +Conversion to Class B Common Stock +(2 +) +2 +— +Repurchase of Class B Common Stock +(34 +) +(10 +) +(1,647 +) +(1,657 +) +Dividends on Common stock ($0.81 per share) +(727 +) +(727 +) +Issuance of shares to employees +2 +65 +65 +Stock-based compensation (Note 11) +174 +174 +Forfeiture of shares from employees +— +(8 +) +(4 +) +(12 +) +Net income +2,485 +2,485 +Other comprehensive income +125 +125 +Balance at May 31, 2013 +178 +$ +— +716 +$ +3 +$ +5,184 +$ +274 +$ +5,695 +$ +11,156 +The accompanying notes to consolidated financial statements are an integral part of this statement. +46 +Table of Contents +Notes to Consolidated Financial Statements +Note 1 +Summary of Significant Accounting Policies +48 +Note 2 +Inventories +52 +Note 3 +Property, Plant and Equipment +52 +Note 4 +Identifiable Intangible Assets and Goodwill +52 +Note 5 +Accrued Liabilities +53 +Note 6 +Fair Value Measurements +53 +Note 7 +Short-Term Borrowings and Credit Lines +55 +Note 8 +Long-Term Debt +56 +Note 9 +Income Taxes +56 +Note 10 +Redeemable Preferred Stock +59 +Note 11 +Common Stock and Stock-Based Compensation +59 +Note 12 +Earnings Per Share +60 +Note 13 +Benefit Plans +61 +Note 14 +Accumulated Other Comprehensive Income +61 +Note 15 +Discontinued Operations +61 +Note 16 +Commitments and Contingencies +62 +Note 17 +Risk Management and Derivatives +63 +Note 18 +Operating Segments and Related Information +66 +47 +Table of Contents +NOTE 1 — Summary of Significant Accounting Policies +Description of Business +NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. Wholly-owned NIKE, Inc. subsidiaries include Converse Inc., which designs, markets and distributes casual footwear, apparel and accessories and Hurley International LLC, which designs, markets and distributes action sports and youth lifestyle footwear, apparel and accessories. +Basis of Consolidation +The consolidated financial statements include the accounts of NIKE, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. +The Company completed the sale of Cole Haan during the third quarter ended February 28, 2013 and completed the sale of Umbro during the second quarter ended November 30, 2012. As a result, the Company reports the operating results of Cole Haan and Umbro in the net income (loss) from discontinued operations line in the consolidated statements of income for all periods presented. In addition, the assets and liabilities associated with these businesses are reported as assets of discontinued operations and liabilities of discontinued operations, as appropriate, in the consolidated balance sheets (refer to Note 15 — Discontinued Operations). Unless otherwise indicated, the disclosures accompanying the consolidated financial statements reflect the Company’s continuing operations. +On November 15, 2012, the Company announced a two -for-one split of both NIKE Class A and Class B Common shares. The stock split was a 100 percent stock dividend payable on December 24, 2012 to shareholders of record at the close of business December 10, 2012. Common stock began trading at the split-adjusted price on December 26, 2012. All share numbers and per share amounts presented reflect the stock split. +Recognition of Revenues +Wholesale revenues are recognized when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Post-invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. Estimates of discretionary discounts, returns and claims are based on historical rates, specific identification of outstanding claims and outstanding returns not yet received from customers, and estimated discounts, returns and claims expected but not yet finalized with customers. As of May 31, 2013 and 2012 , the Company’s reserve balances for post-invoice sales discounts, returns and miscellaneous claims were $531 million and $455 million , respectively. +Cost of Sales +Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third party royalties, certain foreign currency hedge gains and losses, and research, design and development costs. +Shipping and Handling Costs +Shipping and handling costs are expensed as incurred and included in cost of sales. +Operating Overhead Expense +Operating overhead expense consists primarily of payroll and benefit related costs, rent, depreciation and amortization, professional services, and meetings and travel. +Demand Creation Expense +Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events, and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Advertising placement costs are expensed in the month the advertising appears, while costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is completed and delivered. +A significant amount of the Company’s promotional expenses result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in prepaid expenses or other assets depending on the period to which the prepayment applies. +Some of the contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). The Company records selling and administrative expense for these amounts when the endorser achieves the specific goal. +Some of the contracts provide for payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts are recorded in selling and administrative expense when the Company determines that it is probable that the specified level of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or decreased selling and administrative expense may be recorded in a future period. +Some of the contracts provide for royalty payments to endorsers based upon a predetermined percentage of sales of particular products. The Company expenses these payments in cost of sales as the related sales occur. In certain contracts, the Company offers minimum guaranteed royalty payments. For contractual obligations for which the Company estimates it will not meet the minimum guaranteed amount of royalty fees through sales of product, the Company records the amount of the guaranteed payment in excess of that earned through sales of product in selling and administrative expense uniformly over the remaining guarantee period. +48 +Table of Contents +Through cooperative advertising programs, the Company reimburses retail customers for certain costs of advertising the Company’s products. The Company records these costs in selling and administrative expense at the point in time when it is obligated to its customers for the costs, which is when the related revenues are recognized. This obligation may arise prior to the related advertisement being run. +Total advertising and promotion expenses were $2,745 million , $2,607 million , and $2,344 million for the years ended May 31, 2013 , 2012 and 2011 , respectively. Prepaid advertising and promotion expenses recorded in prepaid expenses and other current assets totaled $386 million and $281 million at May 31, 2013 and 2012 , respectively. +Cash and Equivalents +Cash and equivalents represent cash and short-term, highly liquid investments, including commercial paper, U.S. treasury, U.S. agency, and corporate debt securities with maturities of three months or less at date of purchase. +Short-Term Investments +Short-term investments consist of highly liquid investments, including commercial paper, U.S. treasury, U.S. agency, and corporate debt securities, with maturities over three months from the date of purchase. Debt securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2013 and 2012 , the Company did not hold any short-term investments that were classified as trading or held-to-maturity. +At May 31, 2013 and 2012 , short-term investments consisted of available-for-sale securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classifies all securities with maturity dates beyond three months at the date of purchase as current assets within short-term investments on the consolidated balance sheets. +Refer to Note 6 — Fair Value Measurements for more information on the Company’s short-term investments. +Allowance for Uncollectible Accounts Receivable +Accounts receivable consists primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in other assets. The allowance for uncollectible accounts receivable was $104 million and $91 million at May 31, 2013 and 2012 , respectively, of which $54 million and $45 million , respectively, was classified as long-term and recorded in other assets. +Inventory Valuation +Inventories are stated at lower of cost or market and valued primarily on an average cost basis. Inventory costs primarily consist of product cost from our suppliers, as well as freight, import duties, taxes, insurance and logistics and other handling fees. +Property, Plant and Equipment and Depreciation +Property, plant and equipment are recorded at cost. Depreciation for financial reporting purposes is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. +Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in cost of sales. Depreciation and amortization of other assets are recorded in selling and administrative expense. +Software Development Costs +Internal Use Software . Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 10 year period on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. +Computer Software to be Sold, Leased or Otherwise Marketed . Development costs of computer software to be sold, leased, or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. +Impairment of Long-Lived Assets +The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds +49 +Table of Contents +the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value. +Identifiable Intangible Assets and Goodwill +The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test first requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any. +The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. +Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the C ompany determines that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. +Operating Leases +The Company leases retail store space, certain distribution and warehouse facilities, office space, and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rents, which are determined as a percentage of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable. +Fair Value Measurements +The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board ("FASB") that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). +The levels of hierarchy are described below: +• +Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. +• +Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions. +The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement. +Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor. +Refer to Note 6 — Fair Value Measurements for additional information. +50 +Table of Contents +Foreign Currency Translation and Foreign Currency Transactions +Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive income in shareholders’ equity. +The Company’s global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to remeasurement, the impact of which is recorded in other (income) expense, net, within the consolidated statements of income. +Accounting for Derivatives and Hedging Activities +The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the balance sheet and changes in the fair value of derivative financial instruments are either recognized in other comprehensive income (a component of shareholders’ equity), debt or net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge, and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is within the cash provided by operations component of the consolidated statements of cash flows. For designated net investment hedges, this is generally within the cash provided or used by investing activities component of the cash flow statement. As our fair value hedges are receive-fixed, pay-variable interest rate swaps, the cash flows associated with these derivative instruments are periodic interest payments while the swaps are outstanding. These cash flows are reflected within the cash provided by operations component of the cash flow statement. +Refer to Note 17 — Risk Management and Derivatives for more information on the Company’s risk management program and derivatives. +Stock-Based Compensation +The Company estimates the fair value of options and stock appreciation rights granted under the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”) and employees’ purchase rights under the Employee Stock Purchase Plans (“ESPPs”) using the Black-Scholes option pricing model. The Company recognizes this fair value, net of estimated forfeitures, as selling and administrative expense in the consolidated statements of income over the vesting period using the straight-line method. +Refer to Note 11 — Common Stock and Stock-Based Compensation for more information on the Company’s stock programs. +Income Taxes +The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. United States income taxes are provided currently on financial statement earnings of non-U.S. subsidiaries that are expected to be repatriated. The Company determines annually the amount of undistributed non-U.S. earnings to invest indefinitely in its non-U.S. operations. +The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in income tax expense. +Refer to Note 9 — Income Taxes for further discussion. +Earnings Per Share +Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards. +Refer to Note 12 — Earnings Per Share for further discussion. +Management Estimates +The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. +Recently Adopted Accounting Standards +In July 2012, the FASB issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for the Company beginning June 1, 2013, and early adoption is permitted. The Company early adopted this standard and the adoption did not have a material impact on its consolidated financial position or results of operations. +In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance was effective for the Company beginning June 1, 2012 and the adoption did not have a material effect on its consolidated financial position or results of operations. +In June 2011, the FASB issued guidance on the presentation of comprehensive income. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity. Companies are now required to present the components +51 +Table of Contents +of net income and other comprehensive income in either one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This requirement was effective for the Company beginning June 1, 2012. As this guidance only amended the presentation of the components of comprehensive income, the adoption did not have an impact on the Company’s consolidated financial position or results of operations. Further, this guidance required companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This requirement will be effective for the Company beginning June 1, 2013. As this guidance only amends the presentation of the components of comprehensive income, the Company does not anticipate the adoption will have an impact on the Company’s consolidated financial position or results of operations. +Recently Issued Accounting Standards +In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. This new guidance is effective for the Company beginning June 1, 2013. As this guidance only requires expanded disclosures, the Company does not anticipate the adoption will have an impact on its consolidated financial position or results of operations. +NOTE 2 — Inventories +Inventory balances of $3,434 million and $3,222 million at May 31, 2013 and 2012 , respectively, were substantially all finished goods. +NOTE 3 — Property, Plant and Equipment +Property, plant and equipment included the following: +As of May 31, +(In millions) +2013 +2012 +Land +$ +268 +$ +252 +Buildings +1,174 +1,158 +Machinery, equipment and internal-use software +2,985 +2,654 +Leasehold improvements +945 +883 +Construction in process +128 +110 +Total property, plant and equipment, gross +5,500 +5,057 +Less accumulated depreciation +3,048 +2,848 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +2,452 +$ +2,209 +Capitalized interest was not material for the years ended May 31, 2013 , 2012 , and 2011 . The Company had $81 million in capital lease obligations as of May 31, 2013 included in machinery, equipment, and internal-use software; there were no capital lease obligations as of May 31, 2012 . +NOTE 4 — Identifiable Intangible Assets and Goodwill +The following table summarizes the Company’s identifiable intangible asset balances as of May 31, 2013 and 2012 : +As of May 31, 2013 +As of May 31, 2012 +(In millions) +Gross Carrying +Amount +Accumulated +Amortization +Net Carrying +Amount +Gross Carrying +Amount +Accumulated +Amortization +Net Carrying +Amount +Amortized intangible assets: +Patents +$ +119 +$ +(35 +) +$ +84 +$ +99 +$ +(29 +) +$ +70 +Trademarks +43 +(32 +) +11 +40 +(26 +) +14 +Other +20 +(16 +) +4 +19 +(16 +) +3 +TOTAL +$ +182 +$ +(83 +) +$ +99 +$ +158 +$ +(71 +) +$ +87 +Unamortized intangible assets — +Trademarks +283 +283 +IDENTIFIABLE INTANGIBLE +ASSETS, NET +$ +382 +$ +370 +Amortization expense, which is included in selling and administrative expense, was $14 million , $14 million , and $13 million for the years ended May 31, 2013 , 2012 , and 2011 , respectively. The estimated amortization expense for intangible assets subject to amortization for each of the years ending May 31, 2014 through May 31, 2018 are as follows: 2014 : $13 million ; 2015 : $9 million ; 2016 : $9 million ; 2017 : $7 million ; 2018 : $6 million . +Goodwill was $131 million at May 31, 2013 and May 31, 2012 , respectively, and is included in the Company’s “Other” category for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end. +52 +Table of Contents +NOTE 5 — Accrued Liabilities +Accrued liabilities included the following: +As of May 31, +(In millions) +2013 +2012 +Compensation and benefits, excluding taxes +$ +713 +$ +691 +Endorsement compensation +264 +288 +Taxes other than income taxes +192 +169 +Dividends payable +188 +165 +Import and logistics costs +111 +133 +Advertising and marketing +77 +94 +Fair value of derivatives +34 +55 +Other (1) +407 +346 +TOTAL ACCRUED LIABILITIES +$ +1,986 +$ +1,941 +(1) +Other consists of various accrued expenses with no individual item accounting for more than 5% of the balance at May 31, 2013 and 2012 . +NOTE 6 — Fair Value Measurements +The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2013 and 2012 , and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Refer to Note 1 – Summary of Significant Accounting Policies for additional detail regarding the Company’s fair value measurement methodology. +As of May 31, 2013 +Fair Value +Measurements Using +Assets/Liabilities +at Fair Value +(In millions) +Level 1 +Level 2 +Level 3 +Balance Sheet Classification +ASSETS +Derivatives: +Foreign exchange forwards and options +$ +— +$ +278 +$ +— +$ +278 +Other current assets and other long-term assets +Interest rate swap contracts +— +11 +— +11 +Other current assets and other long-term assets +Total derivatives +— +289 +— +289 +Available-for-sale securities: +U.S. Treasury securities +425 +— +— +425 +Cash and equivalents +U.S. Agency securities +— +20 +— +20 +Cash and equivalents +Commercial paper and bonds +— +1,035 +— +1,035 +Cash and equivalents +Money market funds +— +836 +— +836 +Cash and equivalents +U.S. Treasury securities +1,583 +— +— +1,583 +Short-term investments +U.S. Agency securities +— +401 +— +401 +Short-term investments +Commercial paper and bonds +— +644 +— +644 +Short-term investments +Non-marketable preferred stock +— +— +5 +5 +Other long-term assets +Total available-for-sale securities +2,008 +2,936 +5 +4,949 +TOTAL ASSETS +$ +2,008 +$ +3,225 +$ +5 +$ +5,238 +LIABILITIES +Derivatives: +Foreign exchange forwards and options +$ +— +$ +34 +$ +— +$ +34 +Accrued liabilities and other long-term liabilities +TOTAL LIABILITIES +$ +— +$ +34 +$ +— +$ +34 +53 +Table of Contents +As of May 31, 2012 +Fair Value +Measurements Using +Assets / +Liabilities +at Fair Value +(In millions) +Level 1 +Level 2 +Level 3 +Balance Sheet Classification +ASSETS +Derivatives: +Foreign exchange forwards and options +$ +— +$ +265 +$ +— +$ +265 +Other current assets and other long-term assets +Embedded derivatives +— +1 +— +1 +Other current assets +Interest rate swap contracts +— +15 +— +15 +Other current assets and other long-term assets +Total derivatives +— +281 +— +281 +Available-for-sale securities: +U.S. Treasury securities +226 +— +— +226 +Cash and equivalents +U.S. Agency securities +— +254 +— +254 +Cash and equivalents +Commercial paper and bonds +— +159 +— +159 +Cash and equivalents +Money market funds +— +770 +— +770 +Cash and equivalents +U.S. Treasury securities +927 +— +— +927 +Short-term investments +U.S. Agency securities +— +230 +— +230 +Short-term investments +Commercial paper and bonds +— +283 +— +283 +Short-term investments +Non-marketable preferred stock +— +— +3 +3 +Other long-term assets +Total available-for-sale securities +1,153 +1,696 +3 +2,852 +TOTAL ASSETS +$ +1,153 +$ +1,977 +$ +3 +$ +3,133 +LIABILITIES +Derivatives: +Foreign exchange forwards and options +$ +— +$ +55 +$ +— +$ +55 +Accrued liabilities and other long-term liabilities +TOTAL LIABILITIES +$ +— +$ +55 +$ +— +$ +55 +Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swap contracts. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates, and considers nonperformance risk of the Company and that of its counterparties. Adjustments relating to these nonperformance risks were not material at May 31, 2013 or 2012 . Refer to Note 17 — Risk Management and Derivatives for additional detail. +Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Pricing vendors are utilized for certain Level 1 or Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The carrying amounts reflected in the consolidated balance sheets for short-term investments and cash and equivalents approximate fair value. +The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These investments are valued using internally developed models with unobservable inputs. These Level 3 investments are an immaterial portion of our portfolio. Changes in Level 3 investment assets were immaterial during the years ended May 31, 2013 and 2012. +No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2013 or 2012 . +As of May 31, 2013 and 2012 , the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis. +Short-Term Investments +As of May 31, 2013 and 2012 , short-term investments consisted of available-for-sale securities. As of May 31, 2013 , the Company held $2,229 million of available-for-sale securities with maturity dates within one year from the purchase date and $399 million with maturity dates over one year and less than five years from the purchase date within short-term investments. As of May 31, 2012 , the Company held $ 1,129 million of available-for-sale securities with maturity dates within one year from purchase date and $ 311 million with maturity dates over one year and less than five years from purchase date within short-term investments. +54 +Table of Contents +Short-term investments classified as available-for-sale consist of the following at fair value: +As of May 31, +(In millions) +2013 +2012 +Available-for-sale investments: +U.S. treasury and agencies +$ +1,984 +$ +1,157 +Commercial paper and bonds +644 +283 +TOTAL AVAILABLE-FOR-SALE INVESTMENTS +$ +2,628 +$ +1,440 +Included in interest (income) expense, net was interest income related to cash and equivalents and short-term investments of $26 million , $27 million , and $28 million for the years ended May 31, 2013 , 2012 , and 2011 , respectively. +For fair value information regarding notes payable and long-term debt, refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt. +NOTE 7 — Short-Term Borrowings and Credit Lines +Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2013 and 2012 , are summarized below: +As of May 31, +2013 +2012 +(In millions) +Borrowings +Interest Rate +Borrowings +Interest Rate +Notes payable: +U.S. operations +$ +20 +0.00 +% +(1) +$ +30 +5.50 +% +(1) +Non-U.S. operations +101 +4.77 +% +(1) +78 +9.46 +% +(1) +TOTAL NOTES PAYABLE +$ +121 +$ +108 +Interest-Bearing Accounts Payable: +Sojitz America +$ +55 +0.99 +% +$ +75 +1.10 +% +(1) +Weighted average interest rate includes non-interest bearing overdrafts. +The carrying amounts reflected in the consolidated balance sheets for notes payable approximate fair value. +The Company purchases through Sojitz America certain athletic footwear, apparel and equipment it acquires from non-U.S. suppliers. These purchases are for the Company’s operations outside of the United States, Europe and Japan. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60-day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75% . +As of May 31, 2013 and 2012 , the Company had no amounts outstanding under its commercial paper program. +In November 2011, the Company entered into a committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings pursuant to a revolving credit facility with the option to increase borrowings to $1.5 billion with lender approval. The facility matures on November 1, 2016 , with a one -year extension option prior to both the second and third anniversary of the closing date, provided that extensions shall not extend beyond November 1, 2018 . Based on the Company’s current long-term senior unsecured debt ratings of A+ and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.56% . The facility fee is 0.065% of the total commitment. Under this committed credit facility, the Company must maintain, among other things, certain minimum specified financial ratios with which the Company was in compliance at May 31, 2013 . No amounts were outstanding under this facility as of May 31, 2013 or 2012 . +55 +Table of Contents +NOTE 8 — Long-Term Debt +Long-term debt, net of unamortized premiums and discounts and swap fair value adjustments, comprises the following: +Book Value Outstanding +As of May 31, +Scheduled Maturity (Dollars in millions) +Original +Principal +Interest +Rate +Interest +Payments +2013 +2012 +Corporate Bond Payables: (4) +July 23, 2012 (1) +$ +25 +5.66 +% +Semi-Annually +$ +— +$ +25 +August 7, 2012 (1) +$ +15 +5.40 +% +Semi-Annually +— +15 +October 1, 2013 +$ +50 +4.70 +% +Semi-Annually +50 +50 +October 15, 2015 (1) +$ +100 +5.15 +% +Semi-Annually +111 +115 +May 1, 2023 (5) +$ +500 +2.25 +% +Semi-Annually +499 +— +May 1, 2043 (5) +$ +500 +3.63 +% +Semi-Annually +499 +— +Promissory Notes: (2) +April 1, 2017 +$ +40 +6.20 +% +Monthly +40 +— +January 1, 2018 +$ +19 +6.79 +% +Monthly +19 +— +Japanese Yen Notes: +August 20, 2001 through November 20, 2020 (3) +¥ +9,000 +2.60 +% +Quarterly +34 +50 +August 20, 2001 through November 20, 2020 (3) +¥ +4,000 +2.00 +% +Quarterly +15 +22 +Total +1,267 +277 +Less current maturities +57 +49 +TOTAL LONG-TERM DEBT +$ +1,210 +$ +228 +(1) +The Company has entered into interest rate swap agreements whereby the Company receives fixed interest payments at the same rate as the note and pays variable interest payments based on the six-month LIBOR plus a spread. The swaps have the same notional amount and maturity date as the corresponding note. At May 31, 2013 , the interest rates payable on these swap agreements ranged from approximately 0.3% to 0.4% . +(2) +The Company assumed a total of $59 million in bonds payable on May 30, 2013 as part of its agreement to purchase certain Corporate properties, which was treated as a non-cash financing transaction. The property serves as collateral for the debt. The purchase of these properties was accounted for as a business combination where the total consideration of $85 million was allocated to the land and buildings acquired; no other tangible or intangible assets or liabilities resulted from the purchase. The bonds mature in 2017 and 2018 and the Company does not have the ability to re-negotiate the terms of the debt agreements and would incur significant financial penalties if the notes are paid off prior to maturity. +(3) +NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020 . +(4) +Senior unsecured obligations rank equally with our other unsecured and unsubordinated indebtedness. +(5) +The bonds carry a make whole call provision and are redeemable at any time prior to maturity. The bonds also feature a par call provision payable 3 months and 6 months prior to the scheduled maturity date for the bonds maturing on May 1, 2023 and May 1, 2043, respectively. +The scheduled maturity of long-term debt in each of the years ending May 31, 2014 through 2018 are $57 million , $7 million , $108 million , $45 million and $25 million , respectively, at face value. +The fair value of the Company’s long-term debt, including the current portion, was approximately $1,219 million at May 31, 2013 and $283 million at May 31, 2012 . The fair value of long-term debt is estimated based upon quoted prices of similar instruments (level 2). +NOTE 9 — Income Taxes +Income before income taxes is as follows: +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Income before income taxes: +United States +$ +1,240 +$ +804 +$ +1,040 +Foreign +2,032 +2,221 +1,822 +TOTAL INCOME BEFORE INCOME TAXES +$ +3,272 +$ +3,025 +$ +2,862 +56 +Table of Contents +The provision for income taxes is as follows: +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Current: +United States +Federal +$ +434 +$ +289 +$ +298 +State +69 +51 +57 +Foreign +398 +488 +435 +Total +901 +828 +790 +Deferred: +United States +Federal +1 +(48 +) +(62 +) +State +(4 +) +5 +— +Foreign +(90 +) +(29 +) +(38 +) +Total +(93 +) +(72 +) +(100 +) +TOTAL INCOME TAX EXPENSE +$ +808 +$ +756 +$ +690 +A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: +Year Ended May 31, +2013 +2012 +2011 +Federal income tax rate +35.0 +% +35.0 +% +35.0 +% +State taxes, net of federal benefit +1.4 +% +1.3 +% +1.3 +% +Foreign earnings +-11.8 +% +-11.9 +% +-11.4 +% +Other, net +0.1 +% +0.6 +% +-0.8 +% +EFFECTIVE INCOME TAX RATE +24.7 +% +25.0 +% +24.1 +% +The effective tax rate from continuing operations for the year ended May 31, 2013 was 30 basis points lower than the effective tax rate from continuing operations for the year ended May 31, 2012 primarily due to tax benefits received from the intercompany sale of intellectual property rights outside of the U.S., the retroactive reinstatement of the research and development credit and the intra-period allocation of tax expense between continuing operations, discontinued operations, and other comprehensive income. The decrease in the effective tax rate was partially offset by a higher effective tax rate on operations as a result of an increase in earnings in higher tax jurisdictions. The effective tax rate from continuing operations for the year ended May 31, 2012 was 90 basis points higher than the effective tax rate from continuing operations for the year ended May 31, 2011 primarily due to the changes in uncertain tax positions partially offset by a reduction in the effective rate related to a decrease in earnings in higher tax jurisdictions. +57 +Table of Contents +Deferred tax assets and (liabilities) comprise the following: +As of May 31, +(In millions) +2013 +2012 +Deferred tax assets: +Allowance for doubtful accounts +$ +20 +$ +17 +Inventories +40 +37 +Sales return reserves +101 +84 +Deferred compensation +197 +186 +Stock-based compensation +140 +126 +Reserves and accrued liabilities +66 +66 +Foreign loss carry-forwards +19 +35 +Foreign tax credit carry-forwards +106 +216 +Undistributed earnings of foreign subsidiaries +162 +82 +Other +47 +62 +Total deferred tax assets +898 +911 +Valuation allowance +(5 +) +(27 +) +Total deferred tax assets after valuation allowance +893 +884 +Deferred tax liabilities: +Property, plant and equipment +(241 +) +(191 +) +Intangibles +(96 +) +(98 +) +Other +(20 +) +(22 +) +Total deferred tax liability +(357 +) +(311 +) +NET DEFERRED TAX ASSET +$ +536 +$ +573 +The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: +As of May 31, +(In millions) +2013 +2012 +2011 +Unrecognized tax benefits, as of the beginning of the period +$ +285 +$ +212 +$ +282 +Gross increases related to prior period tax positions +77 +48 +13 +Gross decreases related to prior period tax positions +(3 +) +(25 +) +(98 +) +Gross increases related to current period tax positions +130 +91 +59 +Gross decreases related to current period tax positions +(9 +) +(1 +) +(6 +) +Settlements +— +(20 +) +(43 +) +Lapse of statute of limitations +(21 +) +(9 +) +(8 +) +Changes due to currency translation +(12 +) +(11 +) +13 +UNRECOGNIZED TAX BENEFITS, AS OF THE END OF THE PERIOD +$ +447 +$ +285 +$ +212 +As of May 31, 2013 , the total gross unrecognized tax benefits, excluding related interest and penalties, were $447 million , $281 million of which would affect the Company's effective tax rate if recognized in future periods. +The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for payment of interest and penalties increased $4 million , $17 million , and $10 million during the years ended May 31, 2013 , 2012 , and 2011 , respectively. As of May 31, 2013 and 2012 , accrued interest and penalties related to uncertain tax positions was $112 million and $108 million , respectively (excluding federal benefit). +The Company is subject to taxation primarily in the U.S., China, the Netherlands, and Brazil, as well as various state and other foreign jurisdictions. The Company has concluded substantially all U.S. federal income tax matters through fiscal 2010. The Company is currently under audit by the Internal Revenue Service for the 2011 through 2013 tax years. Many issues are at an advanced stage in the examination process, the most significant of which includes the negotiation of a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing issues for fiscal years May 31, 2011 through May 31, 2015. In addition, the Company is in appeals regarding the validation of foreign tax credits taken. The Company’s major foreign jurisdictions, China, the Netherlands and Brazil, have concluded substantially all income tax matters through calendar 2005, fiscal 2007 and calendar 2006, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $86 million within the next 12 months. +We provide for United States income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2013, the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes have not been provided was approximately $6.7 billion . If these undistributed earnings were repatriated to the United States, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings would be approximately $2.2 billion at May 31, 2013 . +A portion of the Company's foreign operations are benefiting from a tax holiday, which will phase out in 2019 . This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The impact of this tax holiday decreased foreign taxes +58 +Table of Contents +by $108 million , $117 million , and $36 million for the fiscal years ended May 31, 2013 , 2012 , and 2011 , respectively. The benefit of the tax holiday on net income per share (diluted) was $0.12 , $0.12 , and $0.04 for the fiscal years ended May 31, 2013 , 2012 , and 2011 , respectively. +Deferred tax assets at May 31, 2013 and 2012 were reduced by a valuation allowance relating to tax benefits of certain subsidiaries with operating losses. The net change in the valuation allowance was a decrease of $22 million , an increase of $23 million , and a decrease of $1 million for the years ended May 31, 2013 , 2012 , and 2011, respectively. +The Company does not anticipate that any foreign tax credit carry-forwards will expire unutilized. +The Company has available domestic and foreign loss carry-forwards of $58 million at May 31, 2013 . Such losses will expire as follows: +Year Ending May 31, +(In millions) +2014 +2015 +2016 +2017 +2018- 2032 +Indefinite +Total +Net Operating Losses +$ +— +— +2 +— +52 +4 +$ +58 +During the years ended May 31, 2013 , 2012 , and 2011 , income tax benefits attributable to employee stock-based compensation transactions of $76 million , $120 million , and $68 million , respectively, were allocated to shareholders’ equity. +NOTE 10 — Redeemable Preferred Stock +Sojitz America is the sole owner of the Company’s authorized Redeemable Preferred Stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million . A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the Redeemable Preferred Stock have been declared and paid in full. There have been no changes in the Redeemable Preferred Stock in the three years ended May 31, 2013 , 2012 , and 2011 . As the holder of the Redeemable Preferred Stock, Sojitz America does not have general voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The Redeemable Preferred Stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock. +NOTE 11 — Common Stock and Stock-Based Compensation +The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 200 million and 1,200 million , respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the Class A and Class B common shareholders. +In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The 1990 Plan provides for the issuance of up to 326 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the plan. The 1990 Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the 1990 Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the 1990 Plan were granted in the first quarter of each fiscal year, vest ratably over four years, and expire 10 years from the date of grant. +The following table summarizes the Company’s total stock-based compensation expense recognized in selling and administrative expense: +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Stock options (1) +$ +123 +$ +96 +$ +77 +ESPPs +19 +16 +14 +Restricted stock +32 +18 +14 +TOTAL STOCK-BASED COMPENSATION EXPENSE +$ +174 +$ +130 +$ +105 +(1) +Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense for years ended May 31, 2013 , 2012 , and 2011 was $22 million , $17 million , and $12 million , respectively. +As of May 31, 2013 , the Company had $199 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized as selling and administrative expense over a weighted average period of 2.3 years. +59 +Table of Contents +The weighted average fair value per share of the options granted during the years ended May 31, 2013 , 2012 , and 2011 , as computed using the Black-Scholes pricing model, was $12.71 , $11.08 , and $8.84 , respectively. The weighted average assumptions used to estimate these fair values are as follows: +Year Ended May 31, +2013 +2012 +2011 +Dividend yield +1.5 +% +1.4 +% +1.6 +% +Expected volatility +35.0 +% +29.5 +% +31.5 +% +Weighted average expected life (in years) +5.3 +5.0 +5.0 +Risk-free interest rate +0.6 +% +1.4 +% +1.7 +% +The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. +The following summarizes the stock option transactions under the plan discussed above: +Shares (1) +Weighted Average +Option Price +(In millions) +Options outstanding May 31, 2010 +72.2 +$ +23.30 +Exercised +(14.0 +) +21.35 +Forfeited +(1.3 +) +29.03 +Granted +12.7 +34.60 +Options outstanding May 31, 2011 +69.6 +$ +25.65 +Exercised +(18.0 +) +22.81 +Forfeited +(1.0 +) +35.61 +Granted +13.7 +45.87 +Options outstanding May 31, 2012 +64.3 +$ +30.59 +Exercised +(9.9 +) +24.70 +Forfeited +(1.3 +) +40.14 +Granted +14.6 +46.55 +Options outstanding May 31, 2013 +67.7 +$ +34.72 +Options exercisable at May 31, +2011 +40.1 +$ +22.03 +2012 +33.9 +24.38 +2013 +35.9 +27.70 +(1) +Includes stock appreciation rights transactions. +The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2013 was 6.3 years and 4.7 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2013 was $1,823 million and $1,218 million , respectively. The aggregate intrinsic value was the amount by which the market value of the underlying stock exceeded the exercise price of the options. The total intrinsic value of the options exercised during the years ended May 31, 2013 , 2012 , and 2011 was $293 million , $453 million , and $267 million , respectively. +In addition to the 1990 Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (“ESPPs”). Employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six -month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 1.6 million , 1.7 million , and 1.6 million shares during each of the three years ended May 31, 2013 , 2012 and 2011 , respectively. +From time to time, the Company grants restricted stock units and restricted stock to key employees under the 1990 Plan. The number of shares underlying such awards granted to employees during the years ended May 31, 2013 , 2012 , and 2011 were 1.6 million , 0.7 million , and 0.4 million with weighted average values per share of $46.86 , $49.49 , and $35.11 , respectively. Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The value of all grants of restricted stock and restricted stock units was established by the market price on the date of grant. During the years ended May 31, 2013 , 2012 , and 2011 , the aggregate fair value of restricted stock and restricted stock units vested was $25 million , $22 million , and $15 million , respectively, determined as of the date of vesting. +NOTE 12 — Earnings Per Share +The following is a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase an additional 0.1 million , 0.2 million , and 0.3 million shares of common stock were outstanding at May 31, 2013 , 2012 , and 2011 respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive. +60 +Table of Contents +Year Ended May 31, +(In millions, except per share data) +2013 +2012 +2011 +Determination of shares: +Weighted average common shares outstanding +897.3 +920.0 +951.1 +Assumed conversion of dilutive stock options and awards +19.1 +19.6 +20.2 +DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING +916.4 +939.6 +971.3 +Earnings per share from continuing operations: +Basic earnings per common share +$ +2.75 +$ +2.47 +$ +2.28 +Diluted earnings per common share +$ +2.69 +$ +2.42 +$ +2.24 +Earnings per share from discontinued operations: +Basic earnings per common share +$ +0.02 +$ +(0.05 +) +$ +(0.04 +) +Diluted earnings per common share +$ +0.02 +$ +(0.05 +) +$ +(0.04 +) +Basic earnings per common share for NIKE, Inc. +$ +2.77 +$ +2.42 +$ +2.24 +Diluted earnings per common share for NIKE, Inc. +$ +2.71 +$ +2.37 +$ +2.20 +NOTE 13 — Benefit Plans +The Company has a profit sharing plan available to most U.S.-based employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors. A subsidiary of the Company also had a profit sharing plan available to its U.S.-based employees prior to fiscal 2012. The terms of the plan called for annual contributions as determined by the subsidiary’s executive management. Contributions of $47 million , $40 million , and $39 million were made to the plans and are included in selling and administrative expense for the years ended May 31, 2013 , 2012 , and 2011 , respectively. The Company has various 401(k) employee savings plans available to U.S.-based employees. The Company matches a portion of employee contributions. Company contributions to the savings plans were $46 million , $42 million , and $38 million for the years ended May 31, 2013 , 2012 , and 2011 , respectively, and are included in selling and administrative expense. +The Company also has a Long-Term Incentive Plan (“LTIP”) that was adopted by the Board of Directors and approved by shareholders in September 1997 and later amended in fiscal 2007. The Company recognized $50 million , $51 million , and $31 million of selling and administrative expense related to cash awards under the LTIP during the years ended May 31, 2013 , 2012 , and 2011 , respectively. +The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $104 million and $113 million at May 31, 2013 and May 31, 2012 , respectively, which was primarily classified as long-term in other liabilities. +NOTE 14 — Accumulated Other Comprehensive Income +The components of accumulated other comprehensive income, net of tax, are as follows: +May 31 +(In millions) +2013 +2012 +Cumulative translation adjustment and other +$ +(14 +) +$ +(127 +) +Net deferred gain on cash flow hedge derivatives +193 +181 +Net deferred gain on net investment hedge derivatives +95 +95 +ACCUMULATED OTHER COMPREHENSIVE INCOME +$ +274 +$ +149 +Refer to Note 17— Risk Management and Derivatives for more information on the Company's risk management program and derivatives. +NOTE 15 — Discontinued Operations +The Company continually evaluates its existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the NIKE Brand and represent the largest growth potential and highest returns. During the year, the Company divested of Umbro and Cole Haan, allowing it to focus its resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. +On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million , net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million , net of $137 million in tax expense; this gain is included in the net income (loss) from discontinued operations line item on the consolidated statements of income. There were no adjustments to these recorded amounts as of May 31, 2013 . Beginning November 30, 2012, the Company classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan's operations in the net income (loss) from discontinued operations line item on the consolidated statements of income. From this date until the sale, the assets and liabilities of Cole Haan were recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the consolidated balance sheets, respectively. Previously, these amounts were reported in the Company's segment presentation as “Other Businesses.” +61 +Table of Contents +Under the sale agreement, the Company agreed to provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. The Company will also license NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not expected to be significant to Cole Haan and the Company will have no significant continuing involvement with Cole Haan beyond the transition services. Additionally, preexisting guarantees of certain Cole Haan lease payments remain in place after the sale; the maximum exposure under the guarantees is $ 44 million at May 31, 2013 . The fair value of the guarantees is not material. +On November 30, 2012, the Company completed the sale of certain assets of Umbro to Iconix Brand Group (“Iconix”) for $ 225 million . The Umbro disposal group was classified as held-for-sale as of November 30, 2012 and the results of Umbro's operations are presented in the net income (loss) from discontinued operations line item on the consolidated statements of income. The remaining liabilities of Umbro are recorded in the liabilities of discontinued operations line items on the consolidated balance sheets. Previously, these amounts were reported in the Company's segment presentation as “Other Businesses.” Upon meeting the held-for-sale criteria, the Company recorded a loss of $ 107 million , net of tax, on the sale of Umbro and the loss is included in the net income (loss) from discontinued operations line item on the consolidated statements of income. The loss on sale was calculated as the net sales price less Umbro assets of $ 248 million , including intangibles, goodwill, and fixed assets, other miscellaneous charges of $ 22 million , and the release of the associated cumulative translation adjustment of $ 129 million . The tax benefit on the loss was $ 67 million . There were no adjustments to these recorded amounts as of May 31, 2013 . +Under the sale agreement, the Company provided transition services to Iconix while certain markets were transitioned to Iconix-designated licensees. These transition services are complete and the Company has wound down the remaining operations of Umbro. +For the year ended May 31, 2013 , net income (loss) from discontinued operations included, for both businesses, the net gain or loss on sale, net operating losses, tax expenses, and approximately $ 20 million in wind down costs. +Summarized results of the Company's discontinued operations are as follows: +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Revenues +$ +523 +$ +796 +$ +746 +Income (loss) before income taxes +108 +(43 +) +(18 +) +Income tax expense (benefit) +87 +3 +21 +Net income (loss) from discontinued operations +$ +21 +$ +(46 +) +$ +(39 +) +As of May 31, 2013 and 2012 , the aggregate components of assets and liabilities classified as discontinued operations and included in current assets and current liabilities consisted of the following: +As of May 31, +(In millions) +2013 +2012 +Accounts Receivable, net +$ +— +$ +148 +Inventories +— +128 +Deferred income taxes and other assets +— +35 +Property, plant and equipment, net +— +70 +Identifiable intangible assets, net +— +234 +TOTAL ASSETS +$ +— +$ +615 +Accounts payable +$ +1 +$ +42 +Accrued liabilities +17 +112 +Deferred income taxes and other liabilities +— +16 +TOTAL LIABILITIES +$ +18 +$ +170 +NOTE 16 — Commitments and Contingencies +The Company leases space for certain of its offices, warehouses and retail stores under leases expiring from 1 to 21 years after May 31, 2013 . Rent expense was $482 million , $431 million , and $386 million for the years ended May 31, 2013 , 2012 and 2011 , respectively. Amounts of minimum future annual rental commitments under non-cancelable operating leases in each of the five years ending May 31, 2014 through 2018 are $403 million , $340 million , $304 million , $272 million , $225 million , respectively, and $816 million in later years. Amounts of minimum future annual commitments under non-cancelable capital leases in each of the four years ending May 31, 2014 through 2017 are $23 million , $28 million , $21 million , and $9 million , respectively; the Company has no capital lease obligations beyond the year ending May 31, 2017. +As of May 31, 2013 and 2012 , the Company had letters of credit outstanding totaling $149 million and $137 million , respectively. These letters of credit were generally issued for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs. +In connection with various contracts and agreements, the Company provides routine indemnifications relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnifications is not material to the Company’s financial position or results of operations. +In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters +62 +Table of Contents +with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company’s results of operations, financial position or cash flows. +NOTE 17 — Risk Management and Derivatives +The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. +The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions. +The majority of derivatives outstanding as of May 31, 2013 are designated as cash flow or fair value hedges. All derivatives are recognized on the balance sheet at fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives as of May 31, 2013 was approximately $9 billion , which primarily comprises cash flow hedges for Euro/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency pairs. As of May 31, 2013, there were outstanding currency forward contracts with maturities up to 24 months. +The following table presents the fair values of derivative instruments included within the consolidated balance sheets as of May 31, 2013 and 2012 : +Asset Derivatives +Liability Derivatives +(In millions) +Balance Sheet +Location +2013 +2012 +Balance Sheet +Location +2013 +2012 +Derivatives formally designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +141 +$ +203 +Accrued liabilities +$ +12 +$ +35 +Foreign exchange forwards and options +Deferred income taxes and other long-term assets +79 +7 +Deferred income taxes and other long-term liabilities +— +— +Interest rate swap contracts +Deferred income taxes and other long-term assets +11 +15 +Deferred income taxes and other long-term liabilities +— +— +Total derivatives formally designated as hedging instruments +$ +231 +$ +225 +$ +12 +$ +35 +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +Prepaid expenses and other current assets +$ +58 +$ +55 +Accrued liabilities +$ +22 +$ +20 +Embedded derivatives +Prepaid expenses and other current assets +— +1 +Accrued liabilities +— +— +Total derivatives not designated as hedging instruments +58 +56 +22 +20 +TOTAL DERIVATIVES +$ +289 +$ +281 +$ +34 +$ +55 +The following tables present the amounts affecting the consolidated statements of income for years ended May 31, 2013 , 2012 and 2011 : +(In millions) +Amount of Gain (Loss) +Recognized in Other +Comprehensive Income +on Derivatives (1) +Amount of Gain (Loss) +Reclassified From Accumulated +Other Comprehensive Income into Income (1) +Year Ended May 31, +Location of Gain (Loss) Reclassified From +Accumulated Other Comprehensive Income Into Income (1) +Year Ended May 31, +2013 +2012 +2011 +2013 +2012 +2011 +Derivatives designated as cash flow hedges: +Foreign exchange forwards and options +$ +42 +$ +(29 +) +$ +(87 +) +Revenue +$ +(19 +) +$ +5 +$ +(30 +) +Foreign exchange forwards and options +67 +253 +(152 +) +Cost of sales +113 +(57 +) +103 +Foreign exchange forwards and options +(3 +) +3 +(4 +) +Selling and administrative expense +2 +(2 +) +1 +Foreign exchange forwards and options +33 +36 +(65 +) +Other (income) expense, net +9 +(9 +) +34 +Total designated cash flow hedges +$ +139 +$ +263 +$ +(308 +) +$ +105 +$ +(63 +) +$ +108 +Derivatives designated as net investment hedges: +Foreign exchange forwards and options +$ +— +$ +45 +$ +(85 +) +Other (income) expense, net +$ +— +$ +— +$ +— +(1) +For the years ended May 31, 2013 , 2012 , and 2011 , the amounts recorded in other (income) expense, net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. +63 +Table of Contents +Amount of Gain (Loss) Recognized in +Income on Derivatives +Location of Gain (Loss) +Recognized in Income on Derivatives +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Derivatives designated as fair value hedges: +Interest rate swaps (1) +$ +5 +$ +6 +$ +6 +Interest (income) expense, net +Derivatives not designated as hedging instruments: +Foreign exchange forwards and options +51 +64 +(30 +) +Other (income) expense, net +Embedded derivatives +$ +(4 +) +$ +1 +$ +— +Other (income) expense, net +(1) +All interest rate swap agreements meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail. +Refer to Note 5 — Accrued Liabilities for derivative instruments recorded in accrued liabilities, Note 6 — Fair Value Measurements for a description of how the above financial instruments are valued, Note 14 — Accumulated Other Comprehensive Income and the consolidated statements of shareholders’ equity for additional information on changes in other comprehensive income for the years ended May 31, 2013 , 2012 and 2011 . +Cash Flow Hedges +The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions. +Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (“NTC”), a wholly-owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC; (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar. +In January 2012, the Company implemented a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order and their accounting treatment is described further below. +The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Hedged transactions are denominated primarily in Euros, British Pounds and Japanese Yen. The Company may enter into hedge contracts typically starting up to 12 to 18 months in advance of the forecasted transaction and may place incremental hedges for up to 100% of the exposure by the time the forecasted transaction occurs. +All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in other comprehensive income will be released to net income some time after the maturity of the related derivative. Effective hedge results are classified within the consolidated statements of income in the same manner as the underlying exposure, with the results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives as described below, recorded in revenues or cost of sales, when the underlying hedged transaction affects consolidated net income. Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in other (income) expense, net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in other (income) expense, net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement. +Premiums paid on options are initially recorded as deferred charges. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to other comprehensive income to the degree they are effective. +The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on forward rates. Ineffectiveness was not material for the years ended May 31, 2013 , 2012 and 2011 . +The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. +64 +Table of Contents +When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net income when the forecasted transaction affects consolidated net income. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in other (income) expense, net . In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing future changes in the fair value in other (income) expense, net . For the years ended May 31, 2013 , 2012 and 2011 , the amounts recorded in other (income) expense, net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial . +As of May 31, 2013 , $132 million of deferred net gains (net of tax) on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of May 31, 2013 , the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions is 24 months. +Fair Value Hedges +The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. As of May 31, 2013 , all interest rate swap agreements are designated as fair value hedges of the related long-term debt and meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the cash provided by operations component of the cash flow statement. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the years ended May 31, 2013 , 2012 , or 2011 . +Net Investment Hedges +The Company has hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in the cumulative translation adjustment component of other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the cash provided or used by investing component of the cash flow statement. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from its net investment hedges for the years ended May 31, 2013 , 2012 , or 2011 . +Embedded Derivatives +As part of the foreign currency adjustment program described above, currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in other (income) expense, net from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. At May 31, 2013 , the notional amount of embedded derivatives was approximately $136 million . +Undesignated Derivative Instruments +The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the balance sheet and/or the embedded derivative contracts explained above. These forwards are not designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in other (income) expense, net , together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement. +Credit Risk +The Company is exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored. +The Company’s derivative contracts contain credit risk related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million . Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2013 , the Company was in compliance with all credit risk related contingent features and the fair value of its derivative instruments with credit risk related contingent features in a net liability position was insignificant. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2013 those counterparties which were required to post collateral complied with such requirements. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial . +65 +Table of Contents +NOTE 18 — Operating Segments and Related Information +Operating Segments. The Company’s operating segments are evidence of the structure of the Company’s internal organization. The major segments are defined by geographic regions for operations participating in NIKE Brand sales activity excluding NIKE Golf. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. The Company’s NIKE Brand Direct to Consumer operations are managed within each geographic segment. +The Company’s “Other” category is broken into two components for presentation purposes to align with the way management views the Company. The “Global Brand Divisions” category primarily represents NIKE Brand licensing businesses that are not part of a geographic operating segment, demand creation and operating overhead expenses that are centrally managed for the NIKE Brand, and costs associated with product development and supply chain operations. The “Other Businesses” category consists of the activities of Converse Inc., Hurley International LLC, and NIKE Golf. Activities represented in the “Other” category are considered immaterial for individual disclosure. +Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments, depreciation and amortization related to the Company’s headquarters, unallocated insurance and benefit programs, including stock-based compensation, certain foreign currency gains and losses, including certain hedge gains and losses, certain corporate eliminations and other items. +The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents net income before interest (income) expense, net and income taxes in the consolidated statements of income. Reconciling items for EBIT represent corporate expense items that are not allocated to the operating segments for management reporting. +As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and certain Other Businesses. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and certain Other Businesses reflect use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. +Accounts receivable, inventories and property, plant and equipment for operating segments are regularly reviewed by management and are therefore provided below. Additions to long-lived assets as presented in the following table represent capital expenditures. +Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. +66 +Table of Contents +Year Ended May 31, +(In millions) +2013 +2012 +2011 +REVENUE +North America +$ +10,387 +$ +8,839 +$ +7,579 +Western Europe +4,128 +4,144 +3,868 +Central & Eastern Europe +1,287 +1,200 +1,040 +Greater China +2,453 +2,539 +2,060 +Japan +791 +835 +773 +Emerging Markets +3,718 +3,411 +2,737 +Global Brand Divisions +117 +111 +96 +Total NIKE Brand +22,881 +21,079 +18,153 +Other Businesses +2,500 +2,298 +2,041 +Corporate +(68 +) +(46 +) +(77 +) +TOTAL NIKE CONSOLIDATED REVENUES +$ +25,313 +$ +23,331 +$ +20,117 +EARNINGS BEFORE INTEREST AND TAXES +North America +$ +2,534 +$ +2,030 +$ +1,736 +Western Europe +640 +597 +730 +Central & Eastern Europe +259 +234 +244 +Greater China +809 +911 +777 +Japan +133 +136 +114 +Emerging Markets +1,011 +853 +688 +Global Brand Divisions +(1,396 +) +(1,200 +) +(971 +) +Total NIKE Brand +3,990 +3,561 +3,318 +Other Businesses +456 +385 +353 +Corporate +(1,177 +) +(917 +) +(805 +) +Total NIKE Consolidated Earnings Before Interest and Taxes +3,269 +3,029 +2,866 +Interest (income) expense, net +(3 +) +4 +4 +TOTAL NIKE CONSOLIDATED EARNINGS BEFORE TAXES +$ +3,272 +$ +3,025 +$ +2,862 +ADDITIONS TO LONG-LIVED ASSETS +North America +$ +201 +$ +131 +$ +79 +Western Europe +74 +93 +75 +Central & Eastern Europe +22 +20 +5 +Greater China +52 +38 +43 +Japan +6 +14 +9 +Emerging Markets +49 +27 +21 +Global Brand Divisions +216 +131 +44 +Total NIKE Brand +620 +454 +276 +Other Businesses +29 +24 +27 +Corporate +131 +109 +118 +TOTAL ADDITIONS TO LONG-LIVED ASSETS +$ +780 +$ +587 +$ +421 +DEPRECIATION +North America +$ +85 +$ +78 +$ +70 +Western Europe +68 +62 +52 +Central & Eastern Europe +9 +6 +4 +Greater China +34 +25 +19 +Japan +21 +23 +22 +Emerging Markets +20 +15 +14 +Global Brand Divisions +83 +53 +39 +Total NIKE Brand +320 +262 +220 +Other Businesses +24 +25 +24 +Corporate +74 +66 +71 +TOTAL DEPRECIATION +$ +418 +$ +353 +$ +315 +67 +Table of Contents +As of May 31, +(In millions) +2013 +2012 +ACCOUNTS RECEIVABLE, NET +North America +$ +1,214 +$ +1,149 +Western Europe +356 +420 +Central & Eastern Europe +301 +261 +Greater China +52 +221 +Japan +133 +152 +Emerging Markets +546 +476 +Global Brand Divisions +28 +30 +Total NIKE Brand +2,630 +2,709 +Other Businesses +436 +401 +Corporate +51 +22 +TOTAL ACCOUNTS RECEIVABLE, NET +$ +3,117 +$ +3,132 +INVENTORIES +North America +$ +1,435 +$ +1,272 +Western Europe +539 +488 +Central & Eastern Europe +207 +180 +Greater China +204 +217 +Japan +60 +83 +Emerging Markets +555 +521 +Global Brand Divisions +32 +35 +Total NIKE Brand +3,032 +2,796 +Other Businesses +400 +384 +Corporate +2 +42 +TOTAL INVENTORIES +$ +3,434 +$ +3,222 +PROPERTY, PLANT AND EQUIPMENT, NET +North America +$ +406 +$ +378 +Western Europe +326 +314 +Central & Eastern Europe +44 +30 +Greater China +213 +191 +Japan +269 +359 +Emerging Markets +89 +59 +Global Brand Divisions +353 +205 +Total NIKE Brand +1,700 +1,536 +Other Businesses +77 +76 +Corporate +675 +597 +TOTAL PROPERTY, PLANT AND EQUIPMENT, NET +$ +2,452 +$ +2,209 +Revenues by Major Product Lines. Revenues to external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues to external customers primarily include external sales by Converse, Hurley, and NIKE Golf. +Year Ended May 31, +(In millions) +2013 +2012 +2011 +Footwear +$ +14,539 +$ +13,428 +$ +11,519 +Apparel +6,820 +6,336 +5,516 +Equipment +1,405 +1,204 +1,022 +Other +2,549 +2,363 +2,060 +TOTAL NIKE CONSOLIDATED REVENUES +$ +25,313 +$ +23,331 +$ +20,117 +Revenues and Long-Lived Assets by Geographic Area +Geographical area information is similar to what is reflected above under operating segments with the exception of the Other activity, which has been allocated to the geographical areas based on the location where the sales originated. Revenues derived in the United States were $11,385 million , $9,793 million , and $8,467 million for the years ended May 31, 2013 , 2012 , and 2011 , respectively. The Company’s largest concentrations of long-lived assets primarily consist of the Company’s world headquarters and distribution facilities in the United States and distribution facilities +68 +Table of Contents +in Japan, Belgium and China. Long-lived assets attributable to operations in the United States, which are primarily composed of net property, plant & equipment, were $1,424 million , $1,204 million , and $1,056 million at May 31, 2013 , 2012 , and 2011 , respectively. Long-lived assets attributable to operations in Japan were $270 million , $360 million , and $361 million at May 31, 2013 , 2012 , and 2011 , respectively. Long-lived assets attributable to operations in Belgium were $157 million , $164 million , and $182 million at May 31, 2013 , 2012 , and 2011 , respectively. Long-lived assets attributable to operations in China were $212 million , $188 million , and $175 million at May 31, 2013 , 2012 , and 2011 , respectively. +Major Customers +No customer accounted for 10% or more of the Company’s net revenues during the years ended May 31, 2013 , 2012 , and 2011 . +ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure +There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of on-going procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2013 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting. +ITEM 9B. Other Information +No disclosure is required under this Item. +69 +Table of Contents +PART III +ITEM 10. Directors, Executive Officers and Corporate Governance +The information required by Item 401 of Regulation S-K regarding directors is included under “Election of Directors” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” in Item 1 of this Report. The information required by Item 405 of Regulation S-K is included under “Election of Directors — Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 406 of Regulation S-K is included under “Corporate Governance — Code of Business Conduct and Ethics” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Items 407(d)(4) and (d)(5) of Regulation S-K regarding the Audit Committee of the Board of Directors is included under “Corporate Governance — Board Committees” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 11. Executive Compensation +The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K regarding executive compensation is included under “Election of Directors — Director Compensation for Fiscal 2013 ,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Election of Directors — Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 201(d) of Regulation S-K is included under “Executive Compensation — Equity Compensation Plans” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by Item 403 of Regulation S-K is included under “Election of Directors — Stock Holdings of Certain Owners and Management” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 13. Certain Relationships and Related Transactions, and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. +ITEM 14. Principal Accountant Fees and Services +The information required by Item 9(e) of Schedule 14A is included under “Ratification Of Independent Registered Public Accounting Firm” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. +70 +Table of Contents +PART IV +ITEM 15. Exhibits and Financial Statement Schedules +(a) +The following documents are filed as part of this report: +Form 10-K +Page No. +1. +Financial Statements: +Report of Independent Registered Public Accounting Firm +41 +Consolidated Statements of Income for each of the three years ended May 31, 2013, May 31, 2012 and May 31, 2011 +42 +Consolidated Statements of Comprehensive Income for each of the three years ended May 31, 2013, May 31, 2012, and May 31, 2011. +43 +Consolidated Balance Sheets at May 31, 2013 and May 31, 2012 +44 +Consolidated Statements of Cash Flows for each of the three years ended May 31, 2013, May 31, 2012 and May 31, 2011 +45 +Consolidated Statements of Shareholders’ Equity for each of the three years ended May 31, 2013, May 31, 2012 and May 31, 2011 +46 +Notes to Consolidated Financial Statements +47 +2. +Financial Statement Schedule: +II — Valuation and Qualifying Accounts +73 +All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. +3. +Exhibits: +3.1 +Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2012). +3.2 +Third Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed June 21, 2013). +4.1 +Restated Articles of Incorporation, as amended (see Exhibit 3.1). +4.2 +Third Restated Bylaws, as amended (see Exhibit 3.2). +10.1 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 21, 2005).* +10.2 +Form of Non-Statutory Stock Option Agreement for options granted to non-employee directors after May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.3 +Form of Non-Statutory Stock Option Agreement for options granted to executives prior to May 31, 2010 under the 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.4 +Form of Non-Statutory Stock Option Agreement for options granted to executives after May 31, 2010 under the 1990 Stock Incentive Plan.* +10.5 +Form of Indemnity Agreement entered into between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.6 +NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 24, 2010).* +10.7 +NIKE, Inc. Executive Performance Sharing Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2012).* +10.8 +NIKE, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 26, 2012).* +10.9 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective April 1, 2013).* +71 +Table of Contents +10.10 +NIKE, Inc. Deferred Compensation Plan (Amended and Restated effective June 1, 2004) (applicable to amounts deferred before January 1, 2005) (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004).* +10.11 +Amendment No. 1 effective January 1, 2008 to the NIKE, Inc. Deferred Compensation Plan (June 1, 2004 Restatement) (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009).* +10.12 +NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).* +10.13 +Amended and Restated Covenant Not To Compete and Non-Disclosure Agreement between NIKE, Inc. and Mark G. Parker dated July 24, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 24, 2008).* +10.14 +Amended and Restated Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Charles D. Denson dated July 24, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 24, 2008).* +10.15 +Form of Restricted Stock Bonus Agreement under the 1990 Stock Incentive Plan for awards prior to May 31, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 21, 2005).* +10.16 +Form of Restricted Stock Agreement under the 1990 Stock Incentive Plan for awards after May 31, 2010.* +10.17 +Form of Restricted Stock Unit Agreement under the 1990 Stock Incentive Plan.* +10.18 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Donald W. Blair dated November 10, 1999 (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2006).* +10.19 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Eric D. Sprunk dated April 18, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2010).* +10.2 +Covenant Not to Compete and Non-Disclosure Agreement between NIKE, Inc. and Trevor A. Edwards dated November 14, 2002 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* +10.21 +Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 20, 2010).* +10.22 +Credit Agreement dated as of November 1, 2011 among NIKE, Inc., Bank of America, N.A., individually and as Agent and the other banks party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 2, 2011). +12.1 +Computation of Ratio of Earnings to Fixed Charges. +21 +Subsidiaries of the Registrant. +23 +Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). +31.1 +Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. +31.2 +Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. +32 +Section 1350 Certifications. +101.INS +XBRL Instance Document +101.SCH +XBRL Taxonomy Extension Schema +101.CAL +XBRL Taxonomy Extension Calculation Linkbase +101.DEF +XBRL Taxonomy Extension Definition Document +101.LAB +XBRL Taxonomy Extension Label Linkbase +101.PRE +XBRL Taxonomy Extension Presentation Linkbase +* Management contract or compensatory plan or arrangement. +The Exhibits filed herewith do not include certain instruments with respect to long-term debt of NIKE and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10 percent of the total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. +Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of any Exhibit upon payment of $.10 per page, which represents our reasonable expenses in furnishing Exhibits. +72 +Table of Contents +SCHEDULE II — Valuation and qualifying accounts +(In millions) +Balance at +Beginning of Period +Charged to Costs +and Expenses +Charged to +Other Accounts +Write-Offs, Net +Balance at End +of Period +Sales returns reserve +For the year ended May 31, 2011 +$ +141 +$ +354 +$ +1 +$ +(345 +) +$ +151 +For the year ended May 31, 2012 +151 +401 +(3 +) +(376 +) +173 +For the year ended May 31, 2013 +173 +538 +1 +(471 +) +241 +Allowance for doubtful accounts (1) +For the year ended May 31, 2011 +$ +109 +$ +28 +$ +14 +$ +(31 +) +$ +120 +For the year ended May 31, 2012 +120 +21 +(9 +) +(41 +) +91 +For the year ended May 31, 2013 +91 +31 +1 +(19 +) +104 +(1) +Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is classified in deferred income taxes and other assets on the consolidated balance sheets. +73 +Table of Contents +Consent of Independent Registered Public Accounting Firm +We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-188072) and Form S-8 (Nos. 033-63995, 333-63581, 333-63583, 333-68864, 333-68886, 333-71660, 333-104822, 333-117059, 333-133360, 333-164248, 333-171647, and 333-173727) of NIKE, Inc. of our report dated July 23, 2013 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. +/s/ PRICEWATERHOUSECOOPERS LLP +Portland, Oregon +July 23, 2013 +74 +Table of Contents +Signatures +Pursuant to the requirements of Section 13 or 15(d) 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. +NIKE, INC. +By: +/s/ MARK G. PARKER +Mark G. Parker +Chief Executive Officer and President +Date: +July 23, 2013 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. +Signature +Title +Date +PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: +/s/ MARK G. PARKER +Mark G. Parker +Director, Chief Executive Officer and President +July 23, 2013 +PRINCIPAL FINANCIAL OFFICER: +/s/ DONALD W. BLAIR +Donald W. Blair +Chief Financial Officer +July 23, 2013 +PRINCIPAL ACCOUNTING OFFICER: +/s/ BERNARD F. PLISKA +Bernard F. Pliska +Corporate Controller +July 23, 2013 +DIRECTORS: +/s/ PHILIP H. KNIGHT +Philip H. Knight +Director, Chairman of the Board +July 23, 2013 +/s/ ELIZABETH J. COMSTOCK +Elizabeth J. Comstock +Director +July 23, 2013 +/s/ JOHN G. CONNORS +John G. Connors +Director +July 23, 2013 +/s/ TIMOTHY D. COOK +Timothy D. Cook +Director +July 23, 2013 +/s/ ALAN B. GRAF, JR. +Alan B. Graf, Jr. +Director +July 23, 2013 +/s/ DOUGLAS G. HOUSER +Douglas G. Houser +Director +July 23, 2013 +/s/ JOHN C. LECHLEITER +John C. Lechleiter +Director +July 23, 2013 +/s/ JOHNATHAN A. RODGERS +Johnathan A. Rodgers +Director +July 23, 2013 +/s/ ORIN C. SMITH +Orin C. Smith +Director +July 23, 2013 +/s/ JOHN R. THOMPSON, JR. +John R. Thompson, Jr. +Director +July 23, 2013 +/s/ PHYLLIS M. WISE +Phyllis M. Wise +Director +July 23, 2013 +75 \ No newline at end of file diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/filing_metadata.csv b/raw/filings/0000320187/2012/0000320187-13-000092/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..eb64d0843c6e53b79edcd413e302c9df553a6062 --- /dev/null +++ b/raw/filings/0000320187/2012/0000320187-13-000092/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000320187,NKE,"NIKE, Inc.",10-K,2013-07-23,2013-05-31,2013-07-24T00:32:32.000Z,0000320187-13-000092,nke-5312013x10k.htm,10-K,26524396,1,0,https://www.sec.gov/Archives/edgar/data/320187/000032018713000092/nke-5312013x10k.htm,https://www.sec.gov/Archives/edgar/data/320187/000032018713000092/,2012,2012,1 diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/item1.txt b/raw/filings/0000320187/2012/0000320187-13-000092/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..9cf4e91a642f149c31a586dc52b7ff564fb06bbd --- /dev/null +++ b/raw/filings/0000320187/2012/0000320187-13-000092/item1.txt @@ -0,0 +1,104 @@ +ITEM 1. Business +General +NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our internet address is www.nike.com. On our NIKE Corporate website, located at www.nikeinc.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. All such filings on our NIKE Corporate website are available free of charge. Also available on the NIKE Corporate website are the charters of the committees of our board of directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. +Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and athletic apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet websites (which we refer to as our “Direct to Consumer” operations) and through a mix of independent distributors and licensees, in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad. +Products +We focus our NIKE Brand and Brand Jordan product offerings in seven key categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, NIKE Sportswear (our sports-inspired lifestyle products), and Action Sports. We also market products designed for kids, as well as for other athletic and recreational uses such as baseball, cricket, golf, lacrosse, outdoor activities, football, tennis, volleyball, walking, and wrestling. +NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovation in our products. NIKE Sportswear, Running, Basketball, Football (Soccer), and kids’ shoes are currently our top-selling footwear categories and we expect them to continue to lead in product sales in the near future. +We sell sports apparel and accessories covering most of the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos. +We sell a line of performance equipment under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc. +Our wholly-owned subsidiary, Converse Inc. (“Converse”), headquartered in North Andover, Massachusetts, designs, distributes and licenses athletic and casual footwear, apparel and accessories under the Converse ® , Chuck Taylor ® , All Star ® , One Star ® , Star Chevron ® and Jack Purcell ® trademarks. +Our wholly-owned subsidiary, Hurley International LLC (“Hurley”), headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley ® trademark. +In addition to the products we sell to our wholesale customers and directly to consumers through our Direct to Consumer operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell certain apparel, digital devices and applications and other equipment designed for sports activities. +As part of our long-term growth strategy, we continually evaluate our portfolio of businesses to ensure we are investing in those businesses that are accretive to the NIKE Brand with the largest growth potential and highest returns. On February 1, 2013, and November 30, 2012, we completed the divestitures of the Cole Haan and Umbro businesses, respectively, allowing us to better focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. +Sales and Marketing +Financial information about geographic and segment operations appears in Note 18 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements. +We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel, and equipment. +Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories, and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. +We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories, and services. Our reportable operating +1 +Table of Contents +segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic segment. +United States Market +In fiscal 2013, sales in the United States, including U.S. sales of our Other Businesses, accounted for approximately 45% of total revenues, compared to 42% in both fiscal 2012 and fiscal 2011. Converse and Hurley, our affiliate brands, and NIKE Golf comprise our Other Businesses. We sell to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts. During fiscal 2013, our three largest customers accounted for approximately 25% of sales in the United States. +We make substantial use of our futures ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2013, 87% of our U.S. wholesale footwear shipments (excluding our Other Businesses) were made under the futures program, compared to 86% in fiscal 2012 and 87% in fiscal 2011. In fiscal 2013, 67% of our U.S. wholesale apparel shipments (excluding our Other Businesses) were made under the futures program, compared to 64% in fiscal 2012 and 60% in fiscal 2011. +We utilize NIKE sales offices to solicit sales in the United States as well as independent sales representatives to sell specialty products for golf, skateboarding, and snowboarding. In addition, our Direct to Consumer operations sell NIKE Brand products to consumers through our internet website, www.nike.com , and through the following number of retail stores in the United States: +U.S. Retail Stores +Number +NIKE Brand factory stores +171 +NIKE Brand in-line stores, including NIKETOWNs and employee-only stores +33 +Converse stores (including factory stores) +72 +Hurley stores (including factory and employee stores) +27 +TOTAL +303 +NIKE has five primary distribution centers in the United States located in Memphis, Tennessee, three of which are leased. NIKE Brand apparel and equipment products are also shipped from our Foothill Ranch, California distribution center. Converse and Hurley products are shipped primarily from Ontario, California. +International Markets +In fiscal 2013, non-U.S. sales including non-U.S. sales of our Other Businesses accounted for 55% of total revenues, compared to 58% in both fiscal 2012 and fiscal 2011. We sell our products to retail accounts, through our own Direct to Consumer operations, and through a mix of independent distributors, licensees, and sales representatives around the world. We sell to thousands of retail accounts and operate 16 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United States futures ordering program described above. During fiscal 2013, NIKE’s three largest customers outside of the U.S. accounted for approximately 6% of total non-U.S. sales. +Our Direct to Consumer business operates the following number of retail stores outside the United States: +Non-U.S. Retail Stores +Number +NIKE Brand factory stores +388 +NIKE Brand in-line stores, including NIKETOWNs and employee-only stores +59 +Converse stores (including factory stores) +3 +TOTAL +450 +International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Costa Rica, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, New Zealand, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam. +Significant Customer +No customer accounted for 10% or more of our worldwide net sales during fiscal 2013. +Orders +Worldwide futures orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2013, were $12.1 billion compared to $11.2 billion for the same period last year. This futures orders amount is calculated based upon our forecast of the actual exchange rates under which our revenues will be translated during this period. Reported futures orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures and at-once orders and the fulfillment of certain of these futures orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of discounts, order cancellations and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses. +Product Research and Development +We believe our research and development efforts are a key factor in our success. Technical innovation in the design and manufacturing process of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce products that help to reduce injury, enhance athletic performance and maximize comfort. +In addition to NIKE’s own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability, and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. +Manufacturing +Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers. In fiscal 2013, contract factories in Vietnam, China and Indonesia manufactured approximately 42%, 30%, and 26% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture footwear for sale primarily within those countries. The largest single footwear factory with which we have contracted accounted for approximately 6% of total fiscal 2013 NIKE Brand footwear production. Almost all of NIKE Brand apparel is manufactured outside of the United States by independent contract manufacturers located in 28 countries. Most of this apparel production occurred in China, Vietnam, Thailand, Indonesia, Sri Lanka, Pakistan, Malaysia, Turkey, Mexico, and Cambodia. The largest single apparel factory that we have contracted with accounted for approximately 6% of total fiscal 2013 apparel production. +The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas, and polyurethane films used to make Air-Sole cushioning components. During fiscal 2013, NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, Inc., with facilities in Beaverton, Oregon and St. Louis, Missouri, as well as independent contractors in China and Vietnam, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain and snow, retain heat, or efficiently wick moisture away from the body. NIKE’s independent contractors and suppliers buy raw materials in bulk for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements. +Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2013, Sojitz America provided financing and purchasing services for NIKE Brand products sold in Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines, Malaysia, South Africa, Korea, and Thailand, excluding products produced and sold in the same country. Approximately 13% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2014. +International Operations and Trade +Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export and import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. +In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, such protectionist measures, if implemented, could result in increases in the cost of our products, which may in turn adversely affect our sales or profitability as well as the imported footwear and apparel industry as a whole. +We monitor protectionist trends and developments throughout the world that may materially impact our industry and engage in administrative and judicial processes to mitigate trade restrictions. In Brazil, we are actively monitoring for dumping investigations against products from China and other countries that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may increase customs clearance times for imports of footwear, apparel and equipment. Moreover, with respect to trade restrictions targeting China, which represents an important sourcing and consumer marketing country for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China's domestic economy and the important role it has in the global economic community. +Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost effective and could have an ongoing adverse impact on profitability. +2 +Table of Contents +Competition +The athletic footwear, apparel, and equipment industry is highly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure footwear, apparel, and equipment, including adidas, V.F. Corp., Puma, Li Ning and Under Armour, among others. We also compete with a number of vertical retailers such as Lululemon and Uniqlo. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. +NIKE is the largest seller of athletic footwear, apparel, and equipment in the world. Important aspects of competition in this industry are: +• +Product quality; performance and reliability; new product innovation and development; and consumer price/value; +• +Consumer connection and affinity for brands and products, developed through marketing and promotion; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products; and active engagement through sponsored sporting events and clinics; and +• +Effective distribution of products, with attractive merchandising and presentation at retail, in store and online. +We believe that we are competitive in all of these areas. +Trademarks and Patents +We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE® and Swoosh Design® trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions. In addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. +NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR® patents have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE AIR® patents will not expire for several years. +We also file and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents covering components, manufacturing techniques and features used in various athletic and leisure footwear, apparel, athletic equipment, digital devices and golf products. These patents expire at various times, and patents issued for applications filed this year in the U.S. will last until 2027 for design patents and until 2033 for utility patents. +We believe our success depends primarily upon our capabilities in design, research and development, production, and marketing rather than exclusively upon our patent position. However, we have followed a policy of filing patent applications for the United States and foreign patents on inventions, designs, and improvements that we deem valuable. +Employees +As of May 31, 2013, we had approximately 48,000 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements. +Executive Officers of the Registrant +The executive officers of NIKE, Inc. as of July 19, 2013 are as follows: +Philip H. Knight, Chairman of the Board of Directors — Mr. Knight, 75, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September 1984, served as its President from 1968 to 1990 and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at Portland State University. +Mark G. Parker, President and Chief Executive Officer — Mr. Parker, 57, was appointed President and Chief Executive Officer in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in 2001. +David J. Ayre, Executive Vice President, Global Human Resources — Mr. Ayre, 53, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards. +Donald W. Blair, Executive Vice President and Chief Financial Officer — Mr. Blair, 55, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with PepsiCo, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining PepsiCo, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells. +Trevor A. Edwards, President, NIKE Brand — Mr. Edwards, 50, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts for Foot Locker in 1993, Director of Marketing for the Americas Region in 1995, Director of Marketing for Europe in 1997, Vice President, Marketing for the Europe, Middle East and Africa Region in 1999, and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate +3 +Table of Contents +Vice President, Global Brand Management in 2002, Vice President, Global Brand and Category Management in 2006 and President, NIKE Brand in 2013. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company. +Jeanne P. Jackson, President, Product and Merchandising — Ms. Jackson, 61, joined NIKE in 2009. She was appointed President, Direct to Consumer in 2009 and President, Product and Merchandising in 2013. Ms. Jackson also served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009. She founded and served as Chief Executive Officer of MSP Capital, a private investment company, from 2002 to 2009. Ms. Jackson was Chief Executive Officer of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and Chief Executive Officer of Banana Republic from 1995 to 2000, also serving as Chief Executive Officer of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue, and Federated Department Stores. +Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 49, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed to Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP. +Bernard F. Pliska, Vice President, Corporate Controller — Mr. Pliska, 51, joined NIKE as Corporate Controller in 1995. He was appointed Vice President, Corporate Controller in 2003. Prior to NIKE, Mr. Pliska was with Price Waterhouse from 1984 to 1995. Mr. Pliska is a certified public accountant. +John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 44, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas Regions in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998. +Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 49, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas Region in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998, and Vice President & General Manager of the Americas Region in 2000. Mr. Sprunk was appointed corporate Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993. +4 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/item13.txt b/raw/filings/0000320187/2012/0000320187-13-000092/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..55290025d575da8fdc53e3b44ec3e16fc927f7ed --- /dev/null +++ b/raw/filings/0000320187/2012/0000320187-13-000092/item13.txt @@ -0,0 +1,2 @@ +ITEM 13. Certain Relationships and Related Transactions, and Director Independence +The information required by Items 404 and 407(a) of Regulation S-K is included under “Election of Directors — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/item9a.txt b/raw/filings/0000320187/2012/0000320187-13-000092/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a6a2f769c8d0269fcad43d9c29272bdd112fb1bb --- /dev/null +++ b/raw/filings/0000320187/2012/0000320187-13-000092/item9a.txt @@ -0,0 +1,5 @@ +ITEM 9A. Controls and Procedures +We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +We carry out a variety of on-going procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2013 . +“Management’s Annual Report on Internal Control Over Financial Reporting” is included in Item 8 of this Report. +There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/rp_note.txt b/raw/filings/0000320187/2012/0000320187-13-000092/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000320187/2012/0000320187-13-000092/rpt_disclosure.txt b/raw/filings/0000320187/2012/0000320187-13-000092/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..5e8ccdd1618e324876863b30424bb8fac1fee1e1 --- /dev/null +++ b/raw/filings/0000320187/2012/0000320187-13-000092/rpt_disclosure.txt @@ -0,0 +1,9 @@ +Transactions with Related Persons +Effective July 1, 2013, Mr. Knight terminated an arrangement whereby he made his airplane available to the Company for business use for no charge. During the course of the arrangement NIKE operated and maintained the aircraft. Mr. Knight reimbursed the Company $96,835 for NIKE’s operating costs related to his personal use of this aircraft during fiscal 2014, determined based on the cost of fuel and other variable costs associated with the flights under FAR 91-501(d). In connection with the termination of the airplane arrangement, the Company sold a tug and power cart, purchased for Mr. Knight's plane, to a company owned by Mr. Knight for $110,000. +Mr. Howard S. Slusher, the father of John Slusher, Executive Vice President of Sports Marketing, and the Company are parties to a Consulting Agreement pursuant to which Howard Slusher manages the planning, design, and construction of new buildings at, and improvements to, NIKE's World Headquarters. Howard Slusher was selected due to his deep history and experience with the Company, as he has managed several significant construction projects for the Company, including the original World Headquarters construction and later expansions. In addition, Howard Slusher's previous engagement with the Company garnered the trust of management and makes him uniquely qualified to oversee the project. During fiscal 2014, the Company paid Howard Slusher $1,525,000 for these services. +Pursuant to the terms of a past consulting agreement with the Company, the Company agreed to pay for health and life insurance policies for Howard Slusher following expiration of the agreement. During fiscal 2014, the Company paid $129,801 for health and life insurance premiums. +Three of Mr. Parker’s siblings are employed by the Company in non-executive roles. Bob Parker is a Marketplace Director, and has been employed by the Company for over 30 years; Stephen Parker is Vice President & General Manager, Converse Asia-Pacific, and has been employed by the Company for over 26 years; and Ann Parker is an Executive Talent Scout, and has been employed by the Company for over 24 years. During fiscal year 2014, the Company paid aggregate compensation to each of Bob Parker, Stephen Parker and Ann Parker in the amounts of $384,637, $514,215, $277,678, respectively. The compensation was consistent with compensation paid to other employees holding similar positions, and was composed of salary, bonuses, the grant date fair value of stock options granted during the fiscal year estimated using the Black-Scholes pricing model, profit sharing and matching contributions to Company-sponsored retirement plans. +Mr. Thompson’s son, John Thompson III, head basketball coach at Georgetown University, and the Company are parties to a contract pursuant to which Mr. Thompson III provides certain endorsement and consulting services to the Company. The terms of this agreement, effective August 2014 through August 2019, provide for annual base compensation of $200,000, and up to $112,000 per year of product and merchandise, for use by him, the basketball staff and team. In addition, there are annual incentive payments based upon his team's performance of up to $100,000. +Compensation Committee Interlocks and Insider Participation +The members of the Compensation Committee of the Board of Directors during the fiscal year ended May 31, 2014 were Timothy D. Cook, Elizabeth J. Comstock, John C. Lechleiter, and Johnathan A. Rodgers. The Committee is composed solely of independent, non-employee directors. No member of the Compensation Committee has been an executive officer of the Company, and no member of the Compensation +NIKE, INC. Ÿ 2014 Notice of Annual Meeting 14 \ No newline at end of file diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/filing.txt b/raw/filings/0000794172/2000/0000950152-00-008668/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..5e3e76e7dc247bf3dec80ae8f313eea5e92cf751 --- /dev/null +++ b/raw/filings/0000794172/2000/0000950152-00-008668/filing.txt @@ -0,0 +1,930 @@ +10-K +1 +l85672ae10-k.txt +MERIDIAN DIAGNOSTICS, INC. FORM 10-K +1 +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +X ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000. +[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES +EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ +TO__________________. +MERIDIAN DIAGNOSTICS, 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. [ ] +The aggregate market value of Common Stock held by non-affiliates is $53,641,941 +based on a closing sale price of $5.56 per share on December 8, 2000. As of +December 8, 2000, 14,597,614 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 2000 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 2001 Annual +Meeting as specified are incorporated by reference in Parts II and III as +specified. +2 +MERIDIAN DIAGNOSTICS, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Part I Page +Item 1 Business ................................................................................ 1 +Item 2 Properties ..............................................................................12 +Item 3 Legal Proceedings .......................................................................13 +Item 4 Submission of Matters to a Vote of Security Holders .....................................14 +Part II +Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ...................14 +Item 6 Selected Financial Data .................................................................14 +Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ...15 +Item 7A Quantitative and Qualitative Disclosures about Market Risk .............................15 +Item 8 Financial Statements and Supplementary Data .............................................15 +Item 9 Disagreements on Accounting and Financial Disclosure ....................................16 +Part III +Item 10 Directors and Executive Officers of the Registrant. ....................................16 +Item 11 Executive Compensation .................................................................16 +Item 12 Security Ownership of Certain Beneficial Owners and Management .........................16 +Item 13 Certain Relationships and Related Transactions .........................................16 +Part IV +Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................16 +i +3 +PART I. +ITEM 1. +BUSINESS +-------- +GENERAL +Meridian is a fully integrated life sciences company that develops, manufactures +and markets a broad range of innovative, disposable diagnostic test kits and +related diagnostic products used for the rapid diagnosis of infectious diseases, +and also offers biopharmaceutical capabilities. Meridian's diagnostics products +provide accuracy, simplicity, and speed, and enable early diagnosis and +treatment of common medical conditions such as gastrointestinal, viral, urinary +tract 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 the Company's decision to change its +official name to Meridian Bioscience, Inc., subject to shareholder approval in +January 2001. +Meridian's 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 1991, +Meridian has also acquired or obtained rights to distribute a number of 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; alternate site markets, including physicians' +offices, outpatient clinics, nursing homes 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 31% of total +fiscal 2000 sales. +During the fourth quarter of fiscal 2000, a plan was implemented to restructure +European distribution operations and eliminate the Company's direct presence in +Germany. This plan involves (i) the shutdown of the German distribution center, +(ii) the transfer of the export business from Germany to the Company's Belgian +operations and (iii) movement of the German in-country business to an +independent distributor. This plan was adopted as a means to improve operating +results in Europe. +1 +4 +ACQUISITIONS AND ALLIANCES +An important facet of Meridian's long-term business strategy is the expansion +into life sciences, as well as the acquisition, licensing or entrance 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. Prior to fiscal +2000, Meridian's management had pursued 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 infections disease and mononucleosis product lines of +Johnson & Johnson in fiscal 1994 and 1993, respectively, and numerous smaller +product acquisitions and licensing arrangements. +In the late fiscal 2000, Meridian completed its acquisition of Viral Antigens, +Inc. VAI further expands Meridian's life sciences capabilities through VAI's +protein expression lab which provides Meridian the opportunity to serve as an +enabler to biopharmaceutical companies in the development of new drugs and +vaccines. VAI also manufactures 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. +The purchase price for VAI was $9 million in cash, and was funded with bank debt +from the Company's existing credit facilities. The purchase agreement provides +for additional consideration, up to $8.25 million, contingent upon VAI's future +earnings though September 30, 2006. See Note 2 to the consolidated financial +statements for further information. On September 29, 2000, Meridian filed on +Form 8-K/A certain financial statements and pro forma financial information +relating to this acquisition. +Also during fiscal 2000, Meridian executed a Research and Development Agreement +and an Exclusive Supply Agreement with OraSure Technologies, Inc. to +commercialize the Uplink technology. Meridian believes that this technology will +offer competitive advantages including the elimination of background +interference, simultaneous detection of multiple biological markers and improved +sensitivity. These agreements require Meridian to make future payments to +OraSure to fund research and development costs and to obtain an exclusive +license to market and sell related products on a global basis. +In early fiscal 1999, Meridian acquired Gull Laboratories, Inc. for $19 million +in cash. Gull develops, manufactures and markets diagnostic test kits and +materials designed to detect past or present infection caused by certain +microbial agents such as viruses, bacteria and protozoa and to detect certain +autoimmune disorders. The products are based on established immunological assay +methods including indirect immunofluorescent antibody assay (IFA), enzyme-linked +immunosorbent assay (EIA), immunodiffusion and Western Blot. Gull's products are +used by private laboratories and hospital clinical laboratories worldwide. +Included in the Gull acquisition was its subsidiary, BIODESIGN International, +which manufactures and markets antigens and +2 +5 +antibodies to diagnostic and pharmaceutical manufacturers as well as academic +researchers. +During fiscal 2000, Meridian completed the transfer of Gull's Salt Lake City +production to the Company's Cincinnati facilities, and the sale of the Salt Lake +City facilities and real estate. During fiscal 1999, Meridian shut down Gull's +European manufacturing activities. See Note 2 to the consolidated financial +statements for further information. +A key component in the success of Meridian's acquisition and licensing of new +products and technologies has been the ability of Meridian's management 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 +an infectious disease caused by pathogens, such as bacteria, viruses and fungi, +and their related antigens are 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. +3 +6 +Technological advances permitting accurate testing to occur outside the +traditional hospital or laboratory setting have also affected the market for +diagnostic products. These technological developments have contributed to the +emergence of alternate site markets, such as physicians' offices, outpatient +clinics, nursing homes and HMOs, as important diagnostic market segments. These +technological advances should also contribute to the development of new markets +for Meridian's products, including food testing, veterinary laboratories and +water treatment facilities. +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. +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. In the last ten years, Meridian has developed 35 new +products, including one new product in fiscal 2000. +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. In the last ten +years, Meridian has acquired, licensed or entered into supply arrangements +relating to approximately 100 products. The Gull acquisition accounted for 65 of +the 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 +4 +7 +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 and the expansion of outside +collaborations with academic and government research laboratories. VAI recently +completed the installation of a pharmaceutical quality proteomics laboratory +that 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, II and III clinical trials. +In September 2000, Meridian expanded its relationship with Texas Tech University +Health Sciences Center for the development of highly specific, gene-mediated +antigen and antibody systems. Texas Tech's capabilities utilize gene +manipulation technologies to produce proteins that are reproducible and specific +for a variety of disease states. +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 Diagnostics Europe s.r.l., and with the +acquisition of Gull has an established sales force in Belgium, France and the +Netherlands. Meridian has added management to expand its ability to serve Latin +American markets and has expanded its international distributor base to include +distributors in Argentina and Asia. Over the last six years, Meridian's +international sales have grown from $2.1 million in fiscal 1993 to $17.7 million +in fiscal 2000 and represented 31% of total consolidated sales in fiscal 2000. +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. During fiscal 1999 and 1998, several +exclusive multiple-year contracts were signed with consolidated health care +providers. In the fall of 1998, a major national reference laboratory added +Premier Platinum HpSA to its test menu and actively markets HpSA to its client +list of primary care physicians and specialists. During fiscal 2000 and 1999, +Meridian extended or renewed supply agreements with several major reference +laboratories and other consolidated health care providers. +Global Sales Excellence - Meridian has launched 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. +5 +8 +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 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, membrane filtration/concentration, 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) and Monolert(R) products, for single physician 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 - 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. +Membrane Filtration/Concentration - Meridian utilizes this technology to detect +infection-causing bacteria present in human urine. These bacteria are +concentrated on a unique filter membrane for detection via the addition of a +special dye solution. This technology is utilized in Meridian's proprietary +rapid, single-unit FiltraCheck-UTI(R) test format. +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, including products acquired in the VAI and Gull +acquisitions, consists of over 250 medical diagnostic products representing four +major disease states. 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 Company'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, +6 +9 +Cryptosporidiosis, Amebiasis and Lyme disease. The markets for these products +are hospital, reference and veterinary laboratoties. +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. +Urogenital Diseases - Meridian manufactures products for the rapid detection of +urinary tract infection and Chlamydia. The markets for these products are +hospital, reference, physicians' office and public 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. +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 the +7 +10 +addition of sales and marketing personnel; the expansion of technical services +staff to support Meridian's customers and distribution network through a +toll-free service hotline; 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, three inside sales representatives and 18 technical sales +representatives. In Europe, Meridian's sales force consists of a vice president +of sales and marketing, six sales and marketing managers, two product managers, +five product specialists and 20 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 +Diagnostics Europe (MDE) 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. 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. Over the past ten years, Meridian has developed internally 35 new +products. Meridian has patent protection on a limited number 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. The disciplines represented in the +group include biochemistry, immunology, mycology, bacteriology, virology and +parasitology. In fiscal 1998, fiscal 1999 and fiscal 2000, Meridian spent $2.0 +million, $2.0 million, and $2.3 million +8 +11 +respectively, on its research and development activities. +CUSTOMERS +The principal customers for Meridian's products are hospitals, commercial and +reference laboratories, alternate site markets, such as physicians' offices, +outpatient clinics, nursing homes and HMOs, and new markets, such as veterinary +laboratories and water treatment facilities. Meridian also serves as an original +equipment manufacturer for other diagnostic companies. Two distributors together +accounted for more than 25% of Meridian's fiscal 2000 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. +MANUFACTURING +During fiscal 2000, substantially all of Meridian's manufacturing was performed +at its Cincinnati, Ohio facility. Meridian's acquisition of VAI has added +additional manufacturing capacity in Memphis, Tennessee. VAI's manufacturing of +veterinary products is regulated by the USDA and VAI's proteomics laboratory is +regulated by CBER (see Government Regulation). VAI's manufacturing facilities +are also subject to audit by certain customers. 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 is required to comply with, among other regulations, the FDA's Quality +System Regulation and is subject to periodic audits by the FDA. In response to +audits conducted in fiscal 2000, the Company implemented various programs to +address necessary corrective actions which it identified and increased its +quality assurance and control staffing. The costs attributable to the additional +staff and consulting assistance for fiscal 2000 were approximately $800,000. The +FDA is currently conducting a follow-up audit and is reviewing certain +validation procedures for certain products. The Company is fully cooperating +with the FDA in an effort to complete this process. While the outcome of the +audit is unknown at this time, if the FDA requires that validation procedures be +re-performed, the Company estimates that the lost revenue impact, while the +product is being re-validated and not available for sale, and the potential +work-in-process inventory that is not saleable, could be significant. +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. For many of its key raw +materials acquired from third parties, Meridian has developed dual sources. As a +result, Meridian believes it has access to sufficient raw materials for its +9 +12 +products. Meridian believes it has sufficient manufacturing capacity for +anticipated growth. Meridian Diagnostics Europe s.r.l. achieved ISO 9002 +certification in fiscal 1998, BIODESIGN achieved ISO 9001 certification in +fiscal 2000 and Meridian is working towards achieving ISO 9000 certification in +Cincinnati in fiscal 2001. +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 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 Wampole Laboratories Division of Carter-Wallace, Inc. +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. The Company'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 +laboratory and research personnel are required to execute confidentiality +agreements designed to protect Meridian's proprietary products. +10 +13 +Meridian has no reason to 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 30 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 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 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. During fiscal 1999, Meridian +received approval for several new product registrations in Japan. Currently, +Meridian is supporting foreign product registrations in Mexico, Korea, Japan, +China and Argentina via the distributors in the respective countries. +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. +11 +14 +The proteins produced in VAI's proteomics laboratory are intended to be used as +"injectibles". As such they are produced under more stringent regulations under +the auspices of the Center for Biologicals Evaluation & Research (CBER). +Approval and licensing, following clinical trials, of these products will be the +responsibility of the company that owns the rights to each protein. Such +products are approved under the "pre-market approval" guidelines which requires +substantially more time than 510(k) clearance. +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, 2000, Meridian had 369 full-time employees, including 75 in +sales, marketing and technical support, 106 in manufacturing, 15 in research and +product development, and 35 in administration and finance. 93 of Meridian's +employees hold scientific degrees. +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. +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. +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 +12 +15 +51,000 square feet of manufacturing space and 9,000 square feet of warehouse +space in the Cincinnati facility. +In the VAI acquisition, Meridian acquired VAI's executive offices and +manufacturing facility located in Memphis, Tennessee. This facility is comprised +of two buildings totaling approximately 31,000 square feet, including +approximately 25,000 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 Diagnostics Europe s.r.l. +In the Gull acquisition, Meridian acquired Gull's executive offices and +principal U.S. manufacturing facilities located in two buildings totaling 33,000 +square feet on approximately five acres of land in Salt Lake City, Utah. Both +the land and the building were sold during fiscal 2000. +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. +Meridian rents approximately 3,000 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. The lawsuit seeks 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. Meridian intends to seek recovery from the defendants for its damages, +costs and expenses, including its legal fees which amounted to approximately +$450,000 at September 30, 2000. There are no assurances, however, that Meridian +will be able to recover all or some of those amounts. +Management is not aware of any other material pending or threatened litigation, +claims or assessments, asserted or unasserted, against Meridian or its +subsidiaries except those arising in the ordinary course of business. +13 +16 +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 2000. +PART II. +ITEM 5. +MARKET FOR REGISTRANT'S COMMON +EQUITY AND RELATED STOCKHOLDER MATTERS +-------------------------------------- +"Common Stock Information" on page 27 and "Quarterly Financial Data" on page 25 +of the Registrant's Annual Report to Shareholders for 2000 are incorporated +herein by reference. There are no external restrictions on cash dividend +payments. +Meridian follows a cash dividend policy consisting of regular quarterly +dividends and special year-end dividends. The Board has set a targeted payout +ratio of 45% to 55% of annual net earnings. Approximately 30% to 35% of +forecasted annual net earnings is intended to be paid in regular quarterly +dividends with any balance being paid as a year-end special dividend. All or a +portion of the year-end dividend may be paid in stock. The declaration and +amount of dividends are determined by the Board of Directors in its discretion +based upon its evaluation of earnings, cash flow requirements and future +business developments. There is no assurance that dividends will continue. +Meridian paid dividends of $0.22 per share, $0.20 per share, and $0.23 per share +in fiscal 1998, fiscal 1999, and fiscal 2000, respectively. +On November 16, 2000, the Board of Directors voted to increase the annual cash +dividend rate to $0.26 per share, an increase of 13%. +ITEM 6. +SELECTED FINANCIAL DATA +----------------------- +"Ten Year Summary" on page 26 of the Registrant's Annual Report to Shareholders +for 2000 is incorporated by reference. +14 +17 +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +----------------------------------- +"Management's Discussion and Analysis of Financial Condition and Results of +Operations" commencing on page 10 of the Registrant's Annual Report to +Shareholders for 2000 is incorporated herein by reference. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +---------------------------------------------------------- +The information required by Item 7A is incorporated by reference from the +discussion of "Market Risk Exposure" contained on page 13 of the Registrants +Annual Report to Shareholders for 2000. +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +------------------------------------------- +"Quarterly Financial Data" on page 25 of the Registrant's Annual Report to +Shareholders for 2000 along with the Consolidated Financial Statements of the +Registrant shown on pages 14 through 25 of its Annual Report to Shareholders for +2000, are incorporated herein by reference: +Consolidated Balance Sheets as of September 30, 2000 and 1999. +Consolidated Statements of Earnings for the years ended September 30, 2000, +1999 and 1998. +Consolidated Statements of Shareholders' Equity for the years ended +September 30, 2000, 1999 and 1998. +Consolidated Statements of Cash Flows for the years ended September 30, +2000, 1999 and 1998. +Notes to Consolidated Financial Statements. +Report of Independent Public Accountants. +The following schedules are filed herewith: +15 +18 +Schedule +No. Description Page +--- ----------- ---- +Report of Independent Public Accountants. 23 +II. Valuation and Qualifying Accounts for the years ended +September 30, 2000, 1999 and 1998. 24 +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. +ITEM 9. +DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +---------------------------------------------------- +None. +PART III +Items 10., 11., 12., and 13. of Part III are incorporated by reference to the +Registrant's Proxy Statement for its 2001 Annual Shareholders' Meeting to be +filed with the Commission pursuant to Regulation 14A. +PART IV +ITEM 14. +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 14 are not applicable to Meridian. +(a) (3) EXHIBITS. +16 +19 +Exhibit Number Description of Exhibit Filing Status +-------------- ---------------------- ------------- +3.1 Articles of Incorporation, including amendments A +3.2 Code of Regulations B +4 Indenture between Meridian and Star Bank, National C +Association, as Trustee, relating to Meridian's 7% +Convertible Subordinated Debentures due 2006 +10.3 License Agreement dated October 6, 1983 with Marion B +Laboratories, Inc. +10.5 Sublicense Agreement dated June 17, 1993 among Johnson & D +Johnson, the Scripps Research Institute and Meridian +Concerning certain Patent Rights +10.6 Assignment dated June 17, 1993 from Ortho Diagnostic D +Systems Inc. to Meridian concerning certain Patent Rights +10.7 Agreement dated January 24, 1994 between Meridian E +Diagnostics, Inc. and Immulok, Inc. +10.8 Asset Purchase Agreement dated June 24, 1996 between F +Cambridge Biotech Corporation and Meridian Diagnostics, +Inc. +10.9 Merger Agreement among Gull Laboratories, Inc., Meridian G +Diagnostics, Inc. Fresenius AG and Meridian Acquisition +Co. dated as of September 15, 1998 +10.10* Savings and Investment Plan, as amended H +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 N +Laboratories, Inc., Meridian Diagnostics +17 +20 +Inc. Fresenius AG and Meridian Acquisition Co. +10.18* 1999 Directors' Stock Option Plan O +10.19* 1996 Stock Option Plan Amended and Restated Effective O +January 22, 1999 +10.20 Dividend Reinvestment Plan Q +10.21 Merger Agreement dated September 13, 2000 among Meridian P +and the Shareholders of Viral Antigens, Inc. +13 2000 Annual Report to Shareholders Filed herewith(1) +21 Subsidiaries of the Registrant Filed herewith +23 Consent of Independent Public Accountants Filed herewith +27 Financial Data Schedule Filed herewith +99 Forward Looking Statements Statement Filed herewith +-------- +1 Only portions of the 2000 Annual Report to Shareholders specifically +incorporated by reference in this Form 10-K are filed herewith. A supplemental +paper copy of the 2000 Annual Report to Shareholders has been provided to the +Securities and Exchange Commission for informational purposes only. +18 +21 +*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. +19 +22 +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. +(b) REPORTS ON FORM 8-K. +Meridian filed Reports on Form 8-K dated September 14, 2000 and September 29, +2000 related to the acquisition of all of the outstanding common stock of Viral +Antigens, Inc. +20 +23 +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 DIAGNOSTICS, INC. +By: /s/ William J. Motto +-------------------------------------- +Date: December 22, 2000 William J. Motto +Chairman of the Board of +Directors and Chief Executive +Officer (Principal Executive Officer) +21 +24 +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 December 22, 2000 +---------------------------------------- Chief Executive Officer (Principal +William J. Motto Executive Officer) +/s/ John A. Kraeutler President and Chief Operating December 22, 2000 +---------------------------------------- Officer, Director +John A. Kraeutler +/s/ Melissa Lueke Corporate Controller December 22, 2000 +---------------------------------------- (Acting Principal Accounting Officer) +Melissa Lueke +/s/ James A. Buzard Director December 22, 2000 +---------------------------------------- +James A. Buzard +/s/ Gary P. Kreider Director December 22, 2000 +---------------------------------------- +Gary P. Kreider +/s/ David C. Phillips Director December 22, 2000 +---------------------------------------- +David C. Phillips +/s/ Robert J. Ready Director December 22, 2000 +---------------------------------------- +Robert J. Ready +22 +25 +Report of Independent Public Accountants +---------------------------------------- +To Meridian Diagnostics, Inc: +We have audited in accordance with generally accepted auditing standards, the +consolidated financial statements included in Meridian Diagnostics, Inc. and +subsidiaries' annual report to shareholders incorporated by reference in this +Form 10-K, and have issued our report thereon dated November 16, 2000. Our audit +was made for the purpose of forming an opinion on those statements taken as a +whole. The schedule listed in Item 8 is the responsibility of the Company's +management and is presented for 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 16, 2000 +23 +26 +SCHEDULE II +Meridian Diagnostics, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2000, 1999 and 1998 +Balance at Charged to Charged Balance +Beginning Costs and to Other at End of +Description of Period Expenses Accounts Deductions Other(1) Period +----------- --------- -------- -------- ---------- -------- ------ +Year Ended September 30, 2000: +------------------------------ +Allowance for Doubtful Accounts $ 380 $ 122 $ - $ (45) $(19) $ 438 +Inventory Reserves 1,013 568 - (806) (90) 685 +Merger Integration Accounts 157 - - (157) - - +Year Ended September 30, 1999: +------------------------------ +Allowance for Doubtful Accounts $ 171 $ 150 $ 7 $ (303) $355 $ 380 +Inventory Reserves 857 667 - (1,242) 731 1,013 +Merger Integration Accounts - 3,415 - (3,258) - 157 +Year Ended September 30, 1998: +------------------------------ +Allowance for Doubtful Accounts $ 166 $ 27 $ 7 $ (29) $ - $ 171 +Inventory Reserves 416 1,029 - (588) - 857 +-------- +1 Balances in fiscal 2000 reflect acquired valuation accounts related to the +Viral Antigens, Inc. acquisition ($5 for the allowance for doubtful accounts) +and the effects of currency translation. Balances in fiscal 1999 reflect the +acquired valuation accounts related to the Gull Laboratories, Inc. acquisition. +24 \ No newline at end of file diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/filing_metadata.csv b/raw/filings/0000794172/2000/0000950152-00-008668/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b11c0edbed14c6ebdbcee41718b7b39765efa378 --- /dev/null +++ b/raw/filings/0000794172/2000/0000950152-00-008668/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2000-12-22,2000-09-30,2000-12-22T05:00:00.000Z,0000950152-00-008668,l85672ae10-k.txt,"MERIDIAN DIAGNOSTICS, INC. FORM 10-K",191246,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015200008668/l85672ae10-k.txt,https://www.sec.gov/Archives/edgar/data/794172/000095015200008668/,2000,2000,1 diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/item1.txt b/raw/filings/0000794172/2000/0000950152-00-008668/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..c70c4cdae8ac158b3a7aabd8421202387cb0e10c --- /dev/null +++ b/raw/filings/0000794172/2000/0000950152-00-008668/item1.txt @@ -0,0 +1,534 @@ +ITEM 1. +BUSINESS +-------- +GENERAL +Meridian is a fully integrated life sciences company that develops, manufactures +and markets a broad range of innovative, disposable diagnostic test kits and +related diagnostic products used for the rapid diagnosis of infectious diseases, +and also offers biopharmaceutical capabilities. Meridian's diagnostics products +provide accuracy, simplicity, and speed, and enable early diagnosis and +treatment of common medical conditions such as gastrointestinal, viral, urinary +tract 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 the Company's decision to change its +official name to Meridian Bioscience, Inc., subject to shareholder approval in +January 2001. +Meridian's 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 1991, +Meridian has also acquired or obtained rights to distribute a number of 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; alternate site markets, including physicians' +offices, outpatient clinics, nursing homes 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 31% of total +fiscal 2000 sales. +During the fourth quarter of fiscal 2000, a plan was implemented to restructure +European distribution operations and eliminate the Company's direct presence in +Germany. This plan involves (i) the shutdown of the German distribution center, +(ii) the transfer of the export business from Germany to the Company's Belgian +operations and (iii) movement of the German in-country business to an +independent distributor. This plan was adopted as a means to improve operating +results in Europe. +1 +4 +ACQUISITIONS AND ALLIANCES +An important facet of Meridian's long-term business strategy is the expansion +into life sciences, as well as the acquisition, licensing or entrance 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. Prior to fiscal +2000, Meridian's management had pursued 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 infections disease and mononucleosis product lines of +Johnson & Johnson in fiscal 1994 and 1993, respectively, and numerous smaller +product acquisitions and licensing arrangements. +In the late fiscal 2000, Meridian completed its acquisition of Viral Antigens, +Inc. VAI further expands Meridian's life sciences capabilities through VAI's +protein expression lab which provides Meridian the opportunity to serve as an +enabler to biopharmaceutical companies in the development of new drugs and +vaccines. VAI also manufactures 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. +The purchase price for VAI was $9 million in cash, and was funded with bank debt +from the Company's existing credit facilities. The purchase agreement provides +for additional consideration, up to $8.25 million, contingent upon VAI's future +earnings though September 30, 2006. See Note 2 to the consolidated financial +statements for further information. On September 29, 2000, Meridian filed on +Form 8-K/A certain financial statements and pro forma financial information +relating to this acquisition. +Also during fiscal 2000, Meridian executed a Research and Development Agreement +and an Exclusive Supply Agreement with OraSure Technologies, Inc. to +commercialize the Uplink technology. Meridian believes that this technology will +offer competitive advantages including the elimination of background +interference, simultaneous detection of multiple biological markers and improved +sensitivity. These agreements require Meridian to make future payments to +OraSure to fund research and development costs and to obtain an exclusive +license to market and sell related products on a global basis. +In early fiscal 1999, Meridian acquired Gull Laboratories, Inc. for $19 million +in cash. Gull develops, manufactures and markets diagnostic test kits and +materials designed to detect past or present infection caused by certain +microbial agents such as viruses, bacteria and protozoa and to detect certain +autoimmune disorders. The products are based on established immunological assay +methods including indirect immunofluorescent antibody assay (IFA), enzyme-linked +immunosorbent assay (EIA), immunodiffusion and Western Blot. Gull's products are +used by private laboratories and hospital clinical laboratories worldwide. +Included in the Gull acquisition was its subsidiary, BIODESIGN International, +which manufactures and markets antigens and +2 +5 +antibodies to diagnostic and pharmaceutical manufacturers as well as academic +researchers. +During fiscal 2000, Meridian completed the transfer of Gull's Salt Lake City +production to the Company's Cincinnati facilities, and the sale of the Salt Lake +City facilities and real estate. During fiscal 1999, Meridian shut down Gull's +European manufacturing activities. See Note 2 to the consolidated financial +statements for further information. +A key component in the success of Meridian's acquisition and licensing of new +products and technologies has been the ability of Meridian's management 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 +an infectious disease caused by pathogens, such as bacteria, viruses and fungi, +and their related antigens are 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. +3 +6 +Technological advances permitting accurate testing to occur outside the +traditional hospital or laboratory setting have also affected the market for +diagnostic products. These technological developments have contributed to the +emergence of alternate site markets, such as physicians' offices, outpatient +clinics, nursing homes and HMOs, as important diagnostic market segments. These +technological advances should also contribute to the development of new markets +for Meridian's products, including food testing, veterinary laboratories and +water treatment facilities. +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. +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. In the last ten years, Meridian has developed 35 new +products, including one new product in fiscal 2000. +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. In the last ten +years, Meridian has acquired, licensed or entered into supply arrangements +relating to approximately 100 products. The Gull acquisition accounted for 65 of +the 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 +4 +7 +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 and the expansion of outside +collaborations with academic and government research laboratories. VAI recently +completed the installation of a pharmaceutical quality proteomics laboratory +that 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, II and III clinical trials. +In September 2000, Meridian expanded its relationship with Texas Tech University +Health Sciences Center for the development of highly specific, gene-mediated +antigen and antibody systems. Texas Tech's capabilities utilize gene +manipulation technologies to produce proteins that are reproducible and specific +for a variety of disease states. +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 Diagnostics Europe s.r.l., and with the +acquisition of Gull has an established sales force in Belgium, France and the +Netherlands. Meridian has added management to expand its ability to serve Latin +American markets and has expanded its international distributor base to include +distributors in Argentina and Asia. Over the last six years, Meridian's +international sales have grown from $2.1 million in fiscal 1993 to $17.7 million +in fiscal 2000 and represented 31% of total consolidated sales in fiscal 2000. +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. During fiscal 1999 and 1998, several +exclusive multiple-year contracts were signed with consolidated health care +providers. In the fall of 1998, a major national reference laboratory added +Premier Platinum HpSA to its test menu and actively markets HpSA to its client +list of primary care physicians and specialists. During fiscal 2000 and 1999, +Meridian extended or renewed supply agreements with several major reference +laboratories and other consolidated health care providers. +Global Sales Excellence - Meridian has launched 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. +5 +8 +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 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, membrane filtration/concentration, 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) and Monolert(R) products, for single physician 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 - 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. +Membrane Filtration/Concentration - Meridian utilizes this technology to detect +infection-causing bacteria present in human urine. These bacteria are +concentrated on a unique filter membrane for detection via the addition of a +special dye solution. This technology is utilized in Meridian's proprietary +rapid, single-unit FiltraCheck-UTI(R) test format. +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, including products acquired in the VAI and Gull +acquisitions, consists of over 250 medical diagnostic products representing four +major disease states. 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 Company'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, +6 +9 +Cryptosporidiosis, Amebiasis and Lyme disease. The markets for these products +are hospital, reference and veterinary laboratoties. +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. +Urogenital Diseases - Meridian manufactures products for the rapid detection of +urinary tract infection and Chlamydia. The markets for these products are +hospital, reference, physicians' office and public 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. +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 the +7 +10 +addition of sales and marketing personnel; the expansion of technical services +staff to support Meridian's customers and distribution network through a +toll-free service hotline; 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, three inside sales representatives and 18 technical sales +representatives. In Europe, Meridian's sales force consists of a vice president +of sales and marketing, six sales and marketing managers, two product managers, +five product specialists and 20 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 +Diagnostics Europe (MDE) 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. 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. Over the past ten years, Meridian has developed internally 35 new +products. Meridian has patent protection on a limited number 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. The disciplines represented in the +group include biochemistry, immunology, mycology, bacteriology, virology and +parasitology. In fiscal 1998, fiscal 1999 and fiscal 2000, Meridian spent $2.0 +million, $2.0 million, and $2.3 million +8 +11 +respectively, on its research and development activities. +CUSTOMERS +The principal customers for Meridian's products are hospitals, commercial and +reference laboratories, alternate site markets, such as physicians' offices, +outpatient clinics, nursing homes and HMOs, and new markets, such as veterinary +laboratories and water treatment facilities. Meridian also serves as an original +equipment manufacturer for other diagnostic companies. Two distributors together +accounted for more than 25% of Meridian's fiscal 2000 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. +MANUFACTURING +During fiscal 2000, substantially all of Meridian's manufacturing was performed +at its Cincinnati, Ohio facility. Meridian's acquisition of VAI has added +additional manufacturing capacity in Memphis, Tennessee. VAI's manufacturing of +veterinary products is regulated by the USDA and VAI's proteomics laboratory is +regulated by CBER (see Government Regulation). VAI's manufacturing facilities +are also subject to audit by certain customers. 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 is required to comply with, among other regulations, the FDA's Quality +System Regulation and is subject to periodic audits by the FDA. In response to +audits conducted in fiscal 2000, the Company implemented various programs to +address necessary corrective actions which it identified and increased its +quality assurance and control staffing. The costs attributable to the additional +staff and consulting assistance for fiscal 2000 were approximately $800,000. The +FDA is currently conducting a follow-up audit and is reviewing certain +validation procedures for certain products. The Company is fully cooperating +with the FDA in an effort to complete this process. While the outcome of the +audit is unknown at this time, if the FDA requires that validation procedures be +re-performed, the Company estimates that the lost revenue impact, while the +product is being re-validated and not available for sale, and the potential +work-in-process inventory that is not saleable, could be significant. +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. For many of its key raw +materials acquired from third parties, Meridian has developed dual sources. As a +result, Meridian believes it has access to sufficient raw materials for its +9 +12 +products. Meridian believes it has sufficient manufacturing capacity for +anticipated growth. Meridian Diagnostics Europe s.r.l. achieved ISO 9002 +certification in fiscal 1998, BIODESIGN achieved ISO 9001 certification in +fiscal 2000 and Meridian is working towards achieving ISO 9000 certification in +Cincinnati in fiscal 2001. +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 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 Wampole Laboratories Division of Carter-Wallace, Inc. +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. The Company'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 +laboratory and research personnel are required to execute confidentiality +agreements designed to protect Meridian's proprietary products. +10 +13 +Meridian has no reason to 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 30 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 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 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. During fiscal 1999, Meridian +received approval for several new product registrations in Japan. Currently, +Meridian is supporting foreign product registrations in Mexico, Korea, Japan, +China and Argentina via the distributors in the respective countries. +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. +11 +14 +The proteins produced in VAI's proteomics laboratory are intended to be used as +"injectibles". As such they are produced under more stringent regulations under +the auspices of the Center for Biologicals Evaluation & Research (CBER). +Approval and licensing, following clinical trials, of these products will be the +responsibility of the company that owns the rights to each protein. Such +products are approved under the "pre-market approval" guidelines which requires +substantially more time than 510(k) clearance. +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, 2000, Meridian had 369 full-time employees, including 75 in +sales, marketing and technical support, 106 in manufacturing, 15 in research and +product development, and 35 in administration and finance. 93 of Meridian's +employees hold scientific degrees. +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. +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. \ No newline at end of file diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/item13.txt b/raw/filings/0000794172/2000/0000950152-00-008668/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..616b0eb98fac69ca1fe6c8906273b909000638b1 --- /dev/null +++ b/raw/filings/0000794172/2000/0000950152-00-008668/item13.txt @@ -0,0 +1 @@ +Item 13 Certain Relationships and Related Transactions .........................................16 \ No newline at end of file diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/item9a.txt b/raw/filings/0000794172/2000/0000950152-00-008668/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/rp_note.txt b/raw/filings/0000794172/2000/0000950152-00-008668/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2000/0000950152-00-008668/rpt_disclosure.txt b/raw/filings/0000794172/2000/0000950152-00-008668/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/filing.txt b/raw/filings/0000794172/2001/0000950109-01-505814/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..df9ea87f82e3d82868845e3bc6708656d8fb44e0 --- /dev/null +++ b/raw/filings/0000794172/2001/0000950109-01-505814/filing.txt @@ -0,0 +1,2786 @@ +10-K +1 +d10k.htm +ANNUAL REPORT +Annual Report +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +[X] +ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001. +[_] +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE +ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO__________________. +MERIDIAN BIOSCIENCE, INC. +Incorporated under +the Laws of Ohio +3471 River Hills Drive +Cincinnati, Ohio 45244 +Phone: (513) 271-3700 +IRS Employer ID +No. 31-0888197 +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. [_] +The aggregate market value of Common Stock held by non-affiliates is $59,750,388 based on a closing sale price of $6.00 per share on November 30, 2001. As of November 30, 2001, 14,599,170 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, 2001 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 2002 Annual Meeting as specified 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 +13 +Item 3 +Legal Proceedings +14 +Item 4 +Submission of Matters to a Vote of Security Holders +15 +Part II +Item 5 +Market for Registrant's Common Equity and Related Stockholder Matters +15 +Item 6 +Selected Financial Data +15 +Item 7 +Management's Discussion and Analysis of Financial Condition and Results of Operations +16 +Item 7A +Quantitative and Qualitative Disclosures about Market Risk +25 +Item 8 +Financial Statements and Supplementary Data +26 +Item 9 +Disagreements on Accounting and Financial Disclosure +52 +Part III +Item 10 +Directors and Executive Officers of the Registrant +52 +Item 11 +Executive Compensation +52 +Item 12 +Security Ownership of Certain Beneficial Owners and Management +52 +Item 13 +Certain Relationships and Related Transactions +52 +Part IV +Item 14 +Exhibits, Financial Statement Schedules, and Reports on Form 8-K +52 +FORWARD LOOKING STATEMENTS STATEMENT +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 approximately 35 internally-developed products since 1991, 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 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. +PART I. +ITEM 1. +BUSINESS +General +Meridian was incorporated in 1976 as an Ohio corporation. Meridian is a fully integrated life sciences company that develops, manufactures and markets 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 and serves as an original equipment manufacturer for other diagnostics companies. +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 the Meridian’s decision to change its official name to Meridian Bioscience, Inc. +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 also 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; alternate site markets, including physicians' +offices, outpatient clinics, nursing homes 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 2001 sales +(see Note 12 to the Consolidated Financial Statements for information regarding sales by business segment). +1 +During the fourth quarter of fiscal 2000, a plan was implemented to restructure European distribution operations, eliminate Meridian’s direct presence in Germany 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 $852,000 during fiscal 2001 compared to an operating loss of $566,000 in fiscal 2000. Substantial savings have been +realized from the closure of the German distribution facility. +Acquisitions and Alliances +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. During the last 14 months, Meridian executed a number of supply arrangements, both domestically and internationally, that included approximately 30 products. +In late fiscal 2000, Meridian completed its acquisition of Viral Antigens, Inc. VAI further expanded Meridian's life sciences capabilities through VAI’s protein expression laboratories, providing Meridian the opportunity to +serve as an enabler to biopharmaceutical companies in the development of new drugs and vaccines. VAI’s facilities are currently being expanded to accommodate a larger volume of business and are expected to be operational in March 2002. VAI also +manufactures 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. See Note 3 to the Consolidated Financial +Statements for further information. +Also during fiscal 2000, Meridian executed a Research and Development Agreement and an Exclusive Supply Agreement with OraSure Technologies, Inc. to commercialize the Up link technology . Meridian believes that this technology will offer competitive advantages including the elimination of background interference, simultaneous detection of multiple biological markers +and improved sensitivity. These agreements require Meridian to make future payments to OraSure to fund research and development costs and to obtain an exclusive license to market and sell related products on a global basis. Meridian expects to begin +the commercial sale of Up link™ products in late fiscal 2002 or early fiscal 2003. +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 and markets antigens and antibodies to diagnostic and pharmaceutical manufacturers as well as academic researchers. See Note 3 to the Consolidated Financial Statements for further information. +2 +Prior to fiscal 2000, Meridian pursued 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 an infectious disease caused by pathogens, such as bacteria, viruses and fungi, and their related +antigens are 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. +3 +Technological advances permitting accurate testing to occur outside the traditional hospital or laboratory setting have also affected the market for diagnostic products. These technological developments have contributed to the +emergence of alternate site markets, such as physicians' offices, outpatient clinics, nursing homes and HMOs, as important diagnostic market segments. These technological advances should also contribute to the development of new markets for +Meridian's products, including food testing, veterinary laboratories and water treatment facilities. +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. +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. Since 1991, Meridian has developed 35 new products. +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. Since 1991, Meridian has acquired, licensed or entered into supply arrangements relating to approximately 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 +4 +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 laboratories, which are currently being expanded, +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. +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 markets and has +expanded its international distributor base to include distributors in Argentina and Asia. Over the last several years, Meridian's international sales have grown from $2.1 million in fiscal 1993 to $16.7 million in fiscal 2001 and represented 30% of +total consolidated sales in fiscal 2001. +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. During the last four years, several exclusive multiple-year contracts were signed with consolidated health +care providers and Meridian also extended or renewed supply agreements with several 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 satisfy customer needs and preferences, whether in a hospital, commercial or reference laboratory or alternate site +5 +location. These technologies include enzyme immunoassay, immunofluorescence, particle agglutination, membrane filtration/concentration, 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 Immuno Card ® +and Monolert ® +products, for single physician 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 ® +products. +Particle Agglutination - 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 ® +and MonoSpot ® +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 ® +, Macro-CON ® +and SpinCON ® +. +Meridian's product line consists of over 200 medical diagnostic products representing four major disease states. 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, Amebiasis 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. +6 +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. +Urogenital Diseases - Meridian manufactures a product for the rapid detection of Chlamydia . The markets for this product are hospital, +reference, physicians’ office and public 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. +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 the addition of sales and marketing personnel; the expansion of technical services staff to support Meridian's customers and distribution network through a toll-free service hotline; 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 +7 +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 such as OraSure. 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. Since 1990, Meridian has developed internally 35 new products. Meridian has patent protection on a limited +number of its products including Premier Platinum HpSA ™ . 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 nine research scientists. The disciplines represented in the group include biochemistry, immunology, mycology, bacteriology, +virology and parasitology. In fiscal 1999, fiscal 2000 and fiscal 2001, Meridian spent $2.0 million, $2.3 million, and $3.4 million, respectively, on its research and development activities. +Customers +The principal customers for Meridian's products are hospitals, commercial and reference laboratories, alternate site markets, such as physicians' offices, outpatient clinics, nursing homes and HMOs, and new markets, such as +8 +veterinary laboratories and water treatment facilities. Meridian also serves as an original equipment manufacturer for other diagnostic companies. Two distributors together accounted for more than 20% of Meridian's fiscal 2001 +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. +Manufacturing +During fiscal 2001, 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 +manufacture and distribution of approximately 30 products. The costs to date of implementing the plan include costs for outside consultants with experience in the quality system regulations, validation and computer software and equipment. During the +fiscal 2001, Meridian incurred plan implementation costs in the amount of $2,322,000, primarily related to consulting fees. On an on-going basis, Meridian has considered the effects of incremental costs of compliance with QSR in its cost structure. +Meridian believes that such incremental costs of compliance with QSR will be offset by cost reductions and efficiencies related to the restructuring of Cincinnati manufacturing operations discussed below, and consequently, gross profit margins for +the diagnostics business are expected to approach 1999 - 2000 levels. +9 +Meridian continues to engage in other activities designed to reduce costs, improve operations and replace products that were discontinued. Meridian restructured its Cincinnati manufacturing operations and quality functions by, among +other things, hiring a number of professionals with experience in monitoring and improving a FDA-compliant quality system. During the second quarter, Meridian entered into a three-year supply agreement (with renewal options) with Zeus Scientific, +Inc., whereby Zeus will manufacture, on an OEM basis, replacement products for 27 of the 30 discontinued Meridian products. +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, Meridian engaged an outside 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. +Contingent upon the successful restructuring of operations and the acceptance of the plan by the FDA, Meridian expects cash flows from operations to be sufficient to fund working capital needs, debt service, dividends and the stock +buyback program referred to in Note 1 to the Consolidated Financial Statements during fiscal 2002. Meridian is communicating with the FDA on a periodic basis to advise it on the progress of the plan implementation. 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 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 +10 +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 Wampole Laboratories Division of +Carter-Wallace, Inc. +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. All of 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. +11 +Each of the products currently marketed by Meridian 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 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. +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 produced in VAI’s proteomics laboratories are intended to be used as “injectibles”. As such they are produced under more stringent regulations under the auspices of the Center for Biologicals Evaluation +& Research (CBER). Approval and licensing, following clinical trials, of these products will be the responsibility of Meridian that owns the rights to each protein. Such products are approved under the “pre-market approval” guidelines +which requires substantially more time than 510(k) clearance. +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, 2001, Meridian had 325 full-time employees and 9 part-time employees. None of Meridian's employees is represented by a labor organization and Meridian is not a party to any collective +bargaining +12 +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. +In the VAI acquisition, Meridian acquired VAI’s executive offices and manufacturing facility located in Memphis, Tennessee. This facility is comprised of two buildings totaling approximately 31,000 square feet, including +approximately 25,000 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. +In the Gull acquisition, Meridian acquired Gull's executive offices and principal U.S. manufacturing facilities located in two buildings totaling 33,000 square feet on approximately five acres of land in Salt Lake City, Utah. Both +the land and the building were sold during fiscal 2000. +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. +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. +13 +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. The former employee filed for bankruptcy in May 2001 but the bankruptcy +court has authorized Meridian to continue to pursue its claims against him. Consequently, Meridian still intends to seek recovery from the defendants for its damages, costs and expenses, including its legal fees which amounted to $440,000 and +$450,000 in fiscal 2001 and 2000, respectively. There are no assurances, however, that Meridian will be able to recover all or some of these amounts. +In July 2000, the former employee commenced a separate action against Meridian in California which was transferred to Ohio, which will likely be 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 claims 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. 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. Meridian plans 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. Related legal fees are +included in the amounts noted above. 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 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 on the +grounds of patent infringement, 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. +14 +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 2001. +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 2001 and "Quarterly Financial Data" in Note 14 to the Consolidated Financial Statements are incorporated herein by reference. There are no +external restrictions on cash dividend payments. +Meridian follows a cash dividend policy consisting of regular quarterly dividends and special year-end dividends. The Board has set a targeted payout ratio of 45% to 55% of annual net earnings. Approximately 30% to 35% of forecasted +annual net earnings is intended to be paid in regular quarterly dividends with any balance being paid as a year-end special dividend. All or a portion of the year-end dividend may be paid in stock. The declaration and amount of dividends are +determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements and future business developments. There is no assurance that dividends will continue. +Meridian paid dividends of $0.20 per share, $0.23 per share, and $0.26 per share in fiscal 1999, fiscal 2000, and fiscal 2001, respectively. +On November 14, 2001, the Board of Directors voted to increase the annual cash dividend rate to $0.28 per share, an increase of 8%. +ITEM 6. +SELECTED FINANCIAL DATA +"Ten Year Summary" on page four of the Annual Report to Shareholders for 2001 is incorporated by reference. +15 +ITEM 7. +MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Results of Operations : +Overview +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2001 were $171,000, or $0.01 per share. Net sales for the fourth quarter of fiscal 2001 were $13,501,000 compared to $13,850,000 for the fourth quarter of fiscal 2000, a decrease of +$349,000 or 3%. Excluding the effects of currency, the decrease in sales for the fourth quarter was $132,000 or 1%. +Meridian sees several positive trends in its sales levels during the fourth quarter of fiscal 2001 that are expected to carry into fiscal 2002. The first positive trend is that meaningful progress continues to occur in restructuring +Meridian’s Cincinnati manufacturing operations and in improving quality systems, resulting in higher levels of available products. This contributed to stronger sales in September compared to other months during the quarter. Meridian has seen +this momentum carry into October. Through November 30, 2001, Meridian is on track to meet its first quarter fiscal 2002 sales plan of $13,248,000. +Net earnings for the fourth quarter of fiscal 2001 also include the effects of a write-off of inventory that was determined to be non-saleable due to increased quality standards implemented over the last eight months, resulting in a +gross profit margin of 45% for the quarter. Excluding this inventory write-off, gross profit margin was 60% for the fourth quarter. +Fiscal Year +Operating results for fiscal 2001 were a net loss of $10,275,000, or $0.70 per share, compared to net earnings of $7,111,000, or $0.49 per share for fiscal 2000. Operating results for fiscal 2001 include after-tax charges of $0.80 +per share for (i) acquired in-process research and development, (ii) asset impairment charges and other costs related to FDA matters and (iii) European restructuring (see discussion below). Operating results for fiscal 2001 also include the impact +of the acquisition of Viral Antigens, which became effective September 15, 2000. Viral Antigens contributed net sales of $7,591,000 for fiscal 2001. +16 +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 have been $1,617,000 (after tax), including $489,000 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 European restructuring plan is complete and Meridian does +not expect to incur additional restructuring costs. 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 $852,000 during +fiscal 2001 compared to an operating loss of $566,000 in fiscal 2000. Substantial savings have been realized from the closure of the German distribution facility. +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 +manufacture and distribution of approximately 30 products. The costs to date of implementing the plan include costs for outside consultants with experience in the quality system regulations, validation and computer software and equipment. During the +fourth quarter, Meridian incurred plan implementation costs in the amount of $361,000, primarily related to consulting fees. Such costs were $2,322,000 for the year ended September 30, 2001. On an on-going basis, Meridian has considered the effects +of incremental costs of compliance with QSR in its cost structure. Meridian believes that such incremental costs of compliance with QSR will be offset by cost reductions and efficiencies related to the restructuring of Cincinnati manufacturing +operations discussed below, and consequently, gross profit margins for the diagnostics business are expected to approach 1999 – 2000 levels. +Meridian continues to engage in other activities designed to reduce costs, improve operations and replace products that were discontinued. Meridian restructured its Cincinnati manufacturing operations and quality functions by, among +other things, hiring a number of professionals with experience in monitoring and improving a FDA- +17 +compliant quality system. During the second quarter, Meridian entered into a three-year supply agreement (with renewal options) with Zeus Scientific, Inc., whereby Zeus will manufacture, on an OEM basis, replacement products for 27 +of the 30 discontinued Meridian products. +As a result of the decision to discontinue the manufacturing and distribution of approximately 30 products, Meridian could not recover the cost of certain assets, and consequently, recorded the following pre-tax charges during +fiscal 2001 (in thousands): +Product inventory write-off +$ +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 include 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, Meridian engaged an outside 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. +Contingent upon the successful restructuring of operations and the acceptance of the plan by the FDA, Meridian expects cash flows from operations to be sufficient to fund working capital needs, debt service, dividends and the stock +buyback program referred to in Note 1 to the Consolidated Financial Statements during fiscal 2002. Meridian is communicating with the FDA on a periodic basis to advise it on the progress of the plan implementation. 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 +Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30, 2000 +Net Sales +Net sales decreased $569,000, or 1%, to $56,527,000 for fiscal 2001 compared to fiscal 2000. This decrease was primarily comprised of currency losses ($1,055,000 or 2%) and volume declines in the traditional Meridian core business, +that have been largely offset by volume increases from the Viral Antigens acquisition. +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. Meaningful progress +was made during fiscal 2001 in restructuring Cincinnati manufacturing operations and improving quality systems as discussed above. As the availability of product continues to improve, Meridian expects to see improvements in sales volume during +fiscal 2002, commensurate with historical levels. Volume declines in the traditional Meridian core business were offset by the VAI acquisition, which contributed sales of $7,591,000. +International sales were $16,689,000, or 30% of total sales, for fiscal 2001, compared to $19,276,000, or 34% of total sales, in fiscal 2000. Domestic exports were $4,268,000 for fiscal 2001, compared to $5,019,000 in fiscal 2000. +The remaining international sales were generated by Meridian’s European distribution businesses (MBE). MBE’s sales include the unfavorable impact of currency translation losses discussed above as well as volume declines attributable to +discontinuing the manufacturing and distribution of the products discussed above. Meridian’s Premier Platinum HpSA product experienced strong volume growth in the Italian market, offsetting a portion of the volume declines. +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, +described above and currency translation losses. +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. Meridian is pursuing several actions to reduce the impact of currency, including price increases in Europe, billing where possible in US dollars and certain +hedging strategies. +19 +Gross profit margin was also impacted by the VAI acquisition. VAI generates lower gross profit margins than traditional Meridian products; however, their selling and marketing costs are lower, as a percentage of sales, than the +traditional Meridian business. +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 the outsourcing arrangement with OraSure for product +development, 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 Viral Antigen’s costs, costs for the outsourcing arrangement with OraSure for product development using the Up link technology and costs for certain clinical trials. +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. This decrease primarily relates to the effects of +cost reduction measures in Cincinnati and Europe, including the closure of the German distribution operation, partially offset by the addition of Viral Antigens’s costs. +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. This increase primarily relates to the addition of +Viral Antigen’s costs, including amortization of goodwill and other intangibles. These increases were partially offset by the results of cost reduction efforts in Cincinnati and Europe, including closure of the German distribution operation, +and lower amortization related to impaired intangible assets from the first quarter. +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, +20 +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. +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). +Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30, 1999 +Net Sales +Net sales increased $3,169,000 or 6%, to $57,096,000 in fiscal 2000 compared to fiscal 1999. This increase was primarily comprised of volume growth, partially offset by currency losses of 4% or $2,063,000. Adjusted for currency +losses, net sales increased 10% in fiscal 2000. +Volume growth in core products resulted primarily from increases in the Rotavirus, Virology, H.pylori and Microbiology product lines, offset by slight decreases in other product lines. Meridian’s proficiency testing and reagent +sales also contributed to the volume growth for fiscal 2000. +21 +International sales were $19,276,000, or 34% of total sales, in fiscal 2000 compared to $19,504,000, or 36% of total sales, in fiscal 1999. Domestic exports were $5,019,000 in fiscal 2000 compared to $4,181,000 in fiscal 1999, with +remaining international sales generated by Meridian’s European distribution businesses (MBE). Although MBE’s sales include the unfavorable impact of currency translation losses discussed above, except for Germany, in most other major +European markets, MBE experienced strong volume growth. +Gross Profit +Gross profit increased $1,077,000 or 3%, to $35,446,000 in fiscal 2000. Gross profit margins declined from 64% in fiscal 1999 to 62% in fiscal 2000. Gross profit margins were unfavorably impacted by currency translation losses, +coupled with higher scrap in manufacturing operations and inventory variances. +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. Meridian is pursuing several actions to reduce the impact of currency including price increases in Europe, billing where possible in US dollars and certain +hedging strategies. +Operating Expenses +Operating expenses, inclusive of merger integration costs and purchased in-process research and development in fiscal 1999, decreased $1,750,000 or 6%. Excluding, these non-recurring items, operating expenses increased $3,165,000 or +14%, to $26,092,000 in fiscal 2000, and as a percentage of sales, increased to 46% in fiscal 2000 compared to 43% in fiscal 1999. Operating expenses include the asset impairment reserve for the German distribution operation ($800,000) and litigation +expenses ($453,000). +Research and development expenses increased $274,000 or 14%, to $2,260,000 in fiscal 2000, and as a percentage of sales, were flat at 4% in both fiscal 2000 and fiscal 1999. This increase, in part, reflects costs related to the +outsourcing arrangement with OraSure for product development using the Up link technology. +Selling and marketing expenses increased $1,084,000 or 10%, to $12,256,000 in fiscal 2000, and as a percentage of sales, were flat at 21% in both fiscal 2000 and fiscal 1999. The dollar increase reflects normal personnel cost +increases, additional freight costs relative to sales volume increases, business development costs in certain Asian countries and one additional month of Gull expenses. +General and administrative expenses increased $1,007,000 or 10%, to $10,776,000 in fiscal 2000, and as a percentage of sales, increased to 19% in fiscal 2000 compared to 18% in fiscal 1999. This increase +reflects a full +22 +year of amortization of Gull intangibles, normal personnel cost increases, and costs of $453,000 related to obtaining a preliminary injunction for misappropriation of trade secrets. +Operating Income +Operating income, inclusive of merger integration costs and purchased in-process research and development in fiscal 1999, increased $2,827,000 or 43%. Excluding these non-recurring items, operating income decreased $2,088,000 or +18%, to $9,354,000 in fiscal 2000. This decrease is attributable to the items discussed above, namely the negative effects of currency, the asset impairment reserve for the German subsidiary and litigation costs. +Other Income and Expense +Interest income decreased $123,000 or 24%, to $382,000 in fiscal 2000. This decrease is due to the use of cash and investments to fund certain Viral Antigens acquisition costs, property, plant and equipment additions and repayment +of certain debt obligations. +Other expense, net in fiscal 2000 includes a gain of $292,000 from the sale of the former Gull headquarters facility and currency losses of $845,000 related to intercompany debt transactions involving the German distribution +operation. +Income Taxes +The effective rate for income taxes is a credit of 2% in fiscal 2000 compared to a provision of 57% in fiscal 1999. The effective tax rate for fiscal 1999 includes 11 percentage points for the effects of purchased in-process +research and development and goodwill amortization. The effective tax rate for fiscal 2000 includes the effect of valuation allowance provisions related to certain net operating losses in Europe ($1,718,000 or 25 percentage points), offset by the +tax benefits related to the write-off of Meridian’s net investment in its German distribution business ($4,641,000 or 67 percentage points). +Liquidity and Capital Resources +Meridian’s operating cash flow and financing requirements are determined by analyses of operating and capital spending budgets, annual dividends, consideration of acquisition plans and the stock buyback program. Meridian has +historically been able to respond to acquisition opportunities through cash and investments on hand and line of credit availability. A discussion of the stock buyback program is included herein in Note 1 to the Consolidated Financial Statements. +23 +Net cash provided by operating activities was $8,702,000 in fiscal 2001, compared to $5,217,000 in fiscal 2000. Although the fiscal 2001 period included a net loss, a substantial portion, namely acquired in-process research and +development, asset impairment charges and European restructuring, was non-cash in nature. Meridian also received substantial tax refunds during the second and third quarters of fiscal 2001. +Net cash used in investing activities was $1,914,000 in fiscal 2001 compared to $9,736,000 in fiscal 2000. Capital expenditures were $1,923,000 in fiscal 2001 compared to $4,047,000 in fiscal 2000. Capital expenditures in fiscal +2001 include the expansion of Viral Antigen’s protein development facilities that are expected to be operational in March 2002. Capital expenditures in fiscal 2000 include the renovation of the Cincinnati facilities to accommodate the +production of Gull products. Net cash used in investing activities in fiscal 2000 also includes the acquisition of Viral Antigens and proceeds from the sale of the former Gull Laboratories headquarters facility. +Net cash used in financing activities was $7,046,000 in fiscal 2001 compared to net cash provided by financing activities of $3,551,000 in fiscal 2000. Net repayments of debt, including activity on the revolving loan facility, were +$3,303,000 in fiscal 2001 compared to net proceeds from debt of $6,723,000 in fiscal 2000, including revolving loan facility borrowings used to finance the Viral Antigens acquisition. Net repayments of debt are higher in fiscal 2001 due to focused +efforts to improve cash management and pay down debt. Financing activity in fiscal 2001 includes proceeds from Euro denominated term loans in the aggregate amount of approximately $4,100,000 that are part of a natural hedging strategy for certain +intercompany Euro denominated receivables. These proceeds were used to pay down existing term debt so that there was no change in the amount of total bank debt outstanding. +Contingent upon the successful restructuring of operations and the FDA's acceptance of Meridian's comprehensive plan to improve it’s quality systems, net cash flows from operating activities are anticipated to fund working +capital requirements, debt service, dividends and the stock buyback program during fiscal 2002. Earnout payments related to fiscal year 2002 (to be paid in fiscal year 2003), if any, under the Viral Antigens purchase agreement may require revolver +financing. 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 line of credit that expires in September 2004. As of November 30, 2001, +borrowings of $4,924,000 were outstanding on the line of credit portion of this facility, and the availability was $15,076,000. +Market Risk Exposure +Meridian has market risk exposure related to interest rate sensitive debt and foreign currency transactions. +Meridian has bank debt and capital lease obligations in the aggregate amount of $32,366,000 outstanding at September 30, 2001, of which $11,253,000 bears interest at variable rates. Information concerning the +maturities +24 +of interest rate sensitive debt is included in Notes 8 and 9 to the Consolidated Financial Statements. 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. See Note 2(e) to the Consolidated Financial Statements for further information. +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 will be eliminated and the Euro will be the single currency for the 11 participating countries. +Meridian’s systems are being 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. +Recently Released Accounting Pronouncements +Information about recently released accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure under Item 7 above. +25 +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Report of Independent Public Accountants +27 +Consolidated Balance Sheets as of September 30, 2001 and 2000 +28 +Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999 +30 +Consolidated Statements of Shareholders' Equity for the years ended September 30, 2001, 2000 and 1999 +31 +Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999 +32 +Notes to Consolidated Financial Statements +33 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September 30, 2001, 2000 and 1999 +58 +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. +26 +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 +27 +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2001 +2000 +Assets +Current Assets: +Cash and cash equivalents +$4,673 +$4,820 +Investments +4 +13 +Accounts receivable, less allowances of $889 in 2001 and $438 in 2000 +12,526 +13,889 +Inventories +12,139 +15,808 +Income tax refunds +170 +4,930 +Prepaid expenses and other current assets +1,355 +1,338 +Deferred income taxes +1,635 +- +Total current assets +32,502 +40,798 +Property, Plant and Equipment, at Cost: +Land +658 +494 +Buildings and improvements +13,970 +14,236 +Machinery, equipment and furniture +13,756 +13,076 +Construction in progress +872 +454 +Subtotal +29,256 +28,260 +Less-accumulated depreciation and amortization +12,530 +10,756 +Net property, plant and equipment +16,726 +17,504 +Other Assets: +Deferred debenture offering costs, net +652 +787 +Goodwill, net +2,956 +5,972 +Other intangible assets, net +12,806 +18,042 +Other assets +340 +1,614 +Total other assets +16,754 +26,415 +Total assets +$65,982 +$84,717 +The accompanying notes are an integral part of these consolidated balance sheets. +28 +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2001 +2000 +Liabilities and Shareholders’ Equity +Current Liabilities: +Current portion of long-term debt and capital lease obligations +$ +2,132 +$ +1,700 +Borrowings under revolving credit facility +5,885 +6,230 +Accounts payable +2,370 +3,251 +Accrued payroll costs +2,103 +2,731 +Other accrued expenses +3,878 +2,690 +Deferred income taxes +- +17 +Total current liabilities +16,368 +16,619 +Long-term Obligations: +Bank debt and capital lease obligations +4,349 +7,159 +Convertible subordinated debentures +20,000 +20,000 +Commitments and Contingencies +- +- +Deferred Income Taxes +2,321 +4,328 +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +- +- +Common stock, no par value, 50,000,000 shares authorized, 14,598,970 and +14,587,434 shares issued at September 30, 2001 and 2000, respectively +2,535 +2,530 +Treasury stock, 8,300 shares at September 30, 2001 +(32 +) +- +Additional paid-in capital +20,962 +20,941 +Retained earnings +892 +14,889 +Accumulated other comprehensive loss +(1,413 +) +(1,749 +) +Total shareholders’ equity +22,944 +36,611 +Total liabilities and shareholders’ equity +$ +65,982 +$ +84,717 +The accompanying notes are an integral part of these consolidated balance sheets. +29 +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2001 +2000 +1999 +Net Sales +$ +56,527 +$ +57,096 +$ +53,927 +Cost of sales +Sale of product +25,821 +21,650 +19,558 +Inventory impairment +4,000 +- +- +Total cost of sales +29,821 +21,650 +19,558 +Gross profit +26,706 +35,446 +34,369 +Operating Expenses: +Research and development +3,363 +2,260 +1,986 +Selling and marketing +10,971 +12,256 +11,172 +General and administrative +11,495 +10,776 +9,769 +Costs and asset impairment charges related to FDA matters +11,074 +- +- +European restructuring costs +1,510 +800 +- +Merger integration costs +- +- +3,415 +Acquired in-process research and development +800 +- +1,500 +Total operating expenses +39,213 +26,092 +27,842 +Operating Income (Loss) +(12,507 +) +9,354 +6,527 +Other Income (Expense): +Interest income +166 +382 +505 +Interest expense +(2,546 +) +(2,124 +) +(2,143 +) +Other, net +(19 +) +(674 +) +(77 +) +Total other income (expense) +(2,399 +) +(2,416 +) +(1,715 +) +Earnings (Loss) Before Income Taxes +(14,906 +) +6,938 +4,812 +Income Taxes +(4,631 +) +(173 +) +2,739 +Net Earnings (Loss) +$ +(10,275 +) +$ +7,111 +$ +2,073 +Earnings Per Share Data: +Basic earnings (loss) per common share +$ +(0.70 +) +$ +0.49 +$ +0.14 +Diluted earnings (loss) per common share +$ +(0.70 +) +$ +0.49 +$ +0.14 +Common shares used for basic earnings (loss) per common share +14,589 +14,565 +14,385 +Dilutive stock options +- +87 +195 +Common shares used for diluted earnings (loss) per common share +14,589 +14,652 +14,580 +Anti-dilutive Securities: +Common stock options +1,088 +407 +265 +Convertible debentures +1,243 +1,243 +1,243 +The accompanying notes are an integral part of these consolidated financial statements. +30 +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +(Dollars and shares in thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Common +Shares +Issued +Shares +Held in +Treasury +Common +Stock +Treasury +Stock +Additional +Paid-in +Capital +Retained +Earnings +Accumulated +Other +Comprehensive +Income (Loss) +Comprehensive +Income (Loss) +Total +Shareholders’ +Equity +Balance at September 30, 1998 +14,383 +- +$ +2,397 +$ +- +$ +20,653 +$ +11,935 +$ +(302 +) +$ +34,683 +Cash dividends paid - $0.20 per share +- +- +- +- +- +(2,877 +) +- +(2,877 +) +Exercise of stock options, net +46 +- +27 +- +202 +- +- +229 +Comprehensive income: +Net earnings +- +- +- +- +2,073 +- +$ +2,073 +2,073 +Foreign currency translation adjustment +- +- +- +- +- +- +(517 +) +(517 +) +(517 +) +Comprehensive income +$ +1,556 +Balance at September 30, 1999 +14,429 +- +2,424 +- +20,855 +11,131 +(819 +) +33,591 +Cash dividends paid - $0.23 per share +- +- +- +- +- +(3,353 +) +- +(3,353 +) +Exercise of stock options, net +158 +- +106 +75 +- +- +181 +Issuance of stock options to non-employees +- +- +- +- +11 +- +- +11 +Comprehensive income: +Net earnings +- +- +- +- +- +7,111 +- +$ +7,111 +7,111 +Foreign currency translation adjustment +- +- +- +- +- +- +(930 +) +(930 +) +(930 +) +Comprehensive income +$ +6,181 +Balance at September 30, 2000 +14,587 +- +2,530 +- +20,941 +14,889 +(1,749 +) +36,611 +Cash dividends paid - $0.26 per share +- +- +- +- +- +(3,722 +) +- +(3,722 +) +Exercise of stock options, net +12 +- +5 +- +6 +- +- +11 +Issuance of stock options to non-employees +- +- +- +- +15 +- +- +15 +Purchase of treasury stock +- +(8 +) +- +(32 +) +- +- +- +(32 +) +Comprehensive income: +- +Net earnings (loss) +- +- +- +- +- +(10,275 +) +- +$ +(10,275 +) +(10,275 +) +Foreign currency translation adjustment +- +- +- +- +- +- +336 +336 +336 +Comprehensive income (loss) +$ +(9,939 +) +Balance at September 30, 2001 +14,599 +(8 +) +$ +2,535 +$ +(32 +) +$ +20,962 +$ +892 +$ +(1,413 +) +$ +22,944 +The accompanying notes are an integral part of these consolidated financial statements. +-31- +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2001 +2000 +1999 +Cash Flows From Operating Activities +Net earnings (loss) +$ +(10,275 +) +$ +7,111 +$ +2,073 +Non-cash items +Acquired in-process research and development +800 +- +1,500 +Depreciation of property, plant and equipment +2,261 +2,039 +2,674 +Amortization of intangible assets +2,485 +2,772 +2,999 +Asset impairment charges related to FDA matters +12,752 +- +- +European restructuring +396 +800 +- +Deferred income taxes, net of impact of acquisitions +(4,394 +) +(42 +) +(953 +) +Stock compensation expense +15 +11 +- +Gain on sale of Gull Laboratories headquarters facility +- +(292 +) +- +Change in current assets, excluding cash, investments and effects of +acquisitions +4,604 +(6,970 +) +787 +Change in current liabilities, excluding current portion of long-term +obligations and acquisitions +(1,302 +) +(631 +) +(591 +) +Other, net +1,360 +419 +525 +Net cash provided by operating activities +8,702 +5,217 +9,014 +Cash Flows From Investing Activities +Acquisitions of businesses, net of cash acquired +- +(8,985 +) +(19,084 +) +Acquisitions of property, plant and equipment +(1,923 +) +(4,047 +) +(2,153 +) +Proceeds from sale of Gull Laboratories headquarters facility +- +2,332 +- +Proceeds from sales of short-term investments +9 +989 +3,367 +Purchase of product license and other intangibles +- +(25 +) +(21 +) +Net cash used in investing activities +(1,914 +) +(9,736 +) +(17,891 +) +Cash Flows From Financing Activities +Net activity on revolving credit facility +(345 +) +6,230 +- +Proceeds from debt obligations +4,058 +6,303 +3,354 +Repayment of debt obligations +(7,016 +) +(5,810 +) +(4,739 +) +Dividends paid +(3,722 +) +(3,353 +) +(2,877 +) +Acquisitions of treasury stock +(32 +) +- +- +Proceeds from exercises of stock options +11 +181 +229 +Net cash provided by (used in) financing activities +(7,046 +) +3,551 +(4,033 +) +Effect of Exchange Rate Changes on Cash +111 +(441 +) +(261 +) +Net Decrease in Cash and Equivalents +(147 +) +(1,409 +) +(13,171 +) +Cash and Equivalents at Beginning of Period +4,820 +6,229 +19,400 +Cash and Equivalents at End of Period +$ +4,673 +4,820 +$ +6,229 +The accompanying notes are an integral part of these consolidated financial statements. +32 +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 will be held in treasury +and may be used to meet requirements for employee benefit plans, acquisitions and other corporate purposes. As of September 30, 2001, 8,300 shares had been purchased under this 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 include amounts for income taxes, including valuation allowances for certain deferred tax assets, and accounts receivable and inventory exposures. +(d) +Reclassifications - Certain reclassifications have been made to 2000 and 1999 financial statements to conform to the 2001 presentation. +(e) +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 +33 +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. +(f) +Inventories - Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis, except for $3,321,000 of inventory for which cost is +determined on a last-in, first-out basis. The FIFO cost of this inventory was $2,188,000 at September 30, 2001. +(g) +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 +(h) +Intangible Assets - Intangible assets, including 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 20 years. Meridian continually evaluates whether subsequent events and circumstances have occurred that indicate the remaining estimated useful lives of intangible assets, including goodwill, 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. 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. For the year ended September 30, 1999, there were no adjustments to the carrying value of intangible assets resulting from these evaluations. See Note 2 (n). +(i) +Revenue Recognition - Revenue is recognized from sales when product is shipped. +(j) +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. +34 +(k) +Advertising - Advertising costs are charged to earnings as incurred. Expenditures for advertising in fiscal 2001, 2000 and 1999 were approximately $193,000, +$366,000, and $327,000 respectively. +(l) +Income Taxes - The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between +income for financial reporting and income for tax purposes. +(m) +Supplemental Cash flow Information - Supplemental cash flow information is as follows for fiscal 2001, 2000 and 1999 (amounts in thousands): +2001 +2000 +1999 +Cash paid (received) for - +Income taxes +$(4,242 +) +$4,259 +$4,583 +Interest +2,447 +2,318 +1,805 +Non-cash items - +Capital lease financing +214 +522 +- +Note received on sale of Gull Laboratories facility +- +950 +- +Viral Antigens earnout obligation +800 +- +- +(n) Recently Issued Accounting Standards - In fiscal 2001, Meridian adopted the provisions of Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging +Activities" (SFAS No. 133). Historically, Meridian has not utilized derivative instruments in order to hedge foreign currency or interest rate risk exposures and therefore, adoption of SFAS No. 133 had no effect on the financial statements. In +fiscal 2001, Meridian implemented a hedging strategy to address certain foreign currency risk exposures relative to intercompany transactions. To date, this strategy has not involved the use of derivative instruments, but rather, uses natural +offsets of foreign currency denominated assets and liabilities. Future strategies may involve the use of derivative instruments. If a derivative instrument is used to hedge an exposure, SFAS No. 133 will require that such derivative instrument, as +well as the hedged exposure itself, be marked to market in the financial statements. Meridian expects that implementation of additional hedging strategies and the accounting prescribed by SFAS No. 133 will reduce the impact of currency fluctuations +related to intercompany transactions. On an overall basis, SFAS No. 133 is not expected to have a significant effect on Meridian's consolidated financial position. +In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). Among other things, SFAS No 142 provides that, upon adoption, goodwill and other intangible assets with indefinite lives will no +longer be subject to amortization over their useful lives. Rather, goodwill will be subject to at least an annual review (or more frequently if impairment indicators arise) for impairment by applying a fair-value-based test. Meridian adopted SFAS +No. 142 on October 1, 2001. Meridian has recognized goodwill for several past acquisition transactions. The amount of amortization expense recognized in fiscal 2001 that will not reoccur in fiscal 2002 is +35 +approximately $267,000. Pursuant to the provisions of SFAS No. 142, Meridian will complete transition impairment analyses of specifically-identified intangible assets and goodwill by December 31, 2001 and March 31, 2001, +respectively. Meridian is continuing to assess the impact of SFAS No. 142 on its financial condition and results of operations. +(3) Acquisitions +(a) +Viral Antigens, Inc. 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. Viral Antigens manufactures infectious disease antigens that are used in common diagnostic technologies and distributes a Pseudorabies Virus anti-body test kit for the veterinary market. Viral Antigens facilities include specialty +laboratories for protein development that are currently being expanded, 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 approximately $7.5 million, contingent upon Viral Antigen’s future earnings through September 30, 2006. Earnout consideration is payable each year, following the period earned. +During fiscal 2001, $800,000 of additional consideration was earned pursuant to this provision and is included in accrued expenses and goodwill in the accompanying consolidated balance sheet. 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 acquisition has been accounted for as a purchase, and the results of operations of Viral Antigens are included in Meridian’s consolidated results of operations from September 15, 2000 forward. A +summary of the purchase price allocation follows (in 000's). This purchase price allocation reflects the fair values of acquired long-lived assets, including in-process research and development in the amount of $800,000. The estimated fair market +value of intangibles acquired was based on discounted future cash flows or an estimate of the cost to recreate. Intangible assets other than goodwill have an estimated useful life of 15 years. Goodwill has an estimated useful life of 20 years. +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. +36 +Purchase price, including transaction costs +$10,442 +Fair value of assets acquired - +Accounts receivable +$ 815 +Inventory +3,361 +Property, plant and equipment +4,191 +Customer list and supply agreements +2,600 +Manufacturing technology +800 +In-process research and development +800 +Goodwill +961 +Other assets +802 +14,330 +Fair value of liabilities assumed - +Debt and capital lease obligations +1,491 +Deferred income tax liabilities +2,081 +Other liabilities +316 +3,888 +Fair value of net assets acquired +$10,442 +(b) +Gull Laboratories, Inc. Acquisition - On November 5, 1998, Meridian acquired all of the outstanding common stock of Gull Laboratories, Inc. for $19 million in cash, financed by cash and cash +equivalents on hand. For accounting purposes, the acquisition was effective on October 31, 1998 and the results of operations of Gull are included in the consolidated results of operations of Meridian from that date forward. During fiscal 1999, Gull +research and development activities were consolidated into Meridian’s Cincinnati operations and production facilities in Germany were shut down. The renovation of the Cincinnati facilities was completed during the second quarter of fiscal 2000. +The manufacturing of Gull products is now conducted in Cincinnati. During fiscal 1999, Meridian incurred costs to integrate Gull in the amount of $3,415,000. These costs included product validation, travel, training, termination payments to +distributors and other costs. +(c) +Unaudited Pro Forma Financial Information - The following unaudited pro forma combined results of operations assume the VAI and Gull acquisitions occurred October 1, 1998. 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) reductions in interest income due to +cash and investments used to fund all (Gull) or a portion (Viral Antigens) of the purchase price, (iv) additional interest +37 +expense related to bank borrowings used to fund most of the purchase price (Viral Antigens), and (v) adjustments to the tax provision (amounts in thousands, except per share data). +Year Ended September 30, +2000 +1999 +Net sales +$62,129 +$60,686 +Net earnings +6,612 +989 +Earnings per share: +Basic +0.45 +0.07 +Diluted +0.45 +0.07 +(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 +manufacture and distribution of approximately 30 products. The costs to date of implementing the plan include costs for outside consultants with experience in the quality system regulations, validation and computer software and equipment. During the +fourth quarter, Meridian incurred plan implementation costs in the amount of $361,000, primarily related to consulting fees. Such costs were $2,322,000 for the year ended September 30, 2001. On an on-going basis, Meridian has considered the effects +of incremental costs of compliance with QSR in its cost structure. Meridian believes that such incremental costs of compliance with QSR will be offset by cost reductions and efficiencies related to the restructuring of Cincinnati manufacturing +operations discussed below, and consequently, gross profit margins for the diagnostics business are expected to be approach 1999 - 2000 levels. +Meridian continues to engage in other activities designed to reduce costs, improve operations and replace products that were discontinued. Meridian restructured its Cincinnati manufacturing operations and quality functions by, among +other things, hiring a number of professionals with experience in monitoring and improving a FDA-compliant quality system. During the second quarter, Meridian entered into a three-year supply agreement (with renewal options) with Zeus Scientific, +Inc., whereby Zeus will manufacture, on an OEM basis, replacement products for 27 of the 30 discontinued Meridian products. +38 +As a result of the decision to discontinue the manufacturing and distribution of approximately 30 products, Meridian could not recover the cost of certain assets, and consequently, recorded the following pre-tax charges during +fiscal 2001 (in thousands): +Product inventory write-off +$ +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 include 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, Meridian engaged an outside 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. +Contingent upon the successful restructuring of operations and the acceptance of the plan by the FDA, Meridian expects cash flows from operations to be sufficient to fund working capital needs, debt service, dividends and the stock +buyback program referred to in Note 1 to the Consolidated Financial Statements during fiscal 2002. Meridian is communicating with the FDA on a periodic basis to advise it on the progress of the plan implementation. 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 have been $2,310,000, including $800,000 recognized in the +fourth quarter of fiscal 2000. Restructuring costs included severance, future lease costs and asset writedowns for accounts receivable, fixed assets and certain intangible assets. The restructuring plan is complete and Meridian does not expect to +incur additional restructuring costs. +39 +(6) Inventories +Inventories are comprised of the following (amounts in thousands): +Year Ended September 30, +2001 +2000 +Raw materials +$ 3,256 +$ 3,771 +Work-in-process +4,928 +6,313 +Finished goods +3,955 +5,724 +$ 12,139 +$ 15,808 +(7) Intangible Assets +Other intangible assets are comprised of the following (amounts in thousands): +Year Ended September 30, +2001 +2000 +Covenants not to compete +$ 1,600 +$ 2,911 +Core products +3,199 +5,300 +Manufacturing technologies +5,747 +8,641 +Trademarks, licenses and patents +1,831 +2,533 +Customer lists and supply agreements +7,362 +5,430 +Workforce +338 +338 +20,077 +25,153 +Less accumulated amortization +(7,271 +) +(7,111 +) +$ 12,806 +$ 18,042 +The amounts for accumulated amortization for goodwill at September 30, 2001 and 2000 were $1,227,000 and $1,019,000 respectively. The amounts for accumulated amortization of deferred debenture offering costs at September 30, 2001 +and 2000 were $676,000 and $541,000 respectively. +(8) 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 prime less 1% or a LIBOR +based rate, at the discretion of Meridian, and expires in September 2004. This line of credit is secured by Meridian’s business assets. Borrowings of $5,885,000 and $6,098,000 were outstanding on this line of credit at September 30, 2001 and +2000, respectively, at weighted average interest rates of 4.9% and 8.5%, respectively. Available borrowings under this line of credit were $14,115,000 at September 30, 2001. In connection with this +40 +bank credit arrangement, Meridian is required to maintain a minimum tangible net worth and comply with other financial covenants. Meridian is in compliance with all covenants. +Meridian’s Viral Antigens subsidiary has a $1,000,000 line of credit that bears interest at a variable rate and expires in February 2002. There were no borrowings outstanding on this line of credit at September 30, 2001. +Borrowings of $80,000 were outstanding on this line of credit at September 30, 2000. This line of credit is secured by Viral Antigens accounts receivable and inventory. +(9) Long-Term Obligations +(a) Long-term debt and capital lease obligations are comprised of the following at (amounts in thousands): +September 30, +2001 +2000 +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 (5.70% at +September 30, 2001), quarterly payments of $117, matures in June 2006 +1,786 +- +Bank term loan, denominated in Euro, interest based on Euro LIBOR (5.70% at +September 30, 2001), quarterly payments of $98 based on ten-year amortization, +balloon payment of $1,272 matures in June 2006 +2,481 +- +Bank term loan, interest at 7.60%, monthly payments of $121, matures October 2005, +secured by certain accounts receivable, inventory and fixed assets +- +6,000 +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 +1,203 +Bank loan, interest at US LIBOR (5.50% at September 30, 2001), monthly payments +of $7 based on four-year amortization, matures November 2003, secured by certain +equipment +136 +201 +Capital leases and other debt obligations +965 +1,455 +26,481 +28,859 +Less current portion +(2,132 +) +(1,700 +) +$24,349 +$27,159 +Maturities of long-term debt and capital lease obligations for fiscal 2002 through fiscal 2006 are $2,132,000, $916,000, $798,000, $721,000, and $21,860,000, 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 +$14.6 million based on limited trading. +In June 2001, Meridian repaid certain United States dollar denominated debt obligations with the proceeds of two Euro denominated term loans. These Euro denominated term loans serve as a natural hedge against certain Euro +denominated intercompany receivables. +(b) +Capital Lease Obligations - At September 30, 2001, Meridian has equipment under capital leases expiring in various years through 2007. The future minimum annual rentals under the capital leases at September 30, 2001 are +as follows (amounts in thousands): +2002 +$ 410 +2003 +238 +2004 +178 +2005 +93 +Thereafter +117 +Subtotal +1,036 +Portion of payments representing interest +(125 +) +Present value of future lease payments +$ 911 +42 +(10) Income Taxes +(a) +Earnings before income taxes, and the related provision for income taxes for the years ended September 30, 2001, 2000 and 1999 were as follows (in thousands). +Year Ended September 30, +2001 +2000 +1999 +Earnings (loss) before income taxes - +Domestic +$(15,206 +) +$ 8,766 +$ 6,137 +Foreign +300 +(1,828 +) +(1,325 +) +Total +$(14,906 +) +$ 6,938 +$ 4,812 +Provision (credit) for income taxes - +Federal – +Currently payable +$ - +$ - +$ 2,479 +Temporary differences +Fixed asset basis differences and depreciation +39 +(608 +) +(98 +) +Intangible asset basis differences and amortization +(2,890 +) +(490 +) +(534 +) +Currently non-deductible expenses and reserves +203 +(54 +) +323 +Currency translation +178 +(148 +) +- +Net operating loss carryforwards +(1,853 +) +- +226 +Other, net +(17 +) +378 +(16 +) +Subtotal +(4,340 +) +(922 +) +2,380 +State and local +(731 +) +(490 +) +496 +Foreign +440 +1,239 +(137 +) +Total +$ (4,631 +) +$ (173 +) +$ 2,739 +(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). +Year Ended September 30, +2001 +2000 +1999 +Computed income taxes at statutory rate +$(5,068 +) +(34.0 +%) +$ 2,428 +35.0 +% +$ 1,636 +34.0 +% +Increase/(decrease) in taxes resulting from - +Goodwill amortization and impairment +414 +2.8 +96 +1.4 +38 +0.8 +Acquired in-process research and development +275 +1.8 +- +- +510 +10.6 +State and local income taxes +(472 +) +(3.2 +) +(134 +) +(1.9 +) +327 +6.8 +Foreign taxes +73 +0.5 +94 +1.4 +313 +6.5 +Foreign sales corporation benefit +(85 +) +(0.6 +) +(91 +) +(1.3 +) +(135 +) +(2.8 +) +Liquidation of German subsidiary +(274 +) +(1.8 +) +(4,176 +) +(60.2 +) +- +- +Valuation allowance provisions +588 +4.0 +1,718 +24.8 +- +- +Other, net +(82 +) +(0.6 +) +(108 +) +(1.7 +) +50 +1.0 +$(4,631 +) +(31.1 +%) +$ (173 +) +(2.5 +%) +$ 2,739 +56.9 +% +43 +(c) +The components of net deferred tax assets (liabilities) were as follows at (amounts in thousands): +September 30, +2001 +2000 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ 885 +$ 353 +Net operating loss carryforwards – domestic +1,853 +- +Net operating loss carryforwards – foreign +2,844 +2,681 +Other +- +191 +Subtotal +5,582 +3,225 +Less valuation allowance +2,182 +1,833 +Deferred tax assets +3,400 +1,392 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(341 +) +(351 +) +Intangible asset basis differences and amortization +(2,451 +) +(4,438 +) +Inventory basis difference +(263 +) +(370 +) +Other +(1,031 +) +(578 +) +Deferred tax liabilities +(4,086 +) +(5,737 +) +Net deferred tax asset (liability) +$ (686 +) +$(4,345 +) +For income tax purposes, Meridian has tax benefits related to operating loss carryforwards in the United States, Belgium, France, and Holland. The operating loss carryforward in the United States is expected to be fully utilized by +fiscal 2003. The operating loss carryforward in France expires between 2001 and 2006. The operating loss carryforward in Belgium has no expiration. Meridian has recorded deferred tax assets for these carryforwards, inclusive of a valuation allowance +for certain foreign jurisdictions, in the amount of $2,182,000 at September 30, 2001. Valuation allowances for pre-acquisition net operating loss carryforwards amount to $1,637,000, while valuation allowances for post-acquisition net operating loss +carryforwards are $545,000. If tax benefits are recognized in future years for pre-acquisition operating losses, such benefits will be allocated to reduce goodwill and acquired intangible assets. The valuation allowance recorded against deferred tax +assets at September 30, 2000 was $1,833,000, 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 +44 +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 $4,100,000 at September 30, 2001. Deferred income taxes not provided on these earnings would be approximately +$1,400,000. +(11) 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 $265,000, $455,000, and $386,000, during fiscal 2001, 2000 and 1999, respectively. +(b) +Stock-Based Compensation Plans - Meridian has two active stock based compensation plans, the 1996 Stock Option Plan Amended and Restated effective January 23, 2001 (“The 1996 +Plan”), the 1999 Directors’ Stock Option Plan (“The 1999 Plan”), and an Employee Stock Purchase Plan (“The ESP Plan”) which became effective October 1, 1997. +Meridian may grant options for up to 1,200,000 shares under the 1996 Plan and 50,000 shares under the 1999 Plan. Meridian has granted 802,067 options under the 1996 Plan and 16,219 shares under the 1999 plan +through September 30, 2001. Options may be granted at exercise prices varying from 95% to 110% of the market value of the underlying common stock on the date of grant and become exercisable on vesting schedules established at the time of grant. All +options contain provisions restricting their transferability and limiting their exercise in +45 +the event of termination of employment or the disability or death of the optionee. Meridian has granted options for 1,020,414 shares under similar plans that have expired. +Effective October 1, 1997, Meridian may sell shares of stock to its full-time and part-time employees under the ESP Plan up to the number of shares equivalent to a 1% to 15% payroll deduction from an +employee’s base salary plus an additional 5% dollar match of this deduction by Meridian. +A summary of the status of Meridian’s stock option plans at September 30, 2001, 2000 and 1999 and changes during the years then ended is presented in the tables and narrative below: +Year Ended September 30, +2001 +2000 +1999 +Wtd Avg +Wtd Avg +Wtd Avg +Shares +Ex Price +Shares +Ex Price +Shares +Ex Price +Outstanding beginning of period +837,394 +$ +8.06 +836,774 +$ +6.84 +838,615 +$ +6.84 +Grants +295,218 +5.42 +166,751 +7.88 +140,368 +6.67 +Exercises +(10,881 +) +1.45 +(157,785 +) +1.13 +(58,864 +) +5.68 +Expirations and forfeitures +(33,365 +) +7.83 +(8,346 +) +8.76 +(83,345 +) +7.34 +Outstanding end of period +1,088,366 +$ +7.40 +837,394 +$ +8.06 +836,774 +$ +6.84 +Exercisable end of period +609,033 +$ +8.08 +486,138 +$ +7.73 +547,520 +$ +5.42 +Weighted average fair value of grants +$ +2.14 +$ +3.23 +$ +3.89 +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, 2001. +Range of Exercise Prices +Options Outstanding +Options Exercisable +Wtd Avg +Wtd +Wtd +Options +Remaining +Avg Ex +Options +Avg Ex +Outstanding +Life +Price +Outstanding +Price +$ +1.00 - $5.00 +138,314 +7.4 +$ +3.16 +32,814 +$ +4.40 +$ +5.01 - $10.00 +747,402 +5.9 +6.82 +405,586 +6.48 +$ +10.01 - $16.00 +202,650 +5.6 +12.41 +170,633 +12.57 +1,088,366 +6.0 +$ +7.40 +609,033 +$ +8.08 +46 +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): +Year Ended September 30, +2001 +2000 +1999 +Net income - +As reported +$(10,275 +) +$7,111 +$2,073 +Pro forma +(10,879 +) +6,609 +1,762 +Basic EPS - +As reported +$(0.70 +) +$0.49 +$0.14 +Pro forma +(0.75 +) +0.45 +0.12 +Diluted EPS - +As reported +$(0.70 +) +$0.49 +$0.14 +Pro forma +(0.75 +) +0.45 +0.12 +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, +2001 +2000 +Risk-free interest rates +4.4%-6.0% +5.7%-6.7% +Dividend yield +3.0%-10.4% +2.2% +Life of option +8 yrs. +3-8 yrs. +Share price volatility +46%-57% +46% +Subsequent to year-end, 220,000 stock options were granted which would have had no impact on the diluted EPS, if granted prior to year-end. +47 +(12) 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, +2001 +2000 +1999 +Customer A +$7,990 +(14 +%) +$8,482 +(15 +%) +$6,849 +(13 +%) +Customer B +$5,124 +(9 +%) +6,713 +(12 +%) +6,780 +(13 +%) +Meridian operates in two geographic segments, Meridian Bioscience, Inc. (MBI) and Meridian Bioscience Europe (MBE). MBI operations consist of the manufacture 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, represent approximately 10% of total Company revenues. MBI export sales were $4,268,000, $5,019,000 and $4,181,000 in +fiscal years 2001, 2000 and 1999, respectively. +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 16% of the accounts receivable balance at +September 30, 2001. Significant country information for MBE is as follows (in thousands): +Year Ended September 30, +2001 +2000 +1999 +Italy - +Sales +$4,864 +$4,839 +$6,013 +Identifiable assets +6,498 +5,968 +5,872 +Belgium - +Sales +$7,557 +$ - +$ - +Identifiable assets +5,150 +- +- +Germany - +Sales +$ - +$9,465 +$9,310 +Identifiable assets +- +5,253 +6,406 +Sales are attributed to the geographic area based on the location from which the product is shipped to the customer. +48 +Segment information for the years ended September 30, 2001, 2000, and 1999 is as follows (in thousands): +MBI +MBE +Elim (1) +Total +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 +Fiscal Year 1999 - +Net sales +$44,682 +$15,323 +$(6,078 +) +$53,927 +Depreciation and amortization +5,138 +535 +- +5,673 +Operating income (loss) +7,826 +(849 +) +(450 +) +6,527 +Total assets +97,515 +12,867 +(38,221 +) +72,161 +Capital expenditures +2,003 +150 +- +2,153 +(1) Eliminations consist of intersegment transactions. +Year Ended September 30, +2001 +2000 +1999 +Segment operating income (loss) +$(12,507 +) +$9,354 +$6,527 +Interest income +166 +382 +505 +Interest expense +(2,546 +) +(2,124 +) +(2,143 +) +Other, net +(19 +) +(674 +) +(77 +) +Consolidated earnings (loss) +before income taxes +$(14,906 +) +$6,938 +$4,812 +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 $15,762,000, $24,014,000, and $24,349,000 for the years ended September +30, 2001, 2000, and 1999 respectively. +49 +(13) 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 $699,000, $942,000, and, $907,000, +respectively, for the years ended September 30, 2001, 2000 and 1999. +(b) +Contract Research and Development Costs - During fiscal 2000, Meridian executed a Research and Development Agreement and an Exclusive Supply Agreement with OraSure Technologies, +Inc. to commercialize the Up Link technology. These agreements require Meridian to make future payments to OraSure to fund research and development costs and to obtain an exclusive license to market and +sell related products on a global basis. Costs to fund research and development under the Research and Development Agreement were $180,000 and $100,000 during fiscal 2001 and 2000, respectively. Meridian expects that payments under these agreements +will amount to as much as $1,025,000 in fiscal 2002, including license fees. +(c) +Contingencies - In June 2000, Meridian filed suit against a former Company 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. The former employee filed +for bankruptcy in May 2001 but the bankruptcy court has authorized Meridian to continue to pursue its claims against him. Consequently, Meridian still intends to seek recovery from the defendants for its damages, costs and expenses, including its +legal fees which amounted to $440,000 and $450,000 in fiscal 2001 and 2000, respectively. There are no assurances, however, that Meridian will be able to recover all or some of the amounts. +In July 2000, the former employee commenced a separate action against Meridian in California which was transferred to Ohio, which will likely be 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 claims 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. 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. Meridian plans 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. +Related legal fees are included in the amounts noted above. 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. +50 +In 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 $5 million in damages. Meridian intends to vigorously defend this case. Meridian also may challenge the sale and distribution of the diagnostic test +kit on the grounds of patent infringement, accordingly the plaintiff’s right to sell the diagnostic kit may be the subject of further litigation. To date litigation costs related to this matter have been immaterial. Based on the status of the +case to date, the ultimate resolution of this matter is not expected to have a material adverse effect on Meridian’s financial position, results of operations or cash flows. +Meridian is party to other litigation that it believes is in the normal course of business. The ultimate resolution of these items is not expected to have a material adverse effect on Meridian’s financial position, +results of operations or cash flows. +(14) Quarterly Financial Data (Unaudited) +Amounts are in thousands except per share data. The sum of the earnings (loss) per common share and cash dividends per share may not equal the corresponding annual amounts due to interim quarter +rounding. +For the Quarter Ended in Fiscal 2001 +December 31 +March 31 +June 30 +September 30 +Net sales +$ 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 +For the Quarter Ended in Fiscal 2000 +December 31 +March 31 +June 30 +September 30 +Net sales +$ 14,329 +$ 14,577 +$ 14,340 +$ 13,850 +Gross profit +9,122 +8,968 +9,140 +8,216 +Net earnings +1,470 +1,849 +1,884 +1,908 +Basic earnings per common share +0.10 +0.13 +0.13 +0.13 +Diluted earnings per common share +0.10 +0.13 +0.13 +0.13 +Cash dividends per common share +0.05 +0.06 +0.06 +0.06 +51 +ITEM 9. +DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +None. +PART III +Items 10, 11, 12, and 13 of Part III are incorporated by reference to the Registrant's Proxy Statement for its 2002 Annual Shareholders' Meeting to be filed with the Commission pursuant to Regulation 14A. +PART IV +ITEM 14. +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 14 are not applicable to Meridian. +(a) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +A +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, +B +Inc. +10.5 +Sublicense Agreement dated June 17, 1993 among Johnson & Johnson, +D +the Scripps Research Institute and Meridian Concerning certain Patent +Rights +10.6 +Assignment dated June 17, 1993 from Ortho Diagnostic Systems Inc. +D +to Meridian concerning certain Patent Rights +52 +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 +F +Biotech Corporation and Meridian Diagnostics, Inc. +10.9 +Merger Agreement among Gull Laboratories, Inc., Meridian +G +Diagnostics, Inc. Fresenius AG and Meridian Acquisition Co. dated as +of September 15, 1998 +10.10* +Savings and Investment Plan, as amended +H +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, +N +Inc., Meridian Diagnostics, Inc. Fresenius AG and Meridian +Acquisition Co. +10.18* +1999 Directors’ Stock Option Plan +O +10.19* +1996 Stock Option Plan Amended and Restated Effective January 22, 1999 +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 +Filed herewith +subsidiaries and Fifth Third Bank Dated as of September 20, 2001 +10.23* +Employment Agreement Dated February 15, 2001 between Meridian +Filed herewith +and John A. Kraeutler, including the Addendum to Employment Agreement +dated April 24, 2001 between Meridian and John A. Kraeutler +10.24* +Sample Incentive Option Agreement Dated October 1, 2001 +Filed herewith +10.25* +Sample Non-qualified Option Agreement Dated October 1, 2001 +Filed herewith +10.26* +Amended and Restated 1996 Stock Option Plan, as Amended on January 23, 2001 +R +13 +2001 Annual Report to Shareholders +Filed herewith (1) +21 +Subsidiaries of the Registrant +Filed herewith +53 +23 +Consent of Independent Public Accountants +Filed herewith +99 +Forward Looking Statements Statement +Filed herewith +(1) +Only portions of the 2001 Annual Report to Shareholders specifically incporated by reference in this Form 10-K are filed herewith. A supplemental paper copy of the 2001 Annual Report to Shareholders has +been provided to the Securities and Exchange Commission for informational purposes only. +54 +*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. +55 +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. +Date: December 14, 2001 +By: /s/ William J. Motto +William J. Motto +Chairman of the Board of +Directors and Chief Executive +Officer (Principal Executive Officer) +56 +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 14, 2001 +Executive Officer (Principal Executive Officer) +William J. Motto +/s/ John A. Kraeutler +President and Chief Operating +December 14, 2001 +Officer, Director +John A. Kraeutler +/s/ Melissa Lueke +Vice President and Chief Financial Officer +December 14, 2001 +Melissa Lueke +/s/ James A. Buzard +Director +December 14, 2001 +James A. Buzard +/s/ Gary P. Kreider +Director +December 14, 2001 +Gary P. Kreider +/s/ David C. Phillips +Director +December 14, 2001 +David C. Phillips +/s/ Robert J. Ready +Director +December 14, 2001 +Robert J. Ready +57 +SCHEDULE I I +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2001, 2000 and 1999 +Description +Balance at +Beginning +of Period +Charged +to Costs +and +Expenses +Charged +to Other +Accounts +Deductions +Other (a) +Balance +at End of +Period +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 +) +- +- +Year Ended September 30, 1999: +Allowance for doubtful accounts +$ +171 +$ +150 +$ +7 +$ +(303 +) +$ +355 +$ +380 +Inventory realizability reserves +857 +667 +- +(1,242 +) +731 +1,013 +Merger integration reserves +- +3,415 +- +(3,258 +) +- +157 +(a) +Balances reflect the effects of currency translation (fiscal years 1999-2001) and acquired valuation accounts related to the Viral Antigens acquisition (fiscal year 2001) and Gull acquisition (fiscal year +1999). +(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. +58 \ No newline at end of file diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/filing_metadata.csv b/raw/filings/0000794172/2001/0000950109-01-505814/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..80972cc38272511aff8881ef550557ed7dec17a9 --- /dev/null +++ b/raw/filings/0000794172/2001/0000950109-01-505814/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2001-12-20,2001-09-30,2001-12-20T05:00:00.000Z,0000950109-01-505814,d10k.htm,ANNUAL REPORT,574517,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095010901505814/d10k.htm,https://www.sec.gov/Archives/edgar/data/794172/000095010901505814/,2001,2001,1 diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/item1.txt b/raw/filings/0000794172/2001/0000950109-01-505814/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..64b8c1b9bf6f0004949171819a0d171d0c50e331 --- /dev/null +++ b/raw/filings/0000794172/2001/0000950109-01-505814/item1.txt @@ -0,0 +1,224 @@ +ITEM 1. +BUSINESS +General +Meridian was incorporated in 1976 as an Ohio corporation. Meridian is a fully integrated life sciences company that develops, manufactures and markets 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 and serves as an original equipment manufacturer for other diagnostics companies. +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 the Meridian’s decision to change its official name to Meridian Bioscience, Inc. +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 also 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; alternate site markets, including physicians' +offices, outpatient clinics, nursing homes 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 2001 sales +(see Note 12 to the Consolidated Financial Statements for information regarding sales by business segment). +1 +During the fourth quarter of fiscal 2000, a plan was implemented to restructure European distribution operations, eliminate Meridian’s direct presence in Germany 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 $852,000 during fiscal 2001 compared to an operating loss of $566,000 in fiscal 2000. Substantial savings have been +realized from the closure of the German distribution facility. +Acquisitions and Alliances +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. During the last 14 months, Meridian executed a number of supply arrangements, both domestically and internationally, that included approximately 30 products. +In late fiscal 2000, Meridian completed its acquisition of Viral Antigens, Inc. VAI further expanded Meridian's life sciences capabilities through VAI’s protein expression laboratories, providing Meridian the opportunity to +serve as an enabler to biopharmaceutical companies in the development of new drugs and vaccines. VAI’s facilities are currently being expanded to accommodate a larger volume of business and are expected to be operational in March 2002. VAI also +manufactures 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. See Note 3 to the Consolidated Financial +Statements for further information. +Also during fiscal 2000, Meridian executed a Research and Development Agreement and an Exclusive Supply Agreement with OraSure Technologies, Inc. to commercialize the Up link technology . Meridian believes that this technology will offer competitive advantages including the elimination of background interference, simultaneous detection of multiple biological markers +and improved sensitivity. These agreements require Meridian to make future payments to OraSure to fund research and development costs and to obtain an exclusive license to market and sell related products on a global basis. Meridian expects to begin +the commercial sale of Up link™ products in late fiscal 2002 or early fiscal 2003. +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 and markets antigens and antibodies to diagnostic and pharmaceutical manufacturers as well as academic researchers. See Note 3 to the Consolidated Financial Statements for further information. +2 +Prior to fiscal 2000, Meridian pursued 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 an infectious disease caused by pathogens, such as bacteria, viruses and fungi, and their related +antigens are 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. +3 +Technological advances permitting accurate testing to occur outside the traditional hospital or laboratory setting have also affected the market for diagnostic products. These technological developments have contributed to the +emergence of alternate site markets, such as physicians' offices, outpatient clinics, nursing homes and HMOs, as important diagnostic market segments. These technological advances should also contribute to the development of new markets for +Meridian's products, including food testing, veterinary laboratories and water treatment facilities. +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. +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. Since 1991, Meridian has developed 35 new products. +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. Since 1991, Meridian has acquired, licensed or entered into supply arrangements relating to approximately 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 +4 +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 laboratories, which are currently being expanded, +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. +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 markets and has +expanded its international distributor base to include distributors in Argentina and Asia. Over the last several years, Meridian's international sales have grown from $2.1 million in fiscal 1993 to $16.7 million in fiscal 2001 and represented 30% of +total consolidated sales in fiscal 2001. +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. During the last four years, several exclusive multiple-year contracts were signed with consolidated health +care providers and Meridian also extended or renewed supply agreements with several 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 satisfy customer needs and preferences, whether in a hospital, commercial or reference laboratory or alternate site +5 +location. These technologies include enzyme immunoassay, immunofluorescence, particle agglutination, membrane filtration/concentration, 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 Immuno Card ® +and Monolert ® +products, for single physician 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 ® +products. +Particle Agglutination - 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 ® +and MonoSpot ® +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 ® +, Macro-CON ® +and SpinCON ® +. +Meridian's product line consists of over 200 medical diagnostic products representing four major disease states. 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, Amebiasis 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. +6 +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. +Urogenital Diseases - Meridian manufactures a product for the rapid detection of Chlamydia . The markets for this product are hospital, +reference, physicians’ office and public 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. +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 the addition of sales and marketing personnel; the expansion of technical services staff to support Meridian's customers and distribution network through a toll-free service hotline; 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 +7 +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 such as OraSure. 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. Since 1990, Meridian has developed internally 35 new products. Meridian has patent protection on a limited +number of its products including Premier Platinum HpSA ™ . 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 nine research scientists. The disciplines represented in the group include biochemistry, immunology, mycology, bacteriology, +virology and parasitology. In fiscal 1999, fiscal 2000 and fiscal 2001, Meridian spent $2.0 million, $2.3 million, and $3.4 million, respectively, on its research and development activities. +Customers +The principal customers for Meridian's products are hospitals, commercial and reference laboratories, alternate site markets, such as physicians' offices, outpatient clinics, nursing homes and HMOs, and new markets, such as +8 +veterinary laboratories and water treatment facilities. Meridian also serves as an original equipment manufacturer for other diagnostic companies. Two distributors together accounted for more than 20% of Meridian's fiscal 2001 +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. +Manufacturing +During fiscal 2001, 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 +manufacture and distribution of approximately 30 products. The costs to date of implementing the plan include costs for outside consultants with experience in the quality system regulations, validation and computer software and equipment. During the +fiscal 2001, Meridian incurred plan implementation costs in the amount of $2,322,000, primarily related to consulting fees. On an on-going basis, Meridian has considered the effects of incremental costs of compliance with QSR in its cost structure. +Meridian believes that such incremental costs of compliance with QSR will be offset by cost reductions and efficiencies related to the restructuring of Cincinnati manufacturing operations discussed below, and consequently, gross profit margins for +the diagnostics business are expected to approach 1999 - 2000 levels. +9 +Meridian continues to engage in other activities designed to reduce costs, improve operations and replace products that were discontinued. Meridian restructured its Cincinnati manufacturing operations and quality functions by, among +other things, hiring a number of professionals with experience in monitoring and improving a FDA-compliant quality system. During the second quarter, Meridian entered into a three-year supply agreement (with renewal options) with Zeus Scientific, +Inc., whereby Zeus will manufacture, on an OEM basis, replacement products for 27 of the 30 discontinued Meridian products. +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, Meridian engaged an outside 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. +Contingent upon the successful restructuring of operations and the acceptance of the plan by the FDA, Meridian expects cash flows from operations to be sufficient to fund working capital needs, debt service, dividends and the stock +buyback program referred to in Note 1 to the Consolidated Financial Statements during fiscal 2002. Meridian is communicating with the FDA on a periodic basis to advise it on the progress of the plan implementation. 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 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 +10 +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 Wampole Laboratories Division of +Carter-Wallace, Inc. +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. All of 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. +11 +Each of the products currently marketed by Meridian 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 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. +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 produced in VAI’s proteomics laboratories are intended to be used as “injectibles”. As such they are produced under more stringent regulations under the auspices of the Center for Biologicals Evaluation +& Research (CBER). Approval and licensing, following clinical trials, of these products will be the responsibility of Meridian that owns the rights to each protein. Such products are approved under the “pre-market approval” guidelines +which requires substantially more time than 510(k) clearance. +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, 2001, Meridian had 325 full-time employees and 9 part-time employees. None of Meridian's employees is represented by a labor organization and Meridian is not a party to any collective +bargaining +12 +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. \ No newline at end of file diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/item13.txt b/raw/filings/0000794172/2001/0000950109-01-505814/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..e9bf94f8c829899d1a88c6b83ff146737dd7aca1 --- /dev/null +++ b/raw/filings/0000794172/2001/0000950109-01-505814/item13.txt @@ -0,0 +1,3 @@ +Item 13 +Certain Relationships and Related Transactions +52 \ No newline at end of file diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/item9a.txt b/raw/filings/0000794172/2001/0000950109-01-505814/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/rp_note.txt b/raw/filings/0000794172/2001/0000950109-01-505814/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2001/0000950109-01-505814/rpt_disclosure.txt b/raw/filings/0000794172/2001/0000950109-01-505814/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/filing.txt b/raw/filings/0000794172/2002/0001206774-02-000020/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..17e672f4f2343e8d71569c10ef1a390cbd53ac4a --- /dev/null +++ b/raw/filings/0000794172/2002/0001206774-02-000020/filing.txt @@ -0,0 +1,2815 @@ +10-K +1 +d11628.txt +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. +i +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 +1 +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. +2 +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 +3 +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. +4 +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. +5 +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 +6 +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. +7 +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 \ No newline at end of file diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/filing_metadata.csv b/raw/filings/0000794172/2002/0001206774-02-000020/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..fea6ae1bac34a457c126f64586f02930dbc37479 --- /dev/null +++ b/raw/filings/0000794172/2002/0001206774-02-000020/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2002-12-20,2002-09-30,2002-12-20T14:47:18.000Z,0001206774-02-000020,d11628.txt,,228860,0,0,https://www.sec.gov/Archives/edgar/data/794172/000120677402000020/d11628.txt,https://www.sec.gov/Archives/edgar/data/794172/000120677402000020/,2002,2002,1 diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/item1.txt b/raw/filings/0000794172/2002/0001206774-02-000020/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d0aed07cbe90a2b84600d0815e36109906f4957b --- /dev/null +++ b/raw/filings/0000794172/2002/0001206774-02-000020/item1.txt @@ -0,0 +1,484 @@ +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 +1 +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. +2 +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 +3 +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. +4 +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. +5 +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 +6 +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. +7 +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. \ No newline at end of file diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/item13.txt b/raw/filings/0000794172/2002/0001206774-02-000020/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..afaf53b382c4d27d4fe872f609e5a3215221c691 --- /dev/null +++ b/raw/filings/0000794172/2002/0001206774-02-000020/item13.txt @@ -0,0 +1 @@ +Item 13 Certain Relationships and Related Transactions .......................................... 45 \ No newline at end of file diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/item9a.txt b/raw/filings/0000794172/2002/0001206774-02-000020/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/rp_note.txt b/raw/filings/0000794172/2002/0001206774-02-000020/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2002/0001206774-02-000020/rpt_disclosure.txt b/raw/filings/0000794172/2002/0001206774-02-000020/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/filing.txt b/raw/filings/0000794172/2006/0000950152-06-009718/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..c96de4573cb60f7c841f6f1b3a5262b1cd0835cd --- /dev/null +++ b/raw/filings/0000794172/2006/0000950152-06-009718/filing.txt @@ -0,0 +1,4257 @@ +10-K +1 +l23454ae10vk.htm +MERIDIAN BIOSCIENCE 10-K +Meridian Bioscience 10-K +Table of Contents +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 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF +1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006. +o +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: +Common Shares, No Par Value +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. +YES NO +o þ +If this report is an annual or transition report, indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange +Act. +YES NO +o þ +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 +þ o +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. +YES NO +o þ +Indicate +by check mark whether the registrant is a large accelerated filer, an +accelerated filer, or a non-accelerated filer. See definition of +“accelerated filer and large accelerated filer” in Rule +12b-2 of the Exchange Act. +Large +accelerated filer +o +Accelerated filer +þ +Non-accelerated filer o +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +YES NO +o þ +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2006 +was $703,576,697 based on a closing sale price of $26.98 per share on March 31, 2006. As +of October 31, 2006, 26,158,687 no par value Common Shares were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended +September 30, 2006 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 2007 Annual +Shareholders’ Meeting are incorporated by reference in +Parts II and III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +4 +Item 1A Risk Factors +14 +Item 1B Unresolved SEC Staff Comments +20 +Item 2 Properties +20 +Item 3 Legal Proceedings +21 +Item 4 Submission of Matters to a Vote of Security Holders +21 +Part II +Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer +Purchases of Equity Securities +21 +Item 6 Selected Financial Data +22 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations +23 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +36 +Item 8 Financial Statements and Supplementary Data +37 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +70 +Item 9A Controls and Procedures +70 +Item 9B Other Information +70 +Part III +Item 10 Directors and Executive Officers of the Registrant +70 +Item 11 Executive Compensation +70 +Item 12 Security Ownership of Certain Beneficial Owners and Management +70 +Item 13 Certain Relationships and Related Transactions +70 +Item 14 Principal Accountant Fees and Services +70 +Item 15 Exhibits and Financial Statement Schedules +71 +EX-10.35 +EX-13 +EX-21 +EX-23.1 +EX-23.2 +EX-31.1 +EX-31.2 +EX-32 +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. Except for +historical information, this report contains forward-looking statements which may be identified by +words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, +“intends”, “believes”, “should” and similar expressions or the negative versions thereof and which +also may be identified by their context. Such statements, whether expressed or implied, are based +upon current expectations of the Company and speak only as of the date made. The Company assumes +no obligation to publicly update any forward-looking statements. These statements are subject to +various risks, uncertainties and other factors that could cause actual results to differ +materially, including, without limitation, the following: 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. Changes in the relative strength or weakness of the U.S. dollar can +change expected results. 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. In addition to the factors described in this paragraph, Part I, Item 1A Risk +Factors contains a list of uncertainties and risks that may affect the financial performance of the +Company. +-3- +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results +of operations that are subject to risks and uncertainties. See “Forward-Looking Statements” above. +Factors that could cause or contribute to such differences include those discussed in Item 1A. In +addition to the risk factors discussed herein, we are also subject to additional risks and +uncertainties not presently known to us or that we currently deem immaterial. If any of these +risks and uncertainties develops into actual events, our business, financial condition or results +of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” +“our,” “the company,” or “our company” +refer to Meridian Bioscience, Inc. and all of its subsidiaries and +predecessors as a combined entity. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. By +exploiting revenue opportunities across research, clinical diagnostics, and therapeutic areas for +key biologicals, Meridian can maximize revenues, efficiently invest in research and development, +and increase profitability of manufacturing operations. +Operating Segments +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostics test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, +and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes +contract services, including the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines and +contract +-4- +Table of Contents +research and development, which involves growth of proteins as part of the development process. +Financial information for Meridian’s operating segments is included in Note 9 to the consolidated +financial statements contained herein. +Meridian’s primary source of domestic and international revenues continues to be its core +diagnostic products, which represented 79% of consolidated net sales for fiscal 2006. Meridian’s +diagnostic products provide accuracy, simplicity, and speed, enable early diagnosis and treatment +of common, acute medical conditions, and provide for better patient outcomes at reduced costs. +Meridian targets diagnostics for disease states that (i) are acute conditions where rapid diagnosis +impacts patient outcomes, (ii) have opportunistic demographic and disease profiles, (iii) are +underserved by current diagnostic products, and (iv) have difficult sample handling requirements. +This approach has allowed Meridian to establish significant market share in its target disease +states. +Meridian’s website is www.meridianbioscience.com. Meridian makes available its Annual Reports on +Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, +free of charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $65,721,000, $53,485,000 and +$48,153,000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound annual growth rate +of 18%. As of September 30, 2006, the US Diagnostics operating segment had 247 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, +urine, stool, and other body fluids or tissue for the presence of antigens and antibodies of +specific infectious diseases. Specific immunodiagnostic technologies used in Meridian’s diagnostic +test kits include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical +-5- +Table of Contents +stains. The enzyme immunoassay technology is used in multiple test formats; the Premier ä +products for large volume users and the Immuno Card â products for rapid, single test, low +volume users. +Meridian’s diagnostic products are used principally in the detection of respiratory diseases, such +as pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal +diseases, such as stomach ulcers (H. pylori ), antibiotic-associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower 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. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and independent distributors in the US and abroad. The direct sales force consists +of one director of sales, three regional sales managers, one director of corporate health systems, +one director of managed health care, one international distribution manager, 24 technical sales +representatives, and three inside sales representatives. Meridian utilizes two primary independent +distributors in the US, who accounted for 47% of the US Diagnostics operating segment’s third-party +sales in fiscal 2006. Meridian drives the selling effort for key customers where these independent +distributors are utilized. +-6- +Table of Contents +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 five years, Meridian has entered into, extended, or renewed several +exclusive multiple-year contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +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 satisfy customer needs and preferences, +whether in a hospital, commercial or reference laboratory or alternate site location. Meridian’s +product offering consists of approximately 150 medical diagnostic products. Meridian’s products +generally range in list price from $1 per test to $33 per test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, particle +agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. +Enzyme +Immunoassay (EIA)/Rapid tests - 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 some of its multiple test +format, the +Premier TM +product for large volume users, and in some of its single test formats, +the Immuno Card ® , Immuno Card STAT! ® and MONOLERT ® 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 ® 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 ® and MONOSPOT ® 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 ® , +Macro-CON ® and Spin-Con ® . +Research and Development +-7- +Table of Contents +The US Diagnostics operating segment’s research and development organization consists of 13 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2006, 2005 and 2004 were $3,342,000, $3,043,000 and $3,151,000, respectively. This research +and development organization focuses its activities on new applications for Meridian’s existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. Meridian believes that new +product development is a key source for sustaining revenue growth. Meridian’s internally developed +products include Premier ä Platinum HpSA, Premier ä Platinum HpSA PLUS, Premier ä +Toxins A & B, and +Immuno Card Ò Toxins A & B, which together accounted for 36% of +the US Diagnostics operating segment’s third-party sales during fiscal 2006. +We believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. +During October 2006, we executed a license agreement with Eiken Chemical Co., Ltd. that provides +rights to Eiken’s loop-mediated isothermal amplification technology for infectious disease testing +in the United States and 18 other geographic markets. This is Meridian’s first look at molecular +testing for infectious diseases. +During August 2006, we entered into a partnership agreement with the Performance & Life Science +Chemicals Division of Merck KGaA, Darmstadt, Germany and its American company EMD for the +development of new clinical assays. Our first product under this agreement is expected to be +launched during fiscal 2007. +Manufacturing +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. +Intellectual Property, Patents, and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products manufactured by the +US Diagnostics operating segment, including Premier ä Platinum HpSA and Premier ä +Platinum HpSA PLUS. In the absence of patent protection, Meridian may be vulnerable to competitors +who successfully replicate Meridian’s production and manufacturing technologies and processes. +Meridian’s employees are required to execute confidentiality and non-disclosure agreements designed +to protect Meridian’s proprietary products. +-8- +Table of Contents +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic 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. +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 does not require pre-market approval. The 510(k) clearance +process for “substantially equivalent” devices allows product sales to be made in the United States +after the filing of an application and upon clearance by the FDA, typically within 90 to 120 days +after submission. If the FDA requests additional information, the product cannot be sold in the +United States 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 except where the product qualifies for +de novo 510(k). Under the Food and Drug Export Reform and Enforcement Act of 1996 (FDERA), +unapproved FDA products can, under certain conditions, be sold outside of the United States prior +to receiving clearance. +Sales of Meridian’s diagnostic 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. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by the US Diagnostics operating segment and by third-party +vendors. Approximately 66% of third-party sales for fiscal 2006 were products purchased from the +US Diagnostics operating segment. Third-party sales for this operating segment were $19,828,000, +$17,818,000 and $15,412,000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound +annual growth rate of 13%. As of September 30, 2006, +-9- +Table of Contents +the European Diagnostics operating segment had 38 employees, including 16 employees in the direct +sales force. The European Diagnostics operating segment’s sales and distribution network consists +of direct sales forces in Belgium, France, Holland, and Italy, and independent distributors in +other European countries, Africa and the Middle East. The European Diagnostics operating segment +maintains a distribution center in Milan, Italy. The primary markets and customers for this +operating segment are hospitals and reference laboratories. +Due to the introduction of new products and improvements in general market conditions, sales in +local currency, the Euro, increased 15% in fiscal 2006, compared to fiscal 2005, and 11% in fiscal +2005, compared to fiscal 2004. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +The Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services. Third-party sales for this +operating segment were $22,864,000, $21,662,000 and $16,041,000 for fiscal 2006, 2005 and 2004, +respectively, reflecting a compound annual growth rate of 23%, including the OEM Concepts +acquisition discussed below. As of September 30, 2006, the Life Science operating segment had 117 +employees. +Most of the revenue for the Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2006, 18% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that have annual +automatic renewal provisions. Meridian has a long-standing relationship with this customer, and +although there can be no assurances, Meridian intends to renew these supply agreements in the +normal course of business. +The protein production facility serves as an enabling technology for process development and +large-scale manufacturing for biologicals used in new drugs and vaccines. The size of the facility +is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials. +The customer base for this aspect of the Life Science business includes biopharmaceutical and +biotechnology companies, as well as government agencies, such as the National Institutes of Health. +Revenues for the Life Science operating segment, in the normal course of business, may be affected +from quarter to quarter by the timing and nature of arrangements for contract services work, which +may have longer production cycles than bioresearch reagents +-10- +Table of Contents +and bulk antigens and antibodies, as well as buying patterns of major customers. See Note 1(j) to +the Consolidated Financial Statements herein for revenue recognition policies. Meridian’s revenues +for contract services were $2,537,000, $3,053,000, and $1,528,000 in fiscal 2006, 2005, and 2004, +respectively. +Growth Strategies +Growth +strategies for the Life Science operating segment include +(i) development of new product +applications from existing technologies and (ii) acquisition or licensing of biologicals and +technologies for development of new products. Contract manufacturing of proteins and other +biologicals used in research for new drugs and vaccines is an example of a significant new product +application built from Meridian’s existing expertise in manufacturing bulk antigens and reagents +using cell culture techniques. +Markets +The Life Science operating segment is represented by four product-line brands. The BIODESIGN brand +represents monoclonal and polyclonal antibodies, as well as assay reagents. The OEM Concepts brand +represents contract ascites and antibody production services. The Viral Antigens brand represents +viral proteins. The cGMP biologics brand represents contract development and manufacturing +services for drug and vaccine discovery and development. +The customer base for bulk biomedical reagents (BIODESIGN, OEM Concepts, and Viral Antigens brands) +is large and fragmented, and includes other diagnostic manufacturers as well as researchers in +academia and the pharmaceutical and biotechnology industries. The market segments for drug and +vaccine discovery and development are intended to be served via contract manufacturing in the +protein production laboratory discussed above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two different manners +that are designed to complement one another. An internal sales and marketing staff, as well as a +website, have been built to market bulk biomedical reagents directly to a large and fragmented +customer base. The website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific resources have been +dedicated to establish sole-source supply arrangements. For drug and vaccine discovery and +development, management and scientific resources are dedicated to each potential customer. +Research and Development +-11- +Table of Contents +The Life Science operating segment’s research and development organization consists of 7 research +scientists. Research and development expenses for the Life Science operating segment for fiscal +2006, 2005 and 2004 were $1,457,000, $823,000 and $1,226,000, respectively. This research and +development organization focuses its activities on the protein production laboratory, and +developing new biomedical reagents. +Manufacturing and Government Regulation +The proteins that are produced in the protein production facility are intended to be used as +“injectibles”. As such, they are produced under cGMP Regulations for Biologics and Human Drugs +under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +Competition +Diagnostics +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 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 new, high value 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 (acquired by +Siemens in 2006), Quidel Corporation, and Inverness Medical. +Life Science +-12- +Table of Contents +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. Meridian faces competitors, many +of which have greater financial, research and development, sales and marketing, and manufacturing +resources where sole-source supply arrangements do not exist. From time to time, customers may +choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors +such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as Meridian’s protein +production laboratory is also competitive. Important competitive factors include reputation, +customer service, and price. Although the product application for this facility was built from +Meridian’s existing expertise in cell culture manufacturing techniques, Meridian faces competitors +with greater experience in contract manufacturing in a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of Meridian’s businesses. +Meridian’s acquisition objectives are to, among other things, (i) enhance product offerings, (ii) +improve product distribution capabilities, (iii) provide access to new markets, and/or (iv) provide +access to key biologicals or new technologies that lead to new products. +Recent examples of completed acquisitions include Gull Laboratories in fiscal 1999, Viral Antigens +in fiscal 2000, and OEM Concepts in fiscal 2005. The Gull acquisition enhanced product offerings, +expanded sales and distribution capabilities in Europe, and provided the initial access into the +Life Science market for Meridian (through the BIODESIGN business). The Viral Antigens acquisition, +coupled with the opening of the protein production facility, solidified Meridian’s entry into the +Life Science market. The OEM Concepts acquisition strengthened Meridian’s Life Science business by +adding custom ascites manufacturing capabilities and diversifying Meridian’s customer base of major +diagnostic manufacturing companies. +Although Meridian cannot provide any assurance that it will consummate any acquisitions in the +future, Meridian expects that acquisitions will continue to serve as a source of new revenues and +earnings growth in the future. +International Markets +International markets are an important source of revenue for Meridian’s operating segments. For +all operating segments combined, international sales were $34,557,000 or 32% of total fiscal 2006 +sales, $30,232,000 or 33% of total fiscal 2005 sales and $24,916,000 or 31% of total fiscal 2004 +sales. Domestic exports for the US Diagnostics and Life Science operating segments were +$14,728,000, $12,414,000 and $9,504,000 in fiscal +-13- +Table of Contents +2006, 2005 and 2004, respectively. Meridian expects to continue to look to international markets +as a source of new revenues and growth in the future. +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste and has a US EPA +identification number. All hazardous material is manifested and disposed of properly. Meridian is +in compliance with applicable portions of the federal and state hazardous waste regulations and has +never been a party to any environmental proceeding. +ITEM 1A. +RISK FACTORS +In +addition to the other information set forth in this report, you +should carefully consider the following factors which could +materially affect our business, financial condition, cash flows or +future results. Any one of these factors could cause the +Company’s actual results to vary materially from recent results +or from anticipated future results. The risks described below are not +the only risks facing our Company. Additional risks and uncertainties +not currently known to us or that we currently deem to be immaterial +also may materially adversely affect our business, financial +condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable +terms. +The medical diagnostic and life science industries are characterized by ongoing technological +developments and changing customer requirements. As such, our results of operations and continued +growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and +successfully introduce into the marketplace, enhancements of existing products and services or new +products and services that incorporate technological advances, meet customer requirements, and +respond to products developed by our competition. We cannot provide any assurance that we will be +successful in developing or acquiring such rights to products and services on a timely basis, or +that such products and services will adequately address the changing needs of the marketplace, +either of which could adversely affect our results of operations. +In addition, we must regularly allocate considerable resources to research and development of new +products, services, and technologies. The research and development process generally takes a +significant amount of time from design stage to product launch. This process is conducted in +various stages. During each stage, there is a risk that we will not achieve our goals on a timely +basis, or at all, and we may have to abandon a product in which we have invested substantial +resources. +During 2006, 2005, and 2004, we incurred $4,799,000, $3,866,000, and $4,377,000, respectively, in +research and development expenses. We expect to continue to invest in our research and development +activities. +-14- +Table of Contents +We may be unable to successfully integrate operations or to achieve expected cost savings from +acquisitions we make. +One of our main growth strategies is the acquisition of companies and/or products. Although +additional acquisitions of companies and products may enhance the opportunity to increase net +earnings over time, such acquisitions could result in greater administrative burdens, increased +exposure to the uncertainties inherent in marketing new products, and financial risks of additional +operating costs. The principal benefits expected to result from any acquisitions we make will not +be achieved fully unless we are able to successfully integrate the operations of the acquired +entities with our operations and realize the anticipated synergies, cost savings, and growth +opportunities from integrating these businesses into our existing businesses. We cannot provide any +assurance that we will be able to identify and complete additional acquisitions on terms we +consider favorable or that, if completed, will be successfully integrated into our operations. +Revenues for our diagnostic operating segments may be impacted by our reliance upon two key +distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our US Diagnostic operating segment sales through two distributors were approximately $31,003,000, +or approximately 29% of total sales, in fiscal 2006, and approximately $23,756,000, or +approximately 26% of total sales for fiscal 2005. These parties distribute our products and other +laboratory products to end-user customers. The loss of either of these distributors could +negatively impact our sales and results of operations unless suitable alternatives were timely +found or lost sales to one distributor were absorbed by another distributor. Finding a suitable +alternative on satisfactory terms may pose challenges in our industry’s competitive environment. +As an alternative, we could expand our efforts to distribute and market our products directly. +This alternative, however, would require substantial investment in additional sales, marketing, and +logistics resources, including hiring additional sales and customer service personnel, which would +significantly increase our future selling, general, and administrative expenses. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common respiratory, +gastrointestinal, viral, and parasitic infectious diseases. Certain infectious diseases may be +seasonal in nature, while others may be associated with sporadic outbreaks, such as food-borne +illnesses. While we believe that the breadth of our diagnostic product lines reduces the risk that +infections subject to seasonality and sporadic outbreaks will cause variability in diagnostic +revenues, we can make no assurance that revenues will not be negatively impacted period over period +by such factors. +Changing Diagnostic Market Conditions +-15- +Table of Contents +Changes in the healthcare delivery system have resulted in major consolidation among reference +laboratories and in the formation of multi-hospital alliances, reducing the number of institutional +customers for diagnostic test products. Due to such consolidation, we may not be able to enter +into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory +commercial basis with institutional customers, which could adversely affect our results of +operations. +Third +party payors for medical products and services, including state and federal governments, are +increasingly concerned about escalating health care costs and can indirectly affect the pricing or +the relative attractiveness of our products by regulating the maximum amount of reimbursement they +will provide for diagnostic testing services. If reimbursement amounts for diagnostic testing +services are decreased in the future, such decreases may reduce the amount that will be reimbursed +to hospitals or physicians for such services and consequently could place constraints on the levels +of overall pricing, which could have a material effect on our sales and/or profit margins. +Revenues for our Life Science operating segment may be impacted by customer concentrations and +buying patterns. +Our Life Science operating segment’s sales of purified antigens and reagents to one customer were +18% and 23%, respectively, of the Life Science operating segment’s total sales for fiscal 2006 and +fiscal 2005, or 4% and 5%, respectively, of our overall total sales for fiscal 2006 and fiscal +2005. A substantial portion of these sales are under exclusive supply agreements that have annual +automatic renewal provisions. Although we have a long-standing relationship with this customer, we +cannot provide any assurance that we will be able to renew these supply agreements, which could +adversely affect our sales and results of operations. +Our Life Science operating segment has five other significant customers who purchase antigens, +antibodies and reagents, which together comprised 20% and 29%, respectively, of the operating +segment’s total sales for fiscal 2006 and fiscal 2005. Any significant alteration of buying +patterns from these customers could adversely affect our period over period sales and results of +operations. +Revenues relating to research, development and manufacturing services for our Life Science +operating segment are generated on a contract by contract basis. The nature of this business is +such that each contract provides a unique product and/or service and corresponding revenue stream. +Although we believe that future prospects for this business will generate targeted growth rates, +there can be no assurance that future contracts will be secured, and if secured, will be +profitable. +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid +change. Hundreds of companies in the United States supply immunodiagnostic tests and purified +reagents. These companies range from multinational healthcare entities, for which +immunodiagnostics is one line of business, +-16- +Table of Contents +to small start-up companies. Many of our competitors have significantly greater financial, +technical, manufacturing, and marketing resources than we do. We cannot provide any assurance that +our products and services will be able to compete successfully with the products and services of +our competitors. +We are dependent on international sales, and our financial results may be adversely impacted by +foreign currency, regulatory or other developments affecting international markets. +We sell products and services into approximately 60 countries. Approximately 32% of our net sales +for fiscal 2006 and approximately 33% of our net sales for fiscal 2005 were attributable to +international markets. Approximately 49% of our international sales were made in Euros, with the +remaining 51% made in U.S. dollars. We are subject to the risks associated with fluctuations in the +U.S. dollar-Euro exchange rates. We are also subject to other risks associated with international +operations, including longer customer payment cycles, tariff regulations, requirements for export +licenses, stability of foreign governments, and governmental requirements with respect to the +importation and distribution of medical devices and antigens, antibodies and reagents, all of which +may vary by country. +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by +these regulations. +Medical device diagnostics and the manufacture, sale, and distribution of bulk antigens, +antibodies, and reagents are highly regulated industries. We cannot provide any assurance that we +will be able to obtain necessary governmental clearances or approvals or timely clearances or +approvals to market future products in the United States and other countries. Costs and +difficulties in complying with laws and regulations administered by the U.S. Food and Drug +Administration, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug +Enforcement Agency, or the Centers for Disease Control can result in unanticipated expenses and +delays and interruptions to the sale of new and existing products. Contract manufacturing of +proteins and other biologicals is regulated by the U.S. Food and Drug Administration. +Regulatory approval can be a lengthy, expensive, and uncertain process, making the timing and costs +of approvals difficult to predict. The failure to comply with these regulations can result in +delay in obtaining authorization to sell products, seizure or recall of products, suspension or +revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or +third-party manufacturing facilities would adversely affect our business and operating results. +Approximately 79% of our diagnostics revenues and 71% of our Life Science revenues come from +products and services manufactured at our Cincinnati, Ohio, Boca Raton, Florida, Memphis, +Tennessee, and Saco, Maine facilities. Our global supply of these products and services is +dependent on the uninterrupted and +-17- +Table of Contents +efficient operation of these facilities. In addition, we currently rely on a small number of +third-party manufacturers to produce certain of our diagnostic products. The operations of our +facilities or these third-party manufacturing facilities could be adversely affected by power +failures, natural or other disasters, such as earthquakes, floods, or terrorist threats. Although +we carry insurance to protect against certain business interruptions at our facilities, there can +be no assurance that such coverage will be adequate or that such coverage will continue to remain +available on acceptable terms, if at all. Any significant interruption in the Company’s or +third-party manufacturing capabilities could materially and adversely affect our operating results. +We are dependent on sole-source suppliers for certain critical components and products. A supply +interruption could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +alternate sources of supply. However, certain critical raw materials and supplies required for the +production of some of our principal products are available only from a single supplier. In +addition, certain finished products, for which Meridian acts as a distributor, are available only +from a single supplier. If these suppliers become unable or unwilling to supply the required raw +materials or products, we would need to find another source, and perform additional development +work and obtain regulatory approvals for the use of the alternative raw materials for our products. +Completing that development and obtaining such approvals could require significant time and +resources, and may not occur at all. Any disruption in the supply of these raw materials or +finished products could have a material adverse affect on us. +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights +that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented +technologies. In addition, we have licensed, and expect to continue to license, various +complementary technologies and methods from academic institutions and public and private companies. +We cannot provide any assurance that the technologies that we own or license provide protection +from competitive threats or from challenges to our intellectual property. In addition, we cannot +provide any assurances that we will be successful in obtaining licenses or proprietary or patented +technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our +ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the +market for diagnostics continues to grow and the number of participants in the market increases, we +may increasingly be subject to patent infringement claims. It is possible that a third-party may +claim infringement against us. If found to infringe, we may attempt to obtain a license to such +intellectual property, however, we may be unable to do so on favorable terms, or at all. +Additionally, if our products are found to infringe on a third party’s +-18- +Table of Contents +intellectual property, we may be required to pay damages for past infringement and lose the ability +to sell certain products, causing our revenues to decrease. +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing, and marketing of medical diagnostic products involves an inherent risk +of product liability claims. If we cannot successfully defend ourselves against product liability +claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially +reasonable, although there is no assurance that it will be adequate to cover claims that may arise. +In certain customer contracts, we indemnify third parties for certain product liability claims +related to our products. These indemnification obligations may cause us to pay significant sums of +money for claims that are covered by these indemnifications. In addition, a defect in the design +or manufacture of our products could have a material adverse affect on our reputation in the +industry and subject us to claims of liability for injury and otherwise. Any substantial +underinsured loss resulting from such a claim could have a material adverse affect on our +profitability and the damage to our reputation in the industry could have a material adverse affect +on our business. +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire, and retain key +personnel. +Our future success depends on our continued ability to attract, hire, and retain highly qualified +personnel, including our executive officers and scientific, technical, sales, and marketing +employees, and their ability to manage growth successfully. If such key employees were to leave +and we were unable to obtain adequate replacements, our operating results could be adversely +affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain +financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we +would be in default under the credit agreement. If an event of default is not cured or waived, it +could result in acceleration of the indebtedness under our credit agreement and under other +instruments that contain cross-acceleration or cross-default provisions, any of which could have a +material adverse effect on our business. At the present time, no borrowings are outstanding under +the credit agreement. +Should we be unable to renew our bank credit agreement on an ongoing basis, our growth potential +could be adversely affected. +Our bank credit agreement provides us with access to funds that may be used for acquisitions or +ongoing operating expenses. If we were unable to renew the credit agreement and unable to put into +place a similar +-19- +Table of Contents +agreement, we could become unable to fund future growth and/or take advantage of acquisition +opportunities. Such limitations on growth could have a material adverse affect on our business. +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred +stock and to determine the rights, preferences, privileges and restrictions, including voting +rights, of such shares without any future vote or action by the shareholders. The issuance of +preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage +takeover bids for our company that have not been negotiated with the board of directors. Such +provisions could limit the price that investors might be willing to pay in the future for shares of +the common stock. In addition, sales of substantial amounts of such shares in the public market +could adversely affect the market price of the common stock and our ability to raise additional +capital at a price favorable to us. +ITEM 1B. +UNRESOLVED SEC STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Meridian’s corporate offices, diagnostics manufacturing facility and diagnostics 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. +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. Meridian also rents office space in France and Belgium for sales and +administration functions. +Meridian Life Science rents a 10,000 square foot facility that houses administration, distribution +and manufacturing facilities in Saco, Maine under a lease that expires in 2006; administrative +offices and a manufacturing facility in Memphis, Tennessee, which consists of two buildings +totaling approximately 34,000 square feet, including approximately 27,000 square feet of +manufacturing space; and approximately 11,100 square feet of space in Boca Raton, Florida that +houses manufacturing operations. Meridian Life Science is currently evaluating the purchase of the +leased facility in Maine or an extension of the lease. +-20- +Table of Contents +ITEM 3. +LEGAL PROCEEDINGS +Meridian is a party to 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. No provision has been made in +the accompanying consolidated financial statements for these matters. +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 2006. +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 2006 +and “Quarterly Financial Data” relating to Meridian’s dividends in Note 11 to the Consolidated +Financial Statements are incorporated herein by reference. There are no restrictions on cash +dividend payments. +Meridian’s cash dividend policy is to set the indicated annual dividend rate between 75% and 85% of +each fiscal year’s 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 $0.425 per share, $0.31 per share, and $0.26 per share in fiscal 2006, +fiscal 2005, and fiscal 2004, respectively. +On August 15, 2005, Meridian announced a three-for-two stock split, with fractional shares paid in +cash. The split was effective on September 2, 2005 to shareholders of record as of August 29, +2005. All references in this Annual Report to number of shares and per share amounts reflect the +stock split. +-21- +Table of Contents +EQUITY COMPENSATION PLAN INFORMATION +The following table presents summary information as of September 30, 2006 with respect to all the +Company’s equity compensation plans, except the Plan under which common shares issued to Directors +are not subject to forfeiture and are not appropriate for inclusion in the table. +(c) +(a) +Number of securities +Number of +(b) +remaining available +Securities to be +Weighted- +for future issuance +issued upon +average exercise +under equity +exercise of +price of +compensation plans +outstanding +outstanding +(excluding securities +options, warrants +options, warrants +reflected in column +Plan Category +and rights +and rights +(a)) +Equity compensation +plans approved by +security +holders (1) +1,270,272 +$ +8.26 +588,667 +Equity compensation +plans not approved +by security holders +9,525 +3.87 +— +Total +1,279,797 +$ +8.22 +588,667 +(1) +1994 Director’s Stock Option Plan +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan, as amended +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2006. +-22- +Table of Contents +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors on pages 14 through 20 of this Annual Report. +Operating Segments: +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostic test kits in Europe, Africa, and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; +and Boca Raton, Florida; the sale and distribution of bulk antigens, antibodies and bioresearch +reagents domestically and abroad; and contract research and development and manufacturing services. +Results of Operations: +Overview +Fourth quarter +Net earnings for the fourth quarter of fiscal 2006 increased 27% to $4,778,000, or $0.18 per +diluted share (increased 20%) from net earnings for the fourth quarter of fiscal 2005 of +$3,761,000, or $0.15 per diluted share. This increase is primarily attributable to increased sales +and continuing efforts to improve operating efficiency across all businesses. Net sales for the +fourth quarter of fiscal 2006 were $28,650,000, an increase of $3,634,000 or 15% compared to the +fourth quarter of fiscal 2005. +During the fourth quarter of fiscal 2006, Meridian determined that the carrying value of a supply +contract related to the Life Science operating segment had become impaired and recorded such +impairment to general and administrative expenses in the amount of $826,000. The contract provides +for the supply of biological materials to the United States Department of Defense. Changes in the +Department’s Critical Reagents Program lowered the amount of materials to be supplied under the +contract in future periods. +Fiscal Year +Net earnings for fiscal 2006 increased 46% to $18,325,000, or $0.68 per diluted share (increased +31%) from net earnings for fiscal 2005 of $12,565,000, or $0.52 per diluted share. Results of +operations for fiscal 2006 +-23- +Table of Contents +compared to fiscal 2005 are discussed below. +Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005 +Net sales +Overall, net sales increased 17% for fiscal 2006 compared to fiscal 2005. Net sales for the US +Diagnostics operating segment increased $12,236,000, or 23%, for the European Diagnostics operating +segment increased $2,010,000, or 11%, and for the Life Science operating segment increased +$1,202,000, or 6%. +For the US Diagnostics operating segment, 46% of the sales increase was related to growth in C. +difficile products (increased $5,682,000), reflecting the market expansion and gains in market +share related to the 2005 launch of Immuno Card Ò C. difficile Toxins A & B. Sales of +respiratory products (increased $1,819,000) also contributed to the increase, driven by growth in +international markets and favorable changes in insurance reimbursement policies. Meridian’s +respiratory products include diagnostic tests for influenza, Respiratory Syncytial Virus (RSV), and +mycoplasma. H. pylori sales (increased $996,000) contributed to the increase due to increased +testing and positive results from focused marketing efforts on the managed care sector. Sales +increases for parasitology products (increased $1,019,000), fungal products (increased $860,000), +food borne products (increased $632,000), rotavirus products (increased $565,000) and microbiology +products ($480,000) also contributed to favorable variances to fiscal 2005. +For the European Diagnostics operating segment, the sales increase offsets currency translation +losses in the amount of approximately $662,000. Sales in local currency, the Euro, increased 15%. +The local currency increase was driven by market increases in sales of H. pylori products +($1,182,000). Increases in sales of C. difficile products ($901,000), including Immuno Card Ò +C. difficile Toxins A & B, also contributed to the increase. These increases reflect market +recognition of the benefits of performing C. difficile testing for both Toxin A and Toxin B and +increased benefits of rapid testing to hospital environments. +For the Life Science operating segment, the sales increase was primarily attributable to the +inclusion of OEM Concepts for a full year in fiscal 2006, compared to eight months in fiscal 2005. +This was partially offset by shifts in buying patterns by one large diagnostic manufacturing +customer and one large defense customer, as well as the timing and number of contract services +arrangements. Sales of made-to-order bulk antigens and antibodies to one customer +provided sales of approximately $4,073,000, $5,000,000, and $5,446,000 in fiscal 2006, 2005 and +2004, respectively. +For all operating segments combined, international sales were $34,557,000, or 32% of total sales, +for fiscal 2006, compared to $30,232,000, or 33% of total sales, in fiscal 2005. Combined domestic +exports for the US Diagnostics and Life Science operating segments were $14,728,000 for fiscal +2006, compared to $12,414,000 +-24- +Table of Contents +in fiscal 2005. The remaining international sales were generated by the European Diagnostics +operating segment. +Gross Profit +Gross profit increased 18% for fiscal 2006 compared to fiscal 2005. Gross profit margins were 60% +for fiscal 2006 compared to 59% for fiscal 2005. This increase reflects higher margins commanded +by new rapid tests, such as Immuno Card ® C. difficile Toxins A & B and operating +efficiencies. +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, bulk antigens and +antibodies, proficiency panels, and contract research and development and contract manufacturing +services. 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 increased 9% for fiscal 2006 compared to fiscal 2005. The overall increase in +operating expenses for fiscal 2006 is discussed below. +Research and development expenses increased 24% for fiscal 2006 compared to fiscal 2005, and as a +percentage of sales, were 4% in fiscal 2006 and fiscal 2005. Of this increase, $299,000 related +to the US Diagnostics operating segment and $634,000 related to the Life Science operating +segment. The US Diagnostics operating segment increase was primarily attributable to increased +stock compensation expense. For the Life Science operating segment, during fiscal 2005, research +and development scientists were performing contract work for third-party customers, and thus, +their related costs were classified in cost of sales. During fiscal 2006, their efforts and +activities were primarily focused on internal research and development work, and therefore charged +to research and development expense, rather than being classified in cost of sales or inventory. +The increase for the Life Science operating segment reflects the classification of such costs. +Selling and marketing expenses increased 10%, for fiscal 2006 compared to fiscal 2005, and as a +percentage of sales, decreased from 16% for fiscal 2005 to 15% for fiscal 2006. Of this increase, +$1,195,000 related to the US Diagnostics operating segment and $475,000 related to the Life Science +operating segment, partially offset by a decrease of $135,000 for the European Diagnostics +operating segment. The increase for the US Diagnostics operating segment was primarily +attributable to sales administration fees to group purchasing organizations and incentive +compensation associated with higher sales levels, as well as higher salaries and benefits costs. +The increase for the Life Science operating segment was primarily due to business development costs +and a full year of costs for the OEM Concepts business, acquired during the second quarter +-25- +Table of Contents +of fiscal 2005. The decrease for the European Diagnostics operating segment was primarily +attributable to fluctuations in the Euro currency. +General and administrative expenses increased 5%, for fiscal 2006 compared to fiscal 2005, and as +a percentage of sales, decreased from 17% in fiscal 2005 to 15% in fiscal 2006. Of this increase, +$18,000 related to the US Diagnostics operating segment, $679,000 related to the Life Science +operating segment and $60,000 related to the European Diagnostics operating segment. The increase +for the US Diagnostics operating segment was primarily attributable to increased salaries and +benefits costs and increased stock compensation expense, offset by an insurance recovery received +and decreased legal and professional fees related to efficiencies in reporting under the +Sarbanes-Oxley Act. The increase for the Life Science operating segment was primarily +attributable to the impairment of a supply contract related to the acquisition of OEM Concepts. +See Note 1(i) to the consolidated financial statements contained herein. +Effective July 1, 2005, Meridian adopted the provisions of Statement of Financial Accounting +Standards No. 123R, Share-Based Payment , in accounting for its stock option plans. The amount of +stock-based compensation expense reported for fiscal year 2006 and fiscal 2005 was $1,082,000 and +$279,000, respectively. +Operating Income +Operating income increased 33% in fiscal 2006, as a result of the factors discussed above. +Other Income and Expense +Interest expense declined 83% for fiscal 2006 compared to fiscal 2005. This decrease was +attributable to the positive effects of the debenture conversion and redemption transactions +discussed under Liquidity and Capital Resources herein. +Interest income was $1,123,000 for fiscal 2006, and related primarily to interest earned on +proceeds from the September 2005 common share offering that have been primarily invested in +tax-exempt securities. +Income Taxes +The effective rate for income taxes was 35% for fiscal 2006 and 36% for fiscal 2005. The decrease +in the effective tax rate was primarily attributable to the favorable effects of tax-exempt +interest and domestic production incentives under the American Jobs Creation Act. +Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004 +-26- +Table of Contents +Net sales +Overall, net sales increased 17% for fiscal 2005 compared to fiscal 2004. Net sales for the US +Diagnostics operating segment increased $5,332,000, or 11%, for the European Diagnostics operating +segment increased $2,406,000, or 16%, and for the Life Science operating segment increased +$5,621,000, or 35%. +For the US Diagnostics operating segment, over 50% of the sales increase was related to growth in +C. difficile products (increased $2,974,000), reflecting the launch of the Company’s new product, +Immuno Card Ò C. difficile Toxins A & B. Sales of respiratory products (increased $2,419,000) +also contributed to the increase, driven by a larger customer base. Meridian’s respiratory +products include diagnostic tests for influenza, Respiratory Syncytial Virus (RSV), and mycoplasma +(walking pneumonia). +For the European Diagnostics operating segment, the sales increase includes currency translation +gains in the amount of approximately $709,000. Sales in local currency, the Euro, increased 11%. +The local currency increase was driven by improvements in general market conditions and a full year +of sales from Immuno Card Ò C. difficile Toxins A & B rapid diagnostic test, launched in +European markets in fiscal 2004. +For the Life Science operating segment, the sales increase was attributable to the acquisition of +OEM Concepts ($3,087,000 for eight months), revenues from contract research and development and +contract services (increased $1,525,000), and volume growth in make-to-order bulk antigens and +antibodies. Sales of made-to-order bulk antigens and antibodies to one customer provided sales of +approximately $5,000,000 and $5,446,000 in fiscal 2005 and fiscal 2004, respectively. +For all operating segments combined, international sales were $30,232,000, or 33% of total sales, +for fiscal 2005, compared to $24,916,000, or 31% of total sales, in fiscal 2004. Combined domestic +exports for the US Diagnostics and Life Science operating segments were $12,414,000 for fiscal +2005, compared to $9,504,000 in fiscal 2004. The remaining international sales were generated by +the European Diagnostics operating segment. +Gross Profit +Gross +profit increased 20% for fiscal 2005 compared to fiscal 2004. Gross profit margins were 59% +for fiscal 2005 compared to 57% for fiscal 2004. This increase reflects higher margins commanded +by new rapid tests, such as Immuno Card ® C. difficile Toxins A & B and operating +efficiencies. +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, bulk antigens and +antibodies, proficiency tests, and contract services. Product sales mix shifts, in the normal +course of business, can cause the consolidated gross profit margin to fluctuate by several points. +-27- +Table of Contents +Operating Expenses +Operating +expenses increased 15% for fiscal 2005 compared to fiscal 2004. The overall increase in +operating expenses for fiscal 2005 is discussed below. +Research and development expenses decreased 12% for fiscal 2005 compared to fiscal 2004, and as a +percentage of sales, decreased to 4% in fiscal 2005, from 5% in fiscal 2004. Of this decrease, +$107,000 related to the US Diagnostics operating segment and $404,000 related to the Life Science +operating segment. For the Life Science operating segment, during fiscal 2005, research and +development scientists were performing contract work for third-party customers, and thus, their +related costs are classified in cost of sales. During fiscal 2004, their efforts and activities +were primarily focused on internal research and development work. The decrease for the Life +Science operating segment reflects the classification of such costs. +Selling and marketing expenses increased 19%, for fiscal 2005 compared to fiscal 2004, and as a +percentage of sales, were 16% for fiscal 2005 and fiscal 2004. Of this increase, $1,160,000 +related to the US Diagnostics operating segment, $802,000 related to the European Diagnostics +operating segment, and $468,000 related to the Life Science operating segment. The increase for +the US Diagnostics operating segment was primarily attributable to higher salaries and benefits +costs for additional sales and marketing personnel, costs of physician education and business +development for H. pylori diagnostics, costs related to distributor incentives, and increased +advertising for corporate branding and new products. The increase for the European Diagnostics +operating segment was primarily due to higher sales commissions related to sales growth and +currency translation. The increase for the Life Science operating segment was primarily due to the +acquisition of OEM Concepts and additional marketing and business development resources. +General and administrative expenses increased 12%, for fiscal 2005 compared to fiscal 2004, and as +a percentage of sales, decreased from 18% in fiscal 2004, to 17% in fiscal 2005. Of this +increase, $1,326,000 related to the US Diagnostics operating segment, $517,000 related to the Life +Science operating segment, partially offset by a decrease of $196,000 related to the European +Diagnostics operating segment. The increase for the US Diagnostics operating segment was +primarily attributable to incentive compensation pursuant to Meridian’s corporate incentive plan, +increased legal and professional fees, primarily related to the audit of the Company’s financial +statements, and compliance with the Sarbanes-Oxley Act, and increased costs related to stock based +compensation pursuant to the Company’s stock option plans. The increase for the Life Science +operating segment was primarily attributable to the acquisition of OEM Concepts, including +amortization of acquired intangibles, partially offset by lower incentive compensation pursuant to +Meridian’s corporate incentive plan. +-28- +Table of Contents +Effective July 1, 2005, Meridian early adopted the provisions of Statement of Financial Accounting +Standards No. 123R, Share-Based Payment , in accounting for its stock option plans. Meridian would +have otherwise been required to adopt SFAS No. 123R on October 1, 2005. Meridian elected to early +adopt SFAS No. 123R in order to achieve a lower cost associated with performance-based stock +options that were granted to certain employees in December 2004 than would have been recognized +under its previous accounting method, the intrinsic value method under Accounting Principles Board +Opinion No. 25. Pursuant to APB No. 25, stock compensation expense for the performance options +would have been measured at Meridian’s stock price at September 30, 2005, which was 90% higher +than at the grant date. The fair value of these stock options, determined under a Black-Scholes +model at the date of grant, was substantially lower. For this reason, Meridian believed that +early adoption of SFAS No. 123R was in the best interests of shareholders. The amount of +stock-based compensation expense reported for fiscal year 2005 was $279,000. The amount of +stock-based compensation expense that would have been reported in fiscal 2005 under a full year of +APB No. 25 was $604,000. +Operating Income +Operating income increased 38% in fiscal 2005, as a result of the factors discussed above. +Other Income and Expense +Interest expense declined 51% for fiscal 2005 compared to fiscal 2004. This decrease was +attributable to the positive effects of the fiscal 2004 debenture exchange and redemption +transactions and the fiscal 2005 debenture redemption and conversion transactions discussed under +Liquidity and Capital Resources herein. +Income Taxes +The effective rate for income taxes was 36% for fiscal 2005 and 30% for fiscal 2004. The increase +in the effective tax rate was primarily attributable to favorable book-to-return adjustments +related to non-US sales activities in fiscal 2004. Book-to-return adjustments represent changes to +prior estimates and generally are determined upon filing Meridian’s tax returns, typically +occurring in the third and fourth quarters. These adjustments are recorded in the period in which +amounts previously estimated become known. +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +-29- +Table of Contents +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 quickly to acquisition opportunities. +Net cash provided by operating activities increased 22% in fiscal 2006 compared to fiscal 2005. +This increase was primarily attributable to higher earnings levels, partially offset by higher +investments in accounts receivable and inventories. +Net cash +used in investing activities was $8,689,000 for fiscal 2006, compared to $9,647,000 for +fiscal 2005. This decrease was primarily attributable to lower acquisition payments in fiscal +2006, in part offset by net purchases of short-term auction rate securities with certain of the +proceeds from the September 2005 common share offering. +Net cash used in financing activities was $10,225,000 for fiscal 2006, compared to net cash +provided by financing activities of $22,618,000 for fiscal 2005. This decrease was primarily +attributable to proceeds received from the September 2005 common share offering and increased +dividend payments. Dividend payments were $11,095,000 in fiscal 2006, compared to $7,200,000 in +fiscal 2005, reflecting increased dividend rates and common shares outstanding relating to the +common share offering, stock option exercises and bond conversions in fiscal 2006 and fiscal 2005. +Net cash flows from operating activities are anticipated to fund working capital requirements, +debt service, and dividends during fiscal 2007. +Capital Resources +During August 2004, Meridian completed the renewal of its credit facility with its commercial +bank. The amount of the credit facility is $25,000,000, and includes $2,500,000 of term debt +and capital lease capacity and a $22,500,000 line of credit that expires in September 2007. As +of November 28, 2006, there were no borrowings outstanding on the line of credit portion of this +facility. +As of September 30, 2004, Meridian had outstanding $12,111,000 principal amount of convertible +subordinated debentures due September 1, 2006, bearing interest at 7% and convertible at the +option of the holder into common shares at a price of $10.727. During fiscal 2005, Meridian made +several calls for redemption of these debentures, with the aggregate amounts totaling $1,812,000. +Holders converted the remaining $10,299,000 of 7% debentures into 959,768 common shares during +fiscal 2005. +As of September 30, 2004, Meridian had outstanding $3,889,000 principal amount of convertible +subordinated debentures due September 1, 2013, bearing interest at 5% and convertible at the +option of the holder into +-30- +Table of Contents +common shares at a price of $9.67. Holders converted $1,438,000 principal amount of debentures +into 148,726 common shares during fiscal 2005 and $648,000 principal amount of debentures into +67,004 common shares during fiscal 2006. +The 2005 conversion and redemption transactions reduced annual interest expense by $920,000. The +2006 conversion and redemption transactions are expected to reduce annual interest expense by +approximately $32,000. +The Viral Antigens acquisition, completed in fiscal 2000, provided for additional purchase +consideration, contingent upon Viral Antigens’ earnings through September 30, 2006. The OEM +Concepts acquisition, completed in fiscal 2005, provides for additional purchase consideration +up to a remaining amount of $2,005,000, contingent upon OEM Concepts’ future calendar-year sales +and gross profit through December 31, 2008. Earnout consideration paid during fiscal 2006 was +$1,494,000. The amount of earnout consideration payable as of September 30, 2006 was $853,000 +for Viral Antigens and $84,000 for OEM Concepts. Earnout consideration is payable each year, +following the period earned. +Meridian’s capital expenditures are estimated to be approximately $5,000,000 for fiscal 2007, +and may be funded with operating cash flows, availability under the $25,000,000 credit facility +discussed above, or proceeds from the September 2005 common share offering. Capital +expenditures relate to manufacturing and other equipment of a normal and recurring nature as +well as capacity expansion for the Maine facility. +-31- +Table of Contents +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2006 +(amounts in thousands): +Less than +More than +Total +1 Year +1-3 Years +4-5 Years +5 Years +Long-term debt +$ +1,803 +$ +— +$ +— +$ +— +$ +1,803 +Interest payments relating to +long-term debt +630 +90 +270 +180 +90 +Operating leases (1) +1,798 +561 +1,039 +198 +— +Purchase obligations (2) +9,402 +8,451 +951 +— +— +Viral Antigens earnout +853 +853 +— +— +— +OEM Concepts earnout (3) +2,089 +84 +2,005 +— +— +Total +$ +16,575 +$ +10,039 +$ +4,265 +$ +378 +$ +1,893 +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in +Maine, Florida, Belgium, and France; (ii) automobiles for use by the diagnostic direct +sales forces in the US and Europe; and (iii) certain office equipment such as facsimile +machines and copier machines across all business units, under operating lease agreements +that expire at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory +and service items. These contractual commitments are not in excess of expected production +requirements over the next twelve months. +(3) +OEM Concepts earnout obligation is contingent upon OEM Concepts’ future calendar-year +sales and gross profit through December 31, 2008. +Other Commitments and Off-balance Sheet Arrangements: +License Agreements +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 $1,012,000 in fiscal 2007. These royalty payments +primarily relate to the US Diagnostics operating segment. +During October 2006, Meridian entered into a license agreement with Eiken Chemical Co., Ltd., that +provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious disease +testing in the United +-32- +Table of Contents +States and 18 other geographic markets. The agreement calls for payments of up to 200,000,000 +Japanese Yen (approximately $1,700,000) based on the achievement of +certain milestones and on-going royalties once +products are available for commercial sale. Payments made during product development are expected +to occur over a five-year period beginning in fiscal 2007. +Derivative financial instruments +Meridian accounts for its derivative financial instruments in accordance with SFAS No. 133, +“Accounting for Derivative Instruments and Hedging Activities,” as amended. These instruments are +designated as cash flow hedges, and therefore, the effective portion of the net gain or loss on the +derivative instrument is reported as a component of other comprehensive income and reclassified +into earnings in the same period or periods during which the hedged transaction affects earnings. +For the ineffective portion of the hedge, gains or losses are charged to earnings in the current +period. All derivative instruments are recognized as either assets or liabilities at fair value in +the consolidated balance sheets. See Note 6 to the consolidated financial statements contained +herein. +Market Risk Exposure: +Meridian has market risk exposure related to foreign currency transactions. Meridian is exposed to +foreign currency risk related to its European distribution operations, including foreign currency +denominated intercompany receivables. +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 require management to make judgments about estimates and assumptions that +affect the reported amounts 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 generally recognized when +product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating +segment is reduced at the date of sale for estimated rebates 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 +-33- +Table of Contents +handling Meridian’s products. Management estimates rebate accruals based on historical statistics, +current trends, and other factors. Changes to these rebate accruals are recorded in the period +that they become known. +Life Science operating segment revenue for contract services may come from standalone arrangements +for process development and/or optimization work (contract research and development services), or +multiple-deliverable arrangements that include process development work followed by larger-scale +manufacturing (contract manufacturing services). Revenue is recognized based on the nature of the +arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple Deliverables . +Contract research and development services may be performed on a “time and materials” basis or +“fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed. For “fixed fee” arrangements, revenue is recognized upon completion and acceptance by +the customer. For contract manufacturing services, revenue is recognized upon delivery of product +and acceptance by the customer. +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 certain 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 were less favorable than such estimates, +additional inventory write-downs 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 acquisition 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, and trade names. All of Meridian’s identifiable intangibles have finite lives. +SFAS No. 142, Goodwill and Other Intangible Assets provides that goodwill and intangible assets +with indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) +-34- +Table of Contents +by applying a fair-value based test. There have been no impairments from the analyses required by +SFAS No. 142. +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 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. During fiscal 2006, Meridian determined that +the carrying value of a supply contract related to the Life Science operating segment had become +impaired and recorded such impairment in the amount of $826,000 to +general and administrative expenses. The contract provides for the +supply of biological materials to the United States Department of +Defense. Changes in the Department’s Critical Reagents Program +lowered the amount of materials to be supplied under the contract in +future periods. There have been no events or +circumstances indicating that the carrying value of other such assets may not be recoverable. +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, impairment of intangible assets could +take place. 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 prepares estimates of permanent and temporary differences between income for +financial reporting purposes and income for tax purposes. These differences are adjusted to actual +upon filing of Meridian’s tax returns, typically occurring in the third and fourth quarters of the +current fiscal year for the preceding fiscal year’s estimates. +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 +-35- +Table of Contents +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 assets 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. +From time to time, Meridian’s tax returns in federal, state, and foreign jurisdictions are examined +by the applicable tax authorities. Meridian’s tax provisions take into consideration the +judgmental nature of certain tax positions through the establishment of reserves for differences +between the probable tax determinations and the “as filed” tax positions of certain assets and +liabilities. To the extent that tax benefits result from the completion of these examinations or +the passing of statutes of limitation, they will affect tax liabilities in the period known. +Meridian believes that the results of any tax authority examinations would not have a significant +adverse impact on financial condition or results of operation. +Recent Accounting Pronouncements: +See Note 1(q) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +-36- +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +38 +Reports of Independent Registered Public Accounting Firms +39 +Consolidated Statements of Operations for the years ended September 30, 2006, 2005 and 2004 +44 +Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005 and 2004 +45 +Consolidated Balance Sheets as of September 30, 2006 and 2005 +46 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2006, 2005 and 2004 +48 +Notes to Consolidated Financial Statements +49 +Schedule No. II — Valuation and Qualifying Accounts for the years ended September 30, 2006, 2005 and 2004 +76 +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. +-37- +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles, and that receipts and expenditures of the +Company are being made only in accordance with authorizations of management and directors of the +Company; and (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and may not prevent or detect misstatements. Also, projections of any +evaluation of effectiveness to future periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree or compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and criteria in Internal Control - +Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2006. +Grant Thornton LLP, the independent registered public accounting firm that audited the consolidated +financial statements as of and for the years ended September 30, 2006 and September 30, 2005, +included in this Annual Report on Form 10-K, has issued an attestation report on management’s +assessment of the Company’s internal control over financial reporting, which appears on pages +39-40. +/s/ William J. Motto +William J. Motto +Chairman of the Board and +Chief Executive Officer +November 29, 2006 +/s/ Melissa Lueke +Melissa Lueke +Vice President and +Chief Financial Officer +November 29, 2006 +-38- +Table of Contents +Report of Independent Registered Public Accounting Firm +Board of Directors and Shareholders of +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio +Corporation) and subsidiaries as of September 30, 2006 and 2005, and the related consolidated +statements of operations, shareholders’ equity, and cash flows for each of the two years in the +period ended September 30, 2006. These financial statements are the responsibility of the Company’s +management. Our responsibility is to express an opinion on these financial statements based on our +audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight +Board (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 consolidated financial statements referred to above present fairly, in all +material respects, the financial position of Meridian Bioscience, Inc. and subsidiaries as of +September 30, 2006 and 2005, and the results of their operations and their cash flows for each of +the two years in the period ended September 30, 2006 in conformity with accounting principles +generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), the effectiveness of Meridian Bioscience, Inc.’s internal control over +financial reporting as of September 30, 2006, based on criteria established in Internal Control - +Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission +(COSO) and our report dated November 27, 2006 expressed an unqualified opinion on Management’s +assessment of the effectiveness of the Company’s internal control over financial reporting and an +unqualified opinion on the effectiveness of the Company’s internal control over financial +reporting. +Our audit was conducted for the purpose of forming an opinion on the consolidated financial +statements taken as a whole. The accompanying Schedule II is presented for purposes of additional +analysis and is not a required part of the basic financial statements. The information for each of +the two years ended September 30, 2006 included in this schedule has been subjected to the auditing +procedures applied in our audits of the basic financial statements as of September 30, 2006 and +2005 and for each of the two years in the period ended September 30, 2006 and, in our opinion, is +fairly stated in all material respects in relation to the basic financial statements taken as a +whole. +-39- +Table of Contents +As noted +in Note 8, the Company adopted SFAS No. 123R, Share-Based Payment, effective July 1, 2005. +/s/ Grant Thornton LLP +Cincinnati, Ohio +November 27, 2006 +-40- +Table of Contents +Report of Independent Registered Public Accounting Firm +Board of Directors and Shareholders of +Meridian Bioscience, Inc. +We have audited management’s assessment, included in the accompanying Report of Management on +Internal Control over Financial Reporting, that Meridian Bioscience, Inc. (an Ohio Corporation) and +subsidiaries (the Company) maintained effective internal control over financial reporting as of +September 30, 2006, based on criteria established in Internal Control — Integrated Framework issued +by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s +management is responsible for maintaining effective internal control over financial reporting and +for its assessment of the effectiveness of internal control over financial reporting. Our +responsibility is to express an opinion on management’s assessment and an opinion on the +effectiveness of the company’s internal control over financial reporting based on our audit. +We conducted our audit in accordance with the standards of the Public Company Accounting Oversight +Board (United States). Those standards require that we plan and perform the audit to obtain +reasonable assurance about whether effective internal control over financial reporting was +maintained in all material respects. Our audit included obtaining an understanding of internal +control over financial reporting, evaluating management’s assessment, testing and evaluating the +design and operating effectiveness of internal control, and performing such other procedures as we +considered necessary in the circumstances. We believe that our audit provides a reasonable basis +for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable +assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in accordance with generally accepted accounting principles. A +company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; (2) provide reasonable assurance that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of the company +are being made only in accordance with authorizations of management and directors of the company; +and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized +acquisition, use, or disposition of the company’s assets that could have a material effect on the +financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are +subject to the risk that controls may become inadequate because of changes in conditions, or that +the degree of compliance with the policies or procedures may deteriorate. +-41- +Table of Contents +In our opinion, management’s assessment that Meridian Bioscience, Inc. and subsidiaries maintained +effective internal control over financial reporting as of September 30, 2006, is fairly stated, in +all material respects, based on the COSO criteria. Also, in our opinion, Meridian Bioscience, Inc. +and subsidiaries maintained, in all material respects, effective internal control over financial +reporting as of September 30, 2006, based on the COSO criteria. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), the consolidated balance sheets of Meridian Bioscience, Inc. and +subsidiaries as of September 30, 2006 and 2005 and the related consolidated statements of +operations, shareholders’ equity, and cash flows for each of the two years in the period ended +September 30, 2006, and our report dated November 27, 2006 expressed an unqualified opinion on +those financial statements. +/s/ Grant Thornton LLP +Cincinnati, Ohio +November 27, 2006 +-42- +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of Meridian Bioscience, Inc.: +In our opinion, the consolidated statements of operations, shareholders’ equity and cash flows +listed in the accompanying index present fairly, in all material respects, the results of +operations and cash flows of Meridian Bioscience, Inc. and its subsidiaries for the year ended +September 30, 2004, 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 and financial statement +schedule based on our audit. We conducted our audit of these statements in accordance with the +standards of the Public Company Accounting Oversight Board (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, 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. +/s/ PricewaterhouseCoopers LLP +Cincinnati, Ohio +November 12, 2004, except for Note 12, as to which the date is December 6, 2005 +-43- +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2006 +2005 +2004 +Net Sales +$ +108,413 +$ +92,965 +$ +79,606 +Cost of Sales +43,742 +38,184 +33,949 +Gross Profit +64,671 +54,781 +45,657 +Operating Expenses: +Research and development +4,799 +3,866 +4,377 +Selling and marketing +16,530 +14,995 +12,565 +General and administrative +16,461 +15,704 +14,057 +Total operating expenses +37,790 +34,565 +30,099 +Operating Income +26,881 +20,216 +14,658 +Other Income (Expense): +Interest income +1,123 +43 +31 +Interest expense +(128 +) +(770 +) +(1,557 +) +Other, net +177 +107 +63 +Total other income (expense) +1,172 +(620 +) +(1,463 +) +Earnings Before Income Taxes +28,053 +19,596 +13,195 +Income Tax Provision +9,728 +7,031 +4,010 +Net Earnings +$ +18,325 +$ +12,565 +$ +9,185 +Earnings Per Share Data: +Basic earnings per common share +$ +0.70 +$ +0.54 +$ +0.41 +Diluted earnings per common share +0.68 +0.52 +$ +0.40 +Common shares used for basic earnings per common share +26,088 +23,474 +22,294 +Effect of dilutive stock options +688 +630 +595 +Common shares used for diluted earnings per common share +26,776 +24,104 +22,889 +Dividends declared per common share +$ +0.425 +$ +0.310 +$ +0.260 +Anti-dilutive Securities: +Common share options +21 +1 +218 +Convertible debentures +186 +253 +1,532 +All share and per share data has been adjusted for the three-for-two stock split that occurred +on September 2, 2005. +The accompanying notes are an integral part of these consolidated financial statements. +-44- +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2006 +2005 +2004 +Cash Flows From Operating Activities +Net earnings +$ +18,325 +$ +12,565 +$ +9,185 +Non-cash items: +Depreciation of property, plant and equipment +2,717 +2,597 +2,615 +Amortization of intangible assets and deferred issuance costs +2,572 +1,655 +1,462 +Deferred income taxes +42 +(279 +) +506 +Stock compensation expense +1,082 +279 +126 +(Gain) loss on disposition of fixed assets +38 +(7 +) +(37 +) +Change in current assets, net of acquisition +(3,133 +) +(991 +) +(3,370 +) +Change in current liabilities, net of acquisition +920 +2,455 +1,683 +Other, net +(408 +) +(87 +) +483 +Net cash provided by operating activities +22,155 +18,187 +12,653 +Cash Flows From Investing Activities +Earnout payments +(1,494 +) +(678 +) +(456 +) +Acquisitions of property, plant and equipment +(3,120 +) +(2,590 +) +(2,385 +) +Proceeds from dispositions of property, plant and equipment +47 +14 +68 +Acquisition of OEM Concepts, Inc. +— +(6,383 +) +— +Purchases of short-term investments +(6,000 +) +— +— +Sales of short-term investments +2,000 +— +— +Other intangibles acquired +(122 +) +(10 +) +(270 +) +Net cash used in investing activities +(8,689 +) +(9,647 +) +(3,043 +) +Cash Flows From Financing Activities +Net activity on revolving credit facility +— +— +(463 +) +Issuance of debt obligations +— +— +930 +Repayment of debt obligations +(790 +) +(3,061 +) +(5,612 +) +Debt issuance costs paid +— +— +(311 +) +Dividends paid +(11,095 +) +(7,200 +) +(5,793 +) +Proceeds and tax benefits from exercises of stock options +1,660 +3,302 +1,458 +Proceeds from issuance of common shares +— +29,925 +— +Common share issuance costs +— +(345 +) +— +Other +— +(3 +) +(36 +) +Net cash provided by (used in) financing activities +(10,225 +) +22,618 +(9,827 +) +Effect of Exchange Rate Changes on Cash and Equivalents +22 +(56 +) +117 +Net Increase (Decrease) in Cash and Equivalents +3,263 +31,102 +(100 +) +Cash and Equivalents at Beginning of Period +33,085 +1,983 +2,083 +Cash and Equivalents at End of Period +$ +36,348 +$ +33,085 +$ +1,983 +The accompanying notes are an integral part of these consolidated financial statements. +-45- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2006 +2005 +Assets +Current Assets: +Cash and equivalents +$ +36,348 +$ +33,085 +Short term investments +4,000 +— +Accounts receivable, less allowances of $408 in 2006 and $360 in 2005 +19,645 +17,366 +Inventories +17,680 +16,785 +Prepaid expenses and other current assets +2,109 +1,666 +Deferred income taxes +1,387 +1,258 +Total current assets +81,169 +70,160 +Property, Plant and Equipment, at Cost: +Land +701 +693 +Buildings and improvements +15,963 +15,510 +Machinery, equipment and furniture +22,902 +21,053 +Construction in progress +870 +433 +Subtotal +40,436 +37,689 +Less-accumulated depreciation and amortization +22,629 +20,229 +Net property, plant and equipment +17,807 +17,460 +Other Assets: +Deferred debenture offering costs, net +106 +164 +Goodwill +9,864 +8,779 +Other intangible assets, net +10,816 +13,249 +Restricted cash +1,000 +600 +Other assets +193 +157 +Total other assets +21,979 +22,949 +Total assets +$ +120,955 +$ +110,569 +The accompanying notes are an integral part of these consolidated financial statements. +-46- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2006 +2005 +Liabilities and Shareholders’ Equity +Current Liabilities: +Current portion of long-term debt +$ +— +$ +556 +Accounts payable +3,671 +2,949 +Accrued payroll costs +7,896 +7,707 +Purchase business combination liability +937 +1,313 +Other accrued expenses +3,955 +3,993 +Income taxes payable +4,158 +3,273 +Total current liabilities +20,617 +19,791 +Long-term Obligations: +Bank debt +Convertible subordinated debentures +— +233 +1,803 +2,451 +Deferred Income Taxes +3,758 +4,326 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,500,000 shares authorized, none issued +— +— +Common shares, no par value, 50,000,000 shares authorized, 26,157,185 +and +25,940,080 shares issued +Treasury stock, at cost, zero and 12,450 shares +— +(32 +) +Additional paid-in capital +74,950 +71,568 +Retained earnings +19,917 +12,687 +Accumulated other comprehensive loss +(90 +) +(455 +) +Total shareholders’ equity +94,777 +83,768 +Total liabilities and shareholders’ equity +$ +120,955 +$ +110,569 +The accompanying notes are an integral part of these consolidated financial statements. +-47- +Table of Contents +CONSOLIDATED +STATEMENTS OF SHAREHOLDERS’ EQUITY (Dollars and shares in +thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Additional +Accumulated Other +Common +Shares Held +Treasury +Paid-in +Retained +Comprehensive +Comprehensive +Shares Issued +in Treasury +Stock +Capital +Earnings +Income (Loss) +Income (Loss) +Total +Balance at September 30, 2003 +22,094 +(12 +) +$ +(32 +) +$ +24,176 +$ +3,930 +$ +(590 +) +$ +27,484 +Cash dividends paid — $0.26 per share +— +— +— +— +(5,793 +) +— +(5,793 +) +Exercise of stock options, net of tax +363 +— +— +1,670 +— +— +1,670 +Stock compensation expense +— +— +— +126 +— +— +126 +Cost of shelf registration statement +— +— +— +(36 +) +— +— +(36 +) +Comprehensive income: +Net earnings +— +— +— +— +9,185 +— +$ +9,185 +9,185 +Foreign currency translation adjustment +— +— +— +— +— +296 +296 +296 +Comprehensive income +$ +9,481 +Balance at September 30, 2004 +22,457 +(12 +) +(32 +) +25,936 +7,322 +(294 +) +32,932 +Cash dividends paid — $0.31 per share +— +— +— +— +(7,200 +) +— +(7,200 +) +Exercise of stock options, net of tax +575 +— +— +3,956 +— +— +3,956 +Stock compensation expense +— +— +— +279 +— +— +279 +Debenture conversions +1,108 +— +— +11,817 +— +— +11,817 +Common share offering, net +1,800 +— +— +29,580 +— +— +29,580 +Comprehensive income: +Net earnings +— +— +— +— +12,565 +— +$ +12,565 +12,565 +Foreign currency translation adjustment +— +— +— +— +— +(161 +) +(161 +) +(161 +) +Comprehensive income +$ +12,404 +Balance at September 30, 2005 +25,940 +(12 +) +(32 +) +71,568 +12,687 +(455 +) +83,768 +Cash dividends paid — $0.425 per share +— +— +— +— +(11,095 +) +— +(11,095 +) +Exercise of stock options, net of tax +163 +— +— +1,722 +— +— +1,722 +Stock compensation expense +— +— +— +1,082 +— +— +1,082 +Debenture conversions +66 +— +— +610 +— +— +610 +Retirement of treasury shares +(12 +) +12 +32 +(32 +) +— +— +— +Comprehensive income: +Net earnings +— +— +— +— +18,325 +— +$ +18,325 +18,325 +Hedging activity +— +— +— +— +— +13 +13 +13 +Other comprehensive income tax benefits +— +— +— +— +— +50 +50 +50 +Foreign currency translation adjustment +— +— +— +— +— +302 +302 +302 +Comprehensive income +$ +18,690 +Balance at September 30, 2006 +26,157 +— +$ +— +$ +74,950 +$ +19,917 +$ +(90 +) +94,777 +-48- +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(1) +Summary of Significant Accounting Policies +(a) +Nature of Business - Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +(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 1(g), 1(i), 1(j), 1(l), 7 and 8(b). +(d) +Foreign Currency Translation — 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) +Cash Equivalents — Meridian considers short-term investments with original maturities of 90 +days or less to be cash equivalents. +(f) +Short-term Investments — Auction-rate securities are separately classified as short-term +investments in the consolidated financial statements and are accounted for as +available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt +and Equity Securities . As such, unrealized holding gains and losses are reported as a +component of other comprehensive income until realized. The carrying value of these +securities was equal to their fair value as of September 30, 2006. +-49- +Table of Contents +(g) +Inventories — Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO), except for $5,653,000 of inventory for which cost is +determined on a last-in, first-out basis (LIFO). The FIFO cost of this inventory was +$4,962,000 at September 30, 2006. +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. Such +reserves were $1,158,000 and $556,000 at September 30, 2006 and 2005, respectively. Management +estimates these reserves based on assumptions about future demand and market conditions. If +actual market conditions are less favorable than such estimates, additional inventory +write-downs 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 acquisition date. To date, inventory quantities have remained above +levels on hand at the acquisition date. +(h) +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 +(i) +Intangible Assets and Application of SFAS Nos. 142 and 144 — SFAS No. 142, Goodwill and Other +Intangible Assets, addresses accounting and reporting for acquired goodwill and other +intangible assets. SFAS No. 142 provides that goodwill and other intangible assets with +indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. Meridian performs its annual +impairment review as of June 30, the end of its third fiscal quarter. Meridian has no +intangible assets with indefinite lives other than goodwill. There have been no impairments +from the analyses prepared pursuant to SFAS No. 142. During fiscal 2006, the change in +goodwill was an increase of $1,085,000. This change consisted of an increase related to the +Viral Antigens earnout obligation for fiscal 2006 in the amount of $853,000 (Life Science +operating segment), an increase related to the OEM Concepts earnout obligations for calendar +2005 and 2006 to date in the amount of $265,000 (Life Science operating segment), offset by a +decrease of $33,000 related to recognition of acquired tax benefits (US Diagnostics operating +segment). During fiscal 2005, the change in goodwill was an increase of $3,356,000. This +change consisted of an increase related to the Viral Antigens earnout obligation for fiscal +-50- +Table of Contents +2005 in the amount of $1,313,000 (Life Science operating segment), goodwill recorded related to +the OEM Concepts acquisition in the amount of $2,243,000 (Life Science operating segment), +offset by a decrease of $200,000 related to recognition of acquired tax benefits (US Diagnostics +operating segment). +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2006 and 2005 is as follows (amounts in thousands). +Wtd Avg +2006 +2005 +Amort +Gross +2006 +Gross +2005 +Period +Carrying +Accumulated +Carrying +Accumulated +As of September 30, +(Yrs) +Value +Amortization +Value +Amortization +Core products and cell lines +15 +$ +4,698 +$ +2,023 +$ +4,698 +$ +1,733 +Manufacturing technologies +15 +5,907 +3,743 +5,907 +3,373 +Trademarks, licenses and patents +13 +2,005 +1,545 +1,941 +1,450 +Customer lists and supply +agreements +13 +10,633 +5,116 +11,396 +4,137 +$ +23,243 +$ +12,427 +$ +23,942 +$ +10,693 +The actual aggregate amortization expense for these intangible assets for fiscal 2006 was +$2,560,000, including an impairment charge of $826,000 on a supply agreement discussed below. +The aggregate amortization expense for these intangible assets for fiscal 2005 and fiscal 2004 +was $1,563,000 and $1,204,000, respectively. The estimated aggregate amortization expense for +these intangible assets for each of the five succeeding fiscal years is as follows: fiscal 2007 +— $1,600,000, fiscal 2008 — $1,444,000, fiscal 2009 — $1,343,000, fiscal 2010- $1,305,000 and +fiscal 2011 — $1,232,000. +SFAS No. 144, Accounting for Impairment or Disposal of Long-lived Assets 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 asset’s future cash flows +to its carrying value. If impairment has occurred, it is measured by a fair-value based test. +SFAS No. 144 requires that assets to be disposed of by sale be reported at the lower of carrying +value or fair value, less costs to sell. During fiscal 2006, Meridian determined that the +carrying value of a supply contract related to the Life Science operating segment had become +impaired and recorded such impairment in the amount of $826,000 to general and administrative +expenses. The contract provides for the supply of biological materials to the United States +Department of Defense. Changes in the Department’s Critical Reagents Program lowered the amount +of materials to be supplied under the contract in future periods. The impairment was measured +by comparing the present value of expected future cash flows to the carrying value of the +contract. There have been no events or circumstances indicating that the carrying value of +other such assets may not be recoverable. +-51- +Table of Contents +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 and fixed assets, 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. +(j) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at +the date of sale for estimated rebates that will be claimed by customers. Management +estimates accruals for rebate agreements based on historical statistics, current trends, and +other factors. Changes to the accruals are recorded in the period that they become known. +Meridian’s rebate accruals were $2,181,000 at September 30, 2006 and $1,711,000 at September +30, 2005. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services), or +multiple-deliverable arrangements that include process development work followed by larger-scale +manufacturing (contract manufacturing services). Revenue is recognized based on the nature of +the arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple +Deliverables . Contract research and development services may be performed on a “time and +materials” basis or “fixed fee” basis. For “time and materials” arrangements, revenue is +recognized as services are performed and billed. For “fixed fee” arrangements, revenue is +recognized upon completion and acceptance by the customer. For contract manufacturing services, +revenue is recognized upon delivery of product and acceptance by the customer. +Trade accounts receivable are recorded in the accompanying consolidated balance sheet at the +invoiced amount less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents Meridian’s estimate of probable credit losses and is based on historical +write-off experience. The allowance for doubtful accounts and related metrics, such as days +sales outstanding, are reviewed monthly. Accounts with past due balances over 90 days are +reviewed individually for collectibility. Customer invoices are charged off against the +allowance when Meridian feels it is probable the receivable will not be recovered. +-52- +Table of Contents +(k) +Research and Development Costs — Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, and costs +for facilities and equipment. +(l) +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. Meridian prepares estimates of +permanent and temporary differences between income for financial reporting purposes and income +for tax purposes. These differences are adjusted to actual upon filing of Meridian’s tax +returns, typically occurring in the third and fourth quarters of the current fiscal year for +the preceding fiscal year’s estimates. See Note 7. +(m) +Stock-based Compensation — Meridian accounts for stock-based compensation pursuant to SFAS +No. 123R, Share-Based Payment , which was adopted as of July 1, 2005. SFAS No. 123R requires +recognition of compensation expense for all share-based awards made to employees, based upon +the fair value of the share-based award on the date of the grant. Meridian elected to adopt +the provisions of SFAS No. 123R, utilizing the modified prospective method, which requires +compensation expense be measured and recognized based on grant-date fair value for stock +option awards granted after July 1, 2005 and portions of stock options awards granted prior to +July 1, 2005, but not vested as of July 1, 2005. See Note 8(b). +(n) +Derivative financial instruments — Meridian accounts for its derivative financial instruments +in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging +Activities,” as amended. These instruments are designated as cash flow hedges, and therefore, +the effective portion of the net gain or loss on the derivative instrument is reported as a +component of other comprehensive income and reclassified into earnings in the same period or +periods during which the hedged transaction affects earnings. For the ineffective portion of +the hedge, gains or losses are charged to earnings in the current period. All derivative +instruments are recognized as either assets or liabilities at fair value in the consolidated +balance sheets. See Note 6. +(o) +Comprehensive income — Comprehensive income represents the net change in shareholders’ equity +during a period from sources other than transactions with shareholders. Meridian’s +comprehensive income is comprised of net earnings, foreign currency translation, and changes +in the fair value of forward exchange contracts accounted for as cash flow hedges. +-53- +Table of Contents +(p) +Supplemental Cash flow Information — Supplemental cash flow information is as follows for fiscal +2006, 2005 and 2004 (amounts in thousands): +Year Ended September 30, +2006 +2005 +2004 +Cash paid for - +Income taxes +$ +6,734 +$ +7,067 +$ +3,722 +Interest +106 +493 +1,334 +Non-cash items - +Viral Antigens earnout obligation +853 +1,313 +678 +OEM Concepts earnout obligation +84 +— +— +Debenture conversions +648 +11,737 +— +(q) +Recent Accounting Pronouncements — During July 2006, the Financial Accounting Standards Board +issued Interpretation 48, “Accounting for Uncertainty in Income Taxes: An Interpretation of +FASB Statement No. 109”. Interpretation 48 establishes criteria that an individual tax +position would have to meet for some or all of the benefit of that position to be recognized +in an entity’s financial statements. Interpretation 48 also establishes disclosure criteria +for tax contingency reserves. Meridian will be required to adopt Interpretation 48 in fiscal +2008. Meridian has not yet determined the impact that adoption will have on its financial +statements. +During September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin +No. 108. SAB 108 requires registrants to evaluate prior period misstatements that were +previously deemed to be immaterial in terms of materiality for current period results. +Registrants are required to provide full disclosure on any required adjustments. Meridian does +not expect the impact of SAB 108 to have a significant impact on its results of operations or +financial condition. +(r) +Shipping and Handling costs — Shipping and handling costs invoiced to customers are included +in net sales. Cost to distribute products to customers, including inbound freight costs, +warehousing costs, and other shipping and handling activities are included in cost of goods +sold. +(s) +Reclassifications — Certain reclassifications have been made to the prior year financial +statements to conform to the current year presentation. +(2) OEM Concepts Acquisition +On January 31, 2005, Meridian acquired all of the outstanding common shares of OEM Concepts, Inc. +for $6,590,000 in cash, including transaction costs. OEM Concepts is a leading producer and +distributor of highly specialized biologicals for the diagnostic, pharmaceutical, and research +markets. The purchase agreement provides for additional consideration, up to a maximum remaining +amount of $2,005,000, contingent upon OEM Concepts’ future calendar-year sales and gross profit +through December 31, 2008. Earnout consideration, if any, +-54- +Table of Contents +is payable each year, following the period earned. Earnout consideration in the amount of $181,000 +related to calendar 2005 was paid during fiscal 2006. Earnout consideration in the amount of +$84,000 related to the nine-month period ended September 30, 2006 has been accrued in the +accompanying consolidated balance sheet. The initial $6,590,000 purchase price and transaction +costs were funded with bank debt under Meridian’s existing line of credit facility and cash on +hand. +The acquisition has been accounted for as a purchase, and the results of operations of OEM Concepts +are included in Meridian’s consolidated results of operations from February 1, 2005 forward. A +summary of the purchase price allocation follows. This purchase price allocation reflects the fair +values of acquired long-lived assets, including supply agreements for $3,466,000 (see Note 1(i) +regarding impairment of one of these supply agreements), cell lines for $1,499,000, and customer +relationships for $562,000. The estimated fair market value of intangibles acquired was based on +discounted future cash flows. Intangible assets other than supply agreements and goodwill have an +estimated useful life of 15 years. Supply agreements have useful lives based on the terms of the +agreements, between 5 and 10 years. Future earnout payment consideration, if any, will be +allocated to goodwill, and will be recorded in the period in which it is earned and becomes +payable. +Acquisition details are as follows (amounts in thousands): +Purchase price, including transaction costs +$ +6,590 +Fair value of assets acquired - +Cash +$ +207 +Accounts receivable +505 +Inventory +643 +Prepaid expenses +47 +Property, plant and equipment, net +145 +Specific intangibles +5,527 +Goodwill +2,243 +Other assets +9 +9,326 +Fair value of liabilities assumed - +Debt and capital lease obligations +233 +Deferred income tax liabilities +2,062 +Other liabilities +441 +2,736 +Fair value of net assets acquired +$ +6,590 +-55- +Table of Contents +(3) Inventories +Inventories are comprised of the following (amounts in thousands): +As of September 30, +2006 +2005 +Raw materials +$ +3,973 +$ +4,059 +Work-in-process +5,139 +4,888 +Finished goods +8,568 +7,838 +$ +17,680 +$ +16,785 +(4) Bank Credit Arrangements +Meridian has a $25,000,000 credit facility with a commercial bank. This facility includes +$2,500,000 of term debt and capital lease capacity and a $22,500,000 revolving line of credit which +bears interest at a LIBOR based rate, and expires in September 2007. This line of credit is +collateralized by Meridian’s business assets except for those of non-domestic subsidiaries. There +were no borrowings outstanding on this line of credit at September 30, 2006 or September 30, 2005. +Available borrowings under this line of credit were $22,500,000 at September 30, 2006. 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 of $1,000,000 pursuant to this bank credit arrangement. +(5) Long-Term Debt Obligations +Long-term debt obligations are comprised of the following (amounts in thousands): +As of September 30, +2006 +2005 +Convertible subordinated debentures, unsecured, 5% +interest payable semi-annually on March 1 and September +1, principal due September 1, 2013 +1,803 +2,451 +Bank term loans, denominated in Euro, interest based on +Euro LIBOR (2.89% at September 30, 2005) +— +789 +Total debt obligations +1,803 +3,240 +Less current portion +— +(556 +) +Long-term debt obligations +1,803 +2,684 +There are no maturities of long-term debt obligations until 2013. +-56- +Table of Contents +As of September 30, 2004, Meridian had outstanding a total of $16,000,000 principal amount of two +series of convertible subordinated debentures. The 7% debentures were convertible, at the option +of the holder, into common shares at a price of $10.727. The 5% debentures mature September 1, +2013 and are convertible, at the option of the holder, into common shares at a price of $9.67. +Holders began converting debentures during the first quarter of fiscal 2005, and such conversions +continued throughout fiscal 2006. During December 2004, Meridian also called for redemption +$4,000,000 of its 7% debentures. This redemption was completed on January 14, 2005. After +conversions, the actual amount of this redemption was $603,000. Subsequently, during May 2005, +Meridian called for redemption $2,500,000 of its 7% debentures. This redemption was completed on +June 3, 2005. After conversions, the actual amount of this redemption was $807,000. On June 14, +2005, the Company announced a call for redemption on July 7, 2005, all remaining outstanding 7% +convertible subordinated debentures at par plus accrued interest. After conversions, the actual +amount of this redemption was $402,000. +The following table summarizes the conversion and redemption activity for fiscal 2005 and 2006 +(amounts in thousands, except share amounts): +7% Series +5% Series +Total +Outstanding at September 30, 2004 +$ +12,111 +$ +3,889 +$ +16,000 +Converted to 1,108,494 common shares +(10,299 +) +(1,438 +) +(11,737 +) +Redeemed +(1,812 +) +— +(1,812 +) +Outstanding at September 30, 2005 +$ +— +$ +2,451 +$ +2,451 +Converted to 67,004 common shares +— +(648 +) +(648 +) +Outstanding at September 30, 2006 +$ +— +$ +1,803 +$ +1,803 +The aggregate fair value of the 5% convertible subordinated debentures is estimated to be +$4,384,000, based on limited trading activity at September 30, 2006. The accompanying consolidated +balance sheets include offering costs, which have been deferred and are being amortized to interest +expense over the life of the debentures. The net amount of such costs was $106,000 and $164,000 at +September 30, 2006 and 2005 (net of accumulated amortization of $206,000 and $148,000, +respectively). +(6) Hedging Transactions +Meridian has historically entered into forward exchange contracts that were not designated as +hedging instruments under SFAS No. 133, but rather, were used to offset the earnings impact related +to the variability in the US dollar/Euro exchange rate on certain inter-company sales transactions +denominated in the Euro currency. Changes in the fair values of these contracts were immediately +recognized in earnings to offset the re-measurement of inter-company receivables denominated in the +Euro currency. +During fiscal 2006, Meridian began designating newly executed forward exchange contracts as cash +flow hedges under SFAS No. 133. The purpose of these contracts is to hedge cash flows related to +forecasted inter-company +-57- +Table of Contents +sales denominated in the Euro currency. The following table presents Meridian’s hedging portfolio +as of September 30, 2006 (amounts in thousands). +Notional +Contract +Estimated Fair +Average +Amount +Value +Value +Exchange Rate +Maturity +€ 2,100 +$ +2,696 +$ +2,678 +1.2838 +FY 2007 +At September 30, 2006, unrealized gains of $13,000 were included in accumulated other comprehensive +income in the consolidated balance sheet. This amount is expected to be reclassified into net +earnings within the next twelve months. The estimated fair value of forward contract outstanding +at September 30, 2006 is based on quoted amounts provided by the counterparties to these contracts. +-58- +Table of Contents +(7) Income Taxes +(a) Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2006, 2005 and 2004 were as follows (amounts in thousands): +Year Ended September 30, +2006 +2005 +2004 +Earnings before income taxes - +Domestic +$ +25,352 +$ +17,531 +$ +11,280 +Foreign +2,701 +2,065 +1,915 +Total +$ +28,053 +$ +19,596 +$ +13,195 +Provision (credit) for income taxes - +Federal - +Current provision +$ +8,902 +$ +6,550 +$ +2,907 +Temporary differences +Fixed asset basis differences and depreciation +(65 +) +(57 +) +398 +Intangible asset basis differences and amortization +(588 +) +(227 +) +(97 +) +Currently non-deductible expenses and reserves +(93 +) +(503 +) +54 +Stock based compensation +(339 +) +(65 +) +(35 +) +Other, net +2 +(163 +) +(152 +) +Subtotal +7,819 +5,535 +3,075 +State and local +814 +600 +194 +Foreign +1,095 +896 +741 +Total +$ +9,728 +$ +7,031 +$ +4,010 +(b) The following is a 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): +Year Ended September 30, +2006 +2005 +2004 +Computed income taxes at statutory rate +$ +9,819 +35.0 +% +$ +6,859 +35.0 +% +$ +4,513 +34.2 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +685 +2.4 +500 +2.5 +346 +2.6 +Federal and state tax credits +(88 +) +(0.3 +) +(166 +) +(0.8 +) +(285 +) +(2.2 +) +Subpart F income taxes +— +— +117 +0.6 +115 +0.9 +Foreign taxes +145 +0.5 +19 +0.1 +174 +1.3 +Extra territorial income exclusion +(275 +) +(1.0 +) +(306 +) +(1.6 +) +(267 +) +(2.0 +) +Valuation allowance +— +— +— +— +(85 +) +(0.6 +) +Qualified domestic production incentives +(236 +) +(0.8 +) +— +— +— +— +Tax exempt interest +(281 +) +(1.0 +) +— +— +— +— +Other, net +(41 +) +(0.1 +) +8 +0.1 +(501 +) +(3.8 +) +$ +9,728 +34.7 +% +$ +7,031 +35.9 +% +$ +4,010 +30.4 +% +-59- +Table of Contents +(c) The components of net deferred tax liabilities were as follows (amounts in thousands): +As of September 30, +2006 +2005 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +1,465 +$ +1,333 +State tax credit carryforwards +90 +154 +Net operating loss carryforwards +890 +943 +Foreign tax credits +3 +162 +Other +635 +222 +Subtotal +3,083 +2,814 +Less valuation allowance +888 +927 +Deferred tax assets +2,195 +1,887 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(830 +) +(600 +) +Intangible asset basis differences and amortization +(3,190 +) +(3,841 +) +Inventory basis differences +(89 +) +(93 +) +Other +(457 +) +(421 +) +Deferred tax liabilities +(4,566 +) +(4,955 +) +Net deferred tax liabilities +$ +(2,371 +) +$ +(3,068 +) +For income tax purposes, Meridian has tax benefits related to operating loss carryforwards in the +countries of Belgium and France. These net operating loss carryforwards have no expiration date. +Meridian has recorded deferred tax assets for these carryforwards, inclusive of valuation +allowances in the amount of $2,000 at September 30, 2006. Valuation allowances for pre-acquisition +net operating loss carryforwards amount to $571,000, while valuation allowances for +post-acquisition net operating loss carryforwards are $317,000. If tax benefits are recognized in +future years for pre-acquisition operating losses, such benefits will be allocated to reduce +goodwill and acquired intangible assets. The valuation allowance recorded against deferred tax +assets at September 30, 2005 was $927,000 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. +-60- +Table of Contents +Undistributed earnings re-invested indefinitely in the Italian operation were approximately +$10,397,000 at September 30, 2006. US deferred tax liabilities of approximately $3,977,000 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. +On June 30, 2005, Ohio’s governor signed Biennial Budget Bill, Am. Sub. H.B. 66. This bill +replaces Ohio’s corporate income and personal property taxes with a commercial activity tax based +on gross receipts, phased in over five years beginning July 1, 2005. Meridian has evaluated the +impact of this new legislation on its existing deferred tax balances. The carrying value of +existing deferred taxes was not materially affected by the enactment of this legislation. +From time to time, Meridian’s tax returns in Federal, state, and foreign jurisdictions are examined +by the applicable tax authorities. Meridian’s tax provisions take into consideration the +judgmental nature of certain tax positions through the establishment of reserves for differences +between the probable tax determinations and the “as filed” tax positions of certain assets and +liabilities. To the extent that tax benefits result from the completion of these examinations or +the passing of statutes of limitation, they will affect tax liabilities in the period known. +Meridian believes that the results of any tax authority examinations would not have a significant +adverse impact on financial condition or results of operation. +(8) Employee Benefits +(a) +Savings and Investment Plan — Meridian has a profit sharing and retirement savings plan +covering substantially all full-time US 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 $1,066,000, $1,006,000, and +$887,000, during fiscal 2006, 2005 and 2004, respectively. +(b) +Stock-Based Compensation Plans — Meridian has one active stock based compensation plan, the +2004 Equity Compensation plan, which became effective December 7, 2004, as amended (the “2004 +Plan”) and an Employee Stock Purchase Plan (“The ESP Plan”), which became effective October 1, +1997. Effective October 1, 1997, Meridian began selling 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. +Meridian may grant new shares for options for up to 975,000 shares under the 2004 Plan, of which +Meridian has granted 410,408 through September 30, 2006. Options may be granted at exercise +prices not less than 100% of the market value of the underlying common shares on the date of +grant and have maximum terms up to ten years. Vesting schedules are established at the time of +grant and may be set based on future +-61- +Table of Contents +service periods, achievement of performance targets, or a combination thereof. 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 3,604,469 shares under similar plans that have expired. +Meridian early adopted SFAS No. 123R, Share-Based Payment , as of July 1, 2005. SFAS No. 123R +requires recognition of compensation expense for all share-based payments made to employees, +based upon the fair value of the share-based payment on the date of the grant. Meridian elected +to adopt the provisions of SFAS No. 123R, pursuant to the modified prospective method, which +requires compensation expense be measured and recognized based on grant-date fair value for +stock option awards granted after July 1, 2005 and portions of stock option awards granted prior +to July 1, 2005, but not vested as of July 1, 2005. +Prior to July 1, 2005, Meridian accounted for its stock based compensation plans pursuant to the +intrinsic value method in APB No. 25. Had compensation cost for these plans been determined +using the fair value method provided in SFAS No. 123R, Meridian’s net earnings for fiscal 2005 +and fiscal 2004 would have been $12,303,000 and $8,894,000, respectively, compared to reported +amounts of $12,565,000 and $9,185,000, respectively. Basic earnings per share for fiscal 2005 +and fiscal 2004 would have been $0.53 and $0.40, respectively, compared to reported amounts of +$0.54 and $0.41, respectively. Diluted earnings per share for fiscal 2005 and fiscal 2004 would +have been $0.51 and $0.39, respectively, compared to reported amounts of $0.52 and $0.40, +respectively. +The amount of stock-based compensation expense reported was $1,082,000, $279,000 and $126,000 in +fiscal 2006, fiscal 2005, and fiscal 2004, respectively. The total income tax benefit +recognized in the income statement for these stock-based compensation arrangements was $339,000, +$65,000, and $35,000, for fiscal 2006, fiscal 2005, and fiscal 2004, respectively. Meridian +expects stock compensation expense for unvested options as of September 30, 2006 to be +$1,433,000, which will be recognized during fiscal years 2007 through 2011. +SFAS No. 123R requires that Meridian recognize compensation expense only for the portion of +shares that the Company expects to vest. As such, the Company applies estimated forfeiture +rates to its compensation expense calculations. These rates have been derived using historical +turnover data for the last five years, stratified by several employee groups. Using the same +turnover data, on July 1, 2005, the Company recorded a cumulative forfeiture adjustment of +$46,000 related to options for which expense was recorded under APB 25. Should the actual +forfeiture rates differ from these estimates, adjustments to compensation expense will be +required. +The Company has elected to use the Black-Scholes option pricing model to determine grant-date +fair value, with the following assumptions for fiscal 2006: (i) expected share price volatility +based on implied volatility calculations using options for Meridian and a peer-group of +companies; (ii) expected life of +-62- +Table of Contents +options based on contractual lives, employees’ historical exercise behavior and employees’ +historical post-vesting employment termination behavior; (iii) risk-free interest rates based on +treasury rates that correspond to the expected lives of the options; and (iv) dividend yield +based on the expected yield on underlying Meridian common stock. +Year Ended September 30, +2006 +2005 +2004 +Risk-free interest rates +4.3%-4.4 +% +3.8%-4.3 +% +3.3%-4.2 +% +Dividend yield +1.55 +% +2.3%-5.4 +% +3.0%-4.1 +% +Life of option +5.70-7.50 yrs. +6.25-7.00 yrs. +7 yrs. +Share price volatility +46 +% +52%-54 +% +54%-56 +% +Forfeitures (by employee group) +0%-20 +% +5%-38 +% +— +A summary of the status of Meridian’s stock option plans at September 30, 2006 and changes +during the year is presented in the table and narrative below: +Wtd Avg +Wtd Avg +Exercise +Remaining +Aggregate +Shares +Price +Life (Yrs) +Intrinsic Value +Outstanding beginning of +period +1,253,392 +$ +5.80 +Grants +207,754 +21.34 +Exercises +(163,585 +) +6.05 +Forfeitures +(16,118 +) +10.44 +Cancellations +(1,646 +) +5.70 +Outstanding end of period +1,279,797 +$ +8.22 +5.9 +$ +19,582,000 +Exercisable end of period +512,067 +$ +5.44 +4.2 +$ +9,253,000 +A summary of the status of Meridian’s nonvested shares as of September 30, 2006, and changes +during the year ended September 30, 2006, is presented below: +Weighted- +Average Grant +Date Fair +Shares +Value +Nonvested beginning of period +659,406 +$ +2.56 +Granted +207,754 +9.81 +Vested +(83,312 +) +3.55 +Forfeited +(16,118 +) +8.67 +Nonvested end of period +767,730 +$ +4.39 +-63- +Table of Contents +The weighted average grant-date fair value of options granted was $9.81, $4.82, and $2.83 for +fiscal 2006, 2005, and 2004, respectively. The total intrinsic value of options exercised was +$2,648,000 and $3,659,000, +for fiscal 2006 and 2005, respectively. The total grant-date fair value of options that vested +during fiscal 2006 and 2005 was $296,000 and $235,000, respectively. +Cash received from options exercised was $990,000, $3,302,000, and $1,458,000 for fiscal 2006, +2005, and 2004, respectively. Tax benefits realized and recorded to additional paid-in capital +from option exercises totaled $732,000, $654,000, and $212,000 for fiscal 2006, 2005, and 2004 +respectively. +(9) Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, development, +manufacturing, marketing and sales organization with primary emphasis in the field of life science. +Meridian’s principal businesses are (i) the development, manufacture and distribution of +diagnostic test kits primarily for certain respiratory, gastrointestinal, viral and parasitic +infectious diseases, (ii) the manufacture and distribution of bulk antigens, antibodies, and +reagents used by researchers and other diagnostic manufacturers and (iii) the contract manufacture +of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged +in research for new drugs and vaccines. +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostic test kits in Europe, Africa, and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, +and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies and bioresearch +reagents domestically and abroad. The Life Science operating segment also includes the contract +development and manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Sales to individual customers constituting 10% or more of consolidated net sales were as follows +(dollars in thousands): +Year Ended September 30, +2006 +2005 +2004 +Customer A (US Diagnostics) +$ +20,014 +(18 +%) +$ +15,512 +(17 +%) +$ +12,647 +(16 +%) +Customer B (US Diagnostics) +$ +10,989 +(10 +%) +$ +8,244 +(9 +%) +$ +7,566 +(10 +%) +Combined export sales for the US Diagnostics and Life Science operating segments were $14,728,000, +$12,414,000 and $9,504,000 in fiscal years 2006, 2005 and 2004, respectively. Four products +accounted for 28%, 23%, and 20% of consolidated net sales in fiscal 2006, fiscal 2005, and fiscal +2004, respectively. +-64- +Table of Contents +Approximately 38% of the consolidated accounts receivable balance at September +30, 2006 is largely dependent upon funds from the Italian government. +Significant country information for the European Diagnostics operating segment is as follows (in +thousands). Sales are attributed to the geographic area based on the location from which the +product is shipped to the customer. +Year Ended September 30, +2006 +2005 +2004 +Italy - +Sales +$ +14,439 +$ +8,034 +$ +6,137 +Identifiable assets +11,397 +9,430 +7,133 +Belgium/France/Holland - +Sales +$ +5,388 +$ +9,785 +$ +9,275 +Identifiable assets +2,262 +3,289 +4,129 +-65- +Table of Contents +Segment information for the years ended September 30, 2006, 2005, and 2004 is as follows (amounts +in thousands): +US +European +Life +Diagnostics +Diagnostics +Science +Elim (1) +Total +Fiscal Year 2006 - +Net sales – +Third-party +$ +65,721 +$ +19,828 +$ +22,864 +$ +— +$ +108,413 +Inter-segment +7,171 +— +712 +(7,883 +) +— +Operating income +20,169 +3,540 +3,131 +41 +26,881 +Depreciation and amortization +2,586 +129 +2,574 +— +5,289 +Capital expenditures +2,040 +37 +1,043 +— +3,120 +Total assets +109,678 +12,716 +42,178 +(43,617 +) +120,955 +Fiscal Year 2005 - +Net sales – +Third-party +$ +53,485 +$ +17,818 +$ +21,662 +$ +— +$ +92,965 +Inter-segment +6,553 +15 +804 +(7,372 +) +— +Operating income +13,655 +2,315 +4,142 +104 +20,216 +Depreciation and amortization +2,667 +147 +1,438 +— +4,252 +Capital expenditures +1,477 +89 +1,024 +— +2,590 +Total assets +99,878 +11,552 +39,382 +(40,243 +) +110,569 +Fiscal Year 2004 - +Net sales – +Third-party +$ +48,153 +$ +15,412 +$ +16,041 +$ +— +$ +79,606 +Inter-segment +5,629 +4 +764 +(6,397 +) +— +Operating income +10,266 +2,095 +2,394 +(97 +) +14,658 +Depreciation and amortization +2,969 +186 +922 +— +4,077 +Capital expenditures +1,892 +152 +341 +— +2,385 +Total assets +63,981 +11,686 +25,329 +(31,674 +) +69,322 +(1) +Eliminations consist of intersegment transactions. +-66- +Table of Contents +Year Ended September 30, +2006 +2005 +2004 +Segment operating income +$ +26,881 +$ +20,216 +$ +14,658 +Interest income +1,123 +43 +31 +Interest expense +(128 +) +(770 +) +(1,557 +) +Other, net +177 +107 +63 +Consolidated earnings +before income taxes +$ +28,053 +$ +19,596 +$ +13,195 +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science +operating segments include goodwill of $1,578,000 and $8,286,000, respectively at September 30, +2006, $1,612,000 and $7,167,000, respectively at September 30, 2005, and $1,825,000 and $3,598,000, +respectively at September 30, 2004. +(10) 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 $866,000, $743,000, and $593,000, respectively, for the years +ended September 30, 2006, 2005 and 2004. +During October 2006, Meridian entered into a license agreement with Eiken Chemical Co., Ltd., +that provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious +disease testing in the United States and 18 other geographic markets. The agreement calls for +payments of up to 200,000,000 Japanese Yen (approximately $1,700,000) +based on the achievement of certain milestones and on-going royalties once products are available for commercial sale. Payments made during +product development are expected to occur over a five-year period beginning in fiscal 2007. +(b) +Operating Lease Commitments — Meridian and its subsidiaries are lessees of (i) office and +warehouse buildings in Florida, Maine, Belgium, and France; (ii) automobiles for use by the +direct sales forces in the US and Europe; and (iii) certain office equipment such as facsimile +machines and copier machines across all business units, under operating lease agreements that +expire at various dates. Amounts charged to expense under operating leases were $686,000 and +$621,000 for fiscal 2006 and 2005, respectively. Operating lease +-67- +Table of Contents +commitments for each of the five succeeding fiscal years are as follows: fiscal 2007 — $561,000, +fiscal 2008 — $432,000, fiscal 2009 — $340,000, fiscal 2010 — $267,000, and fiscal 2011 - +$198,000. +(c) +Litigation — Meridian is a party to 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. No provision +has been made in the accompanying consolidated financial statements for these matters. +(d) +Viral Antigens Earnout +The purchase agreement for the Viral Antigens purchase business combination provided for +additional consideration, up to a maximum amount of $8,250,000, contingent upon Viral Antigens’ +earnings through September 30, 2006. The amount of earnout consideration for fiscal 2006 was +$853,000. Earnout consideration was payable each year following the period earned. During +fiscal 2005, 2004, 2003, 2002 and 2001, additional consideration of $1,313,000, $678,000, +$456,000, $1,407,000 and $905,000, respectively, was earned pursuant to this provision. Such +amounts are included in goodwill in the accompanying consolidated balance sheets. +(e) +OEM Concepts Earnout +The purchase agreement for the OEM Concepts purchase business combination provides for +additional consideration, up to a maximum amount of $2,270,000, contingent upon OEM Concepts’ +future calendar year sales and gross profit through December 31, 2008. Earnout consideration in +the amount of $181,000 related to calendar 2005 was paid during fiscal 2006. Earnout +consideration in the amount of $84,000 related to the nine-month period ended September 30, 2006 +has been accrued in the accompanying consolidated balance sheet. Future earnout +consideration, if any, will be allocated to goodwill, and will be recorded in the period in +which it is earned and becomes payable. +-68- +Table of Contents +(11) Quarterly Financial Data (Unaudited) +Amounts are in thousands except per share data. The sum of the earnings per common share and +cash dividends per share may not equal the corresponding annual amounts due to interim quarter +rounding. +For the Quarter Ended in Fiscal 2006 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +24,908 +$ +28,272 +$ +26,583 +28,650 +Gross profit +15,150 +16,580 +16,355 +16,586 +Net earnings +3,962 +4,723 +4,862 +4,778 +Basic earnings per common share +0.15 +0.18 +0.19 +0.18 +Diluted earnings per common share +0.15 +0.18 +0.18 +0.18 +Cash dividends per common share +0.08 +0.115 +0.115 +0.115 +For the Quarter Ended in Fiscal 2005 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +18,842 +$ +23,686 +$ +25,421 +$ +25,016 +Gross profit +11,013 +13,577 +15,686 +14,505 +Net earnings +2,110 +3,196 +3,498 +3,761 +Basic earnings per common share +0.09 +0.14 +0.15 +0.16 +Diluted earnings per common share +0.09 +0.13 +0.14 +0.15 +Cash dividends per common share +0.07 +0.08 +0.08 +0.08 +(12) Public Offering of Common Shares and Stock Split +On September 21, 2005, Meridian issued 1,800,000 common shares at an offering price of $17.50 +per share. The net proceeds from the offering, after underwriting discounts and offering costs +totaling $1,920,000, were approximately $29,580,000. +Underwriting discounts and offering costs incurred in connection with this offering are +reflected as a reduction of shareholders’ equity. +On August 15, 2005, Meridian announced a three-for-two stock split, with fractional shares paid +in cash. The split was effective on September 2, 2005 to shareholders of record as of August +29, 2005. All references in this Annual Report to number of shares and per share amounts +reflect the stock split. +-69- +Table of Contents +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Nothing to report. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2006, an evaluation was completed under the supervision and with the +participation of Meridian’s management, including Meridian’s Chief Executive Officer and Chief +Financial Officer, of the effectiveness of the design and operation of Meridian’s disclosure +controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities +Exchange Act of 1934, as amended. Based on that evaluation, Meridian’s management, including the +CEO and CFO, concluded that Meridian’s disclosure controls and procedures were effective as of +September 30, 2006. There have been no changes in Meridian’s internal control over financial +reporting identified in connection with the evaluation of internal control that occurred during the +fourth fiscal quarter that has materially affected, or is reasonably likely to affect, Meridian’s +internal control over financial reporting, or in other factors that could significantly affect +internal control subsequent to September 30, 2006. +The Company’s internal control report is included in this Annual Report on Form 10-K after Item 8, +under the caption “Management’s Report on Internal Control over Financial Reporting”. +ITEM 9B. +OTHER INFORMATION +Nothing to report. +PART III +The information required by Items 10., 11., 12., 13., and 14., of Part III are incorporated by +reference from the Registrant’s Proxy Statement for its 2007 Annual Shareholders’ Meeting to be +filed with the Commission pursuant to Regulation 14A. The equity compensation plan chart required +by Regulation S-K Item 201(d) appears in and is hereby incorporated by reference from Item 5 +herein. +-70- +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(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. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +not related to Company name change +A +3.2 +Code of Regulations +B +4.1 +Indenture between Meridian and Star Bank, National +Association, as Trustee, relating to Meridian’s 7% +Convertible Subordinated Debentures due 2006 +C +4.2 +Indenture between Meridian and LaSalle Bank +National Association, as Trustee, relating to +Meridian’s 5% Convertible Subordinated Debentures +due 2013 +D +10.5 +Sublicense Agreement dated June 17, 1993 among +Johnson & Johnson, the Scripps Research Institute +and Meridian Concerning certain Patent Rights +E +10.6 +Assignment dated June 17, 1993 from Ortho +Diagnostic Systems Inc. to Meridian concerning +certain Patent Rights +E +10.7 +Agreement dated January 24, 1994 between Meridian +Diagnostics, Inc. and Immulok, Inc. +F +10.8 +Asset Purchase Agreement dated June 24, 1996 +between Cambridge Biotech Corporation and Meridian +Diagnostics, Inc. +G +10.9 +Merger Agreement among Gull Laboratories, Inc., +Meridian Diagnostics, Inc. Fresenius AG and +Meridian Acquisition Co. dated as of September 15, +1998 +H +10.10* +Savings and Investment Plan Prototype Adoption +Agreement +S +10.14* +1994 Directors’ Stock Option Plan +J +10.15* +1996 Stock Option Plan +K +10.16* +Salary Continuation Agreement for John A. Kraeutler +L +10.17 +First Amendment to Merger Agreement Among Gull +Laboratories, Inc., Meridian Diagnostics, Inc. +Fresenius AG and Meridian Acquisition Co. +M +-71- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +10.18* +1999 Directors’ Stock Option Plan +N +10.19* +2004 Equity Compensation Plan +U +10.20 +Dividend Reinvestment Plan +P +10.21 +Merger Agreement dated September 13, 2000 among +Meridian and the Shareholders of Viral Antigens, Inc. +O +10.22 +Loan and Security Agreement among Meridian, certain of +its subsidiaries and Fifth Third Bank Dated as of +September 20, 2001 +R +10.23* +Employment Agreement Dated February 15, 2001 between +Meridian and John A. Kraeutler, including the Addendum +to Employment Agreement dated April 24, 2001 between +Meridian and John A. Kraeutler +R +10.24* +Sample Option Agreement Dated October 1, 2001 +R +10.26* +1996 Stock Option Plan as Amended and Restated +Effective January 23, 2001 +Q +10.27* +Sample Option Agreement Dated November 19, 2002 +S +10.28* +Agreement Concerning Disability and +Death dated September 10, 2003, between Meridian and William J. +Motto +S +10.29* +Professional Services Agreement dated October 1, 2002 +between Meridian and Antonio Interno +S +10.30 +Amended and Restated Revolving Note with Fifth Third +Bank dated August 5, 2004 +T +10.31 +Stock Purchase Agreement of OEM Concepts, Inc. by +Meridian Bioscience, Inc. dated January 31, 2005 +W +10.32* +Sample Option Agreement dated November 10, 2005 +W +10.33* +2004 Equity Compensation Plan, +Amended and Restated through January 19, 2006 +V +10.34* +Fiscal 2006 Officers’ +Compensation Plan, Amended and Restated through January 19, 2006 +V +10.35* +Sample Option Agreement dated November 15, 2006 +Filed herewith +10.36* +Fiscal 2007 Officers’ Performance Compensation Plan +X +13 +2006 Annual Report to Shareholders +(1 +) +-72- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +14 +Code of Ethics +S +21 +Subsidiaries of the Registrant +Filed herewith +23.1 +Consent of Independent Registered Public Accounting Firm +Filed herewith +23.2 +Consent of Independent Registered Public Accounting Firm +Filed herewith +31.1 +Certification of Principal Executive Officer required +by Rule 13a-14(a) +Filed herewith +31.2 +Certification of Principal Financial Officer required +by Rule 13a-14(a) +Filed herewith +32 +Section 1350 Certification of Chief Executive Officer +and Chief Financial Officer +Filed herewith +(1) +Only portions of the 2006 Annual Report to Shareholders specifically are incorporated by +reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2006 Annual Report +to Shareholders has been provided to the Securities and Exchange Commission for informational +purposes only. +* +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 Schedule T-O filed with the Securities and Exchange Commission on October 24, 2003. +E. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 17, 1993. +F. +Meridian’s Forms 8-K filed with the Securities and Exchange Commission on February 8, 1994 +and April 6, 1994. +G. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on July 2, 1996. +H. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on September 17, 1998. +I. +Registration Statement No. 33-89214 on Form S-8 filed with the Securities and Exchange +Commission on April 5, 1995. +J. +Registration Statement No. 33-78868 on Form S-8 filed with the Securities and Exchange +Commission on May 12, 1994. +K. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1996. +L. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1995. +-73- +Table of Contents +M. +Company’s Report on Form 8-K filed with the Securities and Exchange Commission filed on +November 13, 1998. +N. +Meridian’s Proxy Statement filed with the Securities and Exchange Commission on December 21, +1998. +O. +Meridian’s Current Report on Form 8-K dated September 29, 2000. +P. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1999. +Q. +Registration Statement No. 333-75312 on Form S-8 filed with the Securities and Exchange +Commission on December 17, 2001 +R. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2001. +S. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003. +T. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2004. +U. +Meridian’s Proxy Statement filed with the Securities and Exchange Commission on December 23, +2004. +V. +Meridian’s Form 8-K dated January 19, 2006. +W. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2005. +X. +Meridian’s Form 8-K filed November 21,2006 +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: November 29, 2006 +William J. Motto +Chairman of the Board +and Chief Executive Officer +-74- +Table of Contents +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 +William J. Motto +Chairman of the Board of +Directors and Chief Executive +Officer (Principal Executive +Officer) +November 29, 2006 +/s/ John A. Kraeutler +John A. Kraeutler +President and Chief Operating +Officer, Director +November 29, 2006 +/s/ Melissa Lueke +Melissa Lueke +Vice President and Chief +Financial Officer +November 29, 2006 +/s/ James A. Buzard +James A. Buzard +Director +November 29, 2006 +/s/ Gary P. Kreider +Gary P. Kreider +Director +November 29, 2006 +/s/ David C. Phillips +David C. Phillips +Director +November 29, 2006 +/s/ Robert J. Ready +Robert J. Ready +Director +November 29, 2006 +-75- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2006, 2005 and 2004 +Charged +Balance at +to Costs +Balance +Beginning +and +at End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2006: +Allowance for doubtful accounts +$ +360 +$ +132 +$ +(102 +) +$ +18 +$ +408 +Inventory realizability reserves +556 +630 +(29 +) +1 +1,158 +Valuation allowances – deferred taxes +927 +— +(32 +) +(5 +) +890 +Year Ended September 30, 2005: +Allowance for doubtful accounts +$ +479 +$ +(37 +) +$ +(88 +) +$ +6 +$ +360 +Inventory realizability reserves +271 +494 +(369 +) +160 +556 +Valuation allowances – deferred taxes +1,177 +— +(223 +) +(27 +) +927 +Year Ended September 30, 2004: +Allowance for doubtful accounts +$ +471 +$ +18 +$ +(37 +) +$ +27 +$ +479 +Inventory realizability reserves +585 +109 +(408 +) +(15 +) +271 +European restructuring reserves +103 +29 +(137 +) +5 +— +Valuation allowances – deferred taxes +1,457 +(85 +) +(278 +) +83 +1,177 +(a) +Balances reflect the effects of currency translation (fiscal years 2004-2006) and the +acquisition of OEM Concepts January 31, 2005 (fiscal year 2005). +-76- \ No newline at end of file diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/filing_metadata.csv b/raw/filings/0000794172/2006/0000950152-06-009718/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..34a57a79718b3f6b27f1b56e3bfe06f521add77e --- /dev/null +++ b/raw/filings/0000794172/2006/0000950152-06-009718/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2006-11-29,2006-09-30,2006-11-29T16:57:04.000Z,0000950152-06-009718,l23454ae10vk.htm,MERIDIAN BIOSCIENCE 10-K,573746,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015206009718/l23454ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015206009718/,2006,2006,1 diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/item1.txt b/raw/filings/0000794172/2006/0000950152-06-009718/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..1ea727cfc417a3aeeb3e990d0db798edfc89095f --- /dev/null +++ b/raw/filings/0000794172/2006/0000950152-06-009718/item1.txt @@ -0,0 +1,362 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. By +exploiting revenue opportunities across research, clinical diagnostics, and therapeutic areas for +key biologicals, Meridian can maximize revenues, efficiently invest in research and development, +and increase profitability of manufacturing operations. +Operating Segments +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostics test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, +and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes +contract services, including the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines and +contract +-4- +Table of Contents +research and development, which involves growth of proteins as part of the development process. +Financial information for Meridian’s operating segments is included in Note 9 to the consolidated +financial statements contained herein. +Meridian’s primary source of domestic and international revenues continues to be its core +diagnostic products, which represented 79% of consolidated net sales for fiscal 2006. Meridian’s +diagnostic products provide accuracy, simplicity, and speed, enable early diagnosis and treatment +of common, acute medical conditions, and provide for better patient outcomes at reduced costs. +Meridian targets diagnostics for disease states that (i) are acute conditions where rapid diagnosis +impacts patient outcomes, (ii) have opportunistic demographic and disease profiles, (iii) are +underserved by current diagnostic products, and (iv) have difficult sample handling requirements. +This approach has allowed Meridian to establish significant market share in its target disease +states. +Meridian’s website is www.meridianbioscience.com. Meridian makes available its Annual Reports on +Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, +free of charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $65,721,000, $53,485,000 and +$48,153,000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound annual growth rate +of 18%. As of September 30, 2006, the US Diagnostics operating segment had 247 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, +urine, stool, and other body fluids or tissue for the presence of antigens and antibodies of +specific infectious diseases. Specific immunodiagnostic technologies used in Meridian’s diagnostic +test kits include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical +-5- +Table of Contents +stains. The enzyme immunoassay technology is used in multiple test formats; the Premier ä +products for large volume users and the Immuno Card â products for rapid, single test, low +volume users. +Meridian’s diagnostic products are used principally in the detection of respiratory diseases, such +as pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal +diseases, such as stomach ulcers (H. pylori ), antibiotic-associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower 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. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and independent distributors in the US and abroad. The direct sales force consists +of one director of sales, three regional sales managers, one director of corporate health systems, +one director of managed health care, one international distribution manager, 24 technical sales +representatives, and three inside sales representatives. Meridian utilizes two primary independent +distributors in the US, who accounted for 47% of the US Diagnostics operating segment’s third-party +sales in fiscal 2006. Meridian drives the selling effort for key customers where these independent +distributors are utilized. +-6- +Table of Contents +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 five years, Meridian has entered into, extended, or renewed several +exclusive multiple-year contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +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 satisfy customer needs and preferences, +whether in a hospital, commercial or reference laboratory or alternate site location. Meridian’s +product offering consists of approximately 150 medical diagnostic products. Meridian’s products +generally range in list price from $1 per test to $33 per test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, particle +agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. +Enzyme +Immunoassay (EIA)/Rapid tests - 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 some of its multiple test +format, the +Premier TM +product for large volume users, and in some of its single test formats, +the Immuno Card ® , Immuno Card STAT! ® and MONOLERT ® 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 ® 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 ® and MONOSPOT ® 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 ® , +Macro-CON ® and Spin-Con ® . +Research and Development +-7- +Table of Contents +The US Diagnostics operating segment’s research and development organization consists of 13 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2006, 2005 and 2004 were $3,342,000, $3,043,000 and $3,151,000, respectively. This research +and development organization focuses its activities on new applications for Meridian’s existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. Meridian believes that new +product development is a key source for sustaining revenue growth. Meridian’s internally developed +products include Premier ä Platinum HpSA, Premier ä Platinum HpSA PLUS, Premier ä +Toxins A & B, and +Immuno Card Ò Toxins A & B, which together accounted for 36% of +the US Diagnostics operating segment’s third-party sales during fiscal 2006. +We believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. +During October 2006, we executed a license agreement with Eiken Chemical Co., Ltd. that provides +rights to Eiken’s loop-mediated isothermal amplification technology for infectious disease testing +in the United States and 18 other geographic markets. This is Meridian’s first look at molecular +testing for infectious diseases. +During August 2006, we entered into a partnership agreement with the Performance & Life Science +Chemicals Division of Merck KGaA, Darmstadt, Germany and its American company EMD for the +development of new clinical assays. Our first product under this agreement is expected to be +launched during fiscal 2007. +Manufacturing +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. +Intellectual Property, Patents, and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products manufactured by the +US Diagnostics operating segment, including Premier ä Platinum HpSA and Premier ä +Platinum HpSA PLUS. In the absence of patent protection, Meridian may be vulnerable to competitors +who successfully replicate Meridian’s production and manufacturing technologies and processes. +Meridian’s employees are required to execute confidentiality and non-disclosure agreements designed +to protect Meridian’s proprietary products. +-8- +Table of Contents +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic 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. +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 does not require pre-market approval. The 510(k) clearance +process for “substantially equivalent” devices allows product sales to be made in the United States +after the filing of an application and upon clearance by the FDA, typically within 90 to 120 days +after submission. If the FDA requests additional information, the product cannot be sold in the +United States 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 except where the product qualifies for +de novo 510(k). Under the Food and Drug Export Reform and Enforcement Act of 1996 (FDERA), +unapproved FDA products can, under certain conditions, be sold outside of the United States prior +to receiving clearance. +Sales of Meridian’s diagnostic 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. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by the US Diagnostics operating segment and by third-party +vendors. Approximately 66% of third-party sales for fiscal 2006 were products purchased from the +US Diagnostics operating segment. Third-party sales for this operating segment were $19,828,000, +$17,818,000 and $15,412,000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound +annual growth rate of 13%. As of September 30, 2006, +-9- +Table of Contents +the European Diagnostics operating segment had 38 employees, including 16 employees in the direct +sales force. The European Diagnostics operating segment’s sales and distribution network consists +of direct sales forces in Belgium, France, Holland, and Italy, and independent distributors in +other European countries, Africa and the Middle East. The European Diagnostics operating segment +maintains a distribution center in Milan, Italy. The primary markets and customers for this +operating segment are hospitals and reference laboratories. +Due to the introduction of new products and improvements in general market conditions, sales in +local currency, the Euro, increased 15% in fiscal 2006, compared to fiscal 2005, and 11% in fiscal +2005, compared to fiscal 2004. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +The Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services. Third-party sales for this +operating segment were $22,864,000, $21,662,000 and $16,041,000 for fiscal 2006, 2005 and 2004, +respectively, reflecting a compound annual growth rate of 23%, including the OEM Concepts +acquisition discussed below. As of September 30, 2006, the Life Science operating segment had 117 +employees. +Most of the revenue for the Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2006, 18% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that have annual +automatic renewal provisions. Meridian has a long-standing relationship with this customer, and +although there can be no assurances, Meridian intends to renew these supply agreements in the +normal course of business. +The protein production facility serves as an enabling technology for process development and +large-scale manufacturing for biologicals used in new drugs and vaccines. The size of the facility +is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials. +The customer base for this aspect of the Life Science business includes biopharmaceutical and +biotechnology companies, as well as government agencies, such as the National Institutes of Health. +Revenues for the Life Science operating segment, in the normal course of business, may be affected +from quarter to quarter by the timing and nature of arrangements for contract services work, which +may have longer production cycles than bioresearch reagents +-10- +Table of Contents +and bulk antigens and antibodies, as well as buying patterns of major customers. See Note 1(j) to +the Consolidated Financial Statements herein for revenue recognition policies. Meridian’s revenues +for contract services were $2,537,000, $3,053,000, and $1,528,000 in fiscal 2006, 2005, and 2004, +respectively. +Growth Strategies +Growth +strategies for the Life Science operating segment include +(i) development of new product +applications from existing technologies and (ii) acquisition or licensing of biologicals and +technologies for development of new products. Contract manufacturing of proteins and other +biologicals used in research for new drugs and vaccines is an example of a significant new product +application built from Meridian’s existing expertise in manufacturing bulk antigens and reagents +using cell culture techniques. +Markets +The Life Science operating segment is represented by four product-line brands. The BIODESIGN brand +represents monoclonal and polyclonal antibodies, as well as assay reagents. The OEM Concepts brand +represents contract ascites and antibody production services. The Viral Antigens brand represents +viral proteins. The cGMP biologics brand represents contract development and manufacturing +services for drug and vaccine discovery and development. +The customer base for bulk biomedical reagents (BIODESIGN, OEM Concepts, and Viral Antigens brands) +is large and fragmented, and includes other diagnostic manufacturers as well as researchers in +academia and the pharmaceutical and biotechnology industries. The market segments for drug and +vaccine discovery and development are intended to be served via contract manufacturing in the +protein production laboratory discussed above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two different manners +that are designed to complement one another. An internal sales and marketing staff, as well as a +website, have been built to market bulk biomedical reagents directly to a large and fragmented +customer base. The website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific resources have been +dedicated to establish sole-source supply arrangements. For drug and vaccine discovery and +development, management and scientific resources are dedicated to each potential customer. +Research and Development +-11- +Table of Contents +The Life Science operating segment’s research and development organization consists of 7 research +scientists. Research and development expenses for the Life Science operating segment for fiscal +2006, 2005 and 2004 were $1,457,000, $823,000 and $1,226,000, respectively. This research and +development organization focuses its activities on the protein production laboratory, and +developing new biomedical reagents. +Manufacturing and Government Regulation +The proteins that are produced in the protein production facility are intended to be used as +“injectibles”. As such, they are produced under cGMP Regulations for Biologics and Human Drugs +under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +Competition +Diagnostics +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 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 new, high value 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 (acquired by +Siemens in 2006), Quidel Corporation, and Inverness Medical. +Life Science +-12- +Table of Contents +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. Meridian faces competitors, many +of which have greater financial, research and development, sales and marketing, and manufacturing +resources where sole-source supply arrangements do not exist. From time to time, customers may +choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors +such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as Meridian’s protein +production laboratory is also competitive. Important competitive factors include reputation, +customer service, and price. Although the product application for this facility was built from +Meridian’s existing expertise in cell culture manufacturing techniques, Meridian faces competitors +with greater experience in contract manufacturing in a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of Meridian’s businesses. +Meridian’s acquisition objectives are to, among other things, (i) enhance product offerings, (ii) +improve product distribution capabilities, (iii) provide access to new markets, and/or (iv) provide +access to key biologicals or new technologies that lead to new products. +Recent examples of completed acquisitions include Gull Laboratories in fiscal 1999, Viral Antigens +in fiscal 2000, and OEM Concepts in fiscal 2005. The Gull acquisition enhanced product offerings, +expanded sales and distribution capabilities in Europe, and provided the initial access into the +Life Science market for Meridian (through the BIODESIGN business). The Viral Antigens acquisition, +coupled with the opening of the protein production facility, solidified Meridian’s entry into the +Life Science market. The OEM Concepts acquisition strengthened Meridian’s Life Science business by +adding custom ascites manufacturing capabilities and diversifying Meridian’s customer base of major +diagnostic manufacturing companies. +Although Meridian cannot provide any assurance that it will consummate any acquisitions in the +future, Meridian expects that acquisitions will continue to serve as a source of new revenues and +earnings growth in the future. +International Markets +International markets are an important source of revenue for Meridian’s operating segments. For +all operating segments combined, international sales were $34,557,000 or 32% of total fiscal 2006 +sales, $30,232,000 or 33% of total fiscal 2005 sales and $24,916,000 or 31% of total fiscal 2004 +sales. Domestic exports for the US Diagnostics and Life Science operating segments were +$14,728,000, $12,414,000 and $9,504,000 in fiscal +-13- +Table of Contents +2006, 2005 and 2004, respectively. Meridian expects to continue to look to international markets +as a source of new revenues and growth in the future. +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste and has a US EPA +identification number. All hazardous material is manifested and disposed of properly. Meridian is +in compliance with applicable portions of the federal and state hazardous waste regulations and has +never been a party to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/item13.txt b/raw/filings/0000794172/2006/0000950152-06-009718/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..d6f281bbdf85ebd2f80001e2d8f41c78d232137b --- /dev/null +++ b/raw/filings/0000794172/2006/0000950152-06-009718/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions +70 \ No newline at end of file diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/item9a.txt b/raw/filings/0000794172/2006/0000950152-06-009718/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..0657c2bfef15658f00d129a0709e953210f0cc4b --- /dev/null +++ b/raw/filings/0000794172/2006/0000950152-06-009718/item9a.txt @@ -0,0 +1,15 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2006, an evaluation was completed under the supervision and with the +participation of Meridian’s management, including Meridian’s Chief Executive Officer and Chief +Financial Officer, of the effectiveness of the design and operation of Meridian’s disclosure +controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities +Exchange Act of 1934, as amended. Based on that evaluation, Meridian’s management, including the +CEO and CFO, concluded that Meridian’s disclosure controls and procedures were effective as of +September 30, 2006. There have been no changes in Meridian’s internal control over financial +reporting identified in connection with the evaluation of internal control that occurred during the +fourth fiscal quarter that has materially affected, or is reasonably likely to affect, Meridian’s +internal control over financial reporting, or in other factors that could significantly affect +internal control subsequent to September 30, 2006. +The Company’s internal control report is included in this Annual Report on Form 10-K after Item 8, +under the caption “Management’s Report on Internal Control over Financial Reporting”. \ No newline at end of file diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/rp_note.txt b/raw/filings/0000794172/2006/0000950152-06-009718/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2006/0000950152-06-009718/rpt_disclosure.txt b/raw/filings/0000794172/2006/0000950152-06-009718/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..42bcb95a2233b932282074143502f135fc1aaff1 --- /dev/null +++ b/raw/filings/0000794172/2006/0000950152-06-009718/rpt_disclosure.txt @@ -0,0 +1,7 @@ +CERTAIN RELATED PERSON TRANSACTIONS +Todd Motto, the adult son of William J. Motto, is Vice President, Sales and Marketing. Todd Motto received $343,311 in compensation for fiscal 2007. This compensation consisted of base salary of $168,273, bonus of $131,254 under the Officers’ Performance Compensation +21 +Plan, $8,834 of auto and professional allowances, $11,972 of retirement plan contributions, and $22,978 related to stock option awards. +Nasdaq rules require the Company to conduct an appropriate review of related party transactions required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential conflict of interest situations on an ongoing basis and that all such transactions must be approved by the Audit Committee or another committee comprised of independent directors. As a result, the Audit Committee annually reviews all such related party transactions and approves each related party transaction if it determines that it is in the best interests of the Company. Additionally, the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions involving the Company and “related persons” (directors and executive officers or their immediate family members, or shareholders owning five percent or greater of the Company’s outstanding stock). This also covers +any related person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest). In considering the transaction, the Audit Committee may consider all relevant factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (vi) the overall fairness of the transaction to the Company. While the Company adheres to this policy for potential related person transactions, the +policy, except as described above, is not in written form and approval of such related person transactions are evidenced by internal Company resolutions where applicable and/or our practice of approving transactions in this manner. \ No newline at end of file diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/filing.txt b/raw/filings/0000794172/2008/0000950152-08-009754/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..bec7f2ad59536445fe8db5435f2a938b8a5e94df --- /dev/null +++ b/raw/filings/0000794172/2008/0000950152-08-009754/filing.txt @@ -0,0 +1,4614 @@ +10-K +1 +l34668ae10vk.htm +FORM 10-K +FORM 10-K +Table of Contents +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 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF +1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2008. +o +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. +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID No. 31-0888197 +Incorporated under the Laws of Ohio +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +Common Shares, No Par Value +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. +YES þ NO o +If this report is an annual or transition report, indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange +Act. +YES o NO þ +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 þ NO o +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. +YES o NO þ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated +filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large +accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the +Exchange Act. (Check one): +Large accelerated filer þ +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller Reporting Company o +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +YES o NO þ +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2008 +was $1,288,569,112 based on a closing sale price of $33.43 per share on March 31, 2008. +As of October 31, 2008, 40,314,930 no par value Common Shares were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended September +30, 2008 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 2009 Annual Shareholders’ Meeting +are incorporated by reference in Part III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +4 +Item 1A Risk Factors +13 +Item 1B Unresolved Staff Comments +20 +Item 2 Properties +20 +Item 3 Legal Proceedings +20 +Item 4 Submission of Matters to a Vote of Security Holders +20 +Part II +Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +21 +Item 6 Selected Financial Data +21 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations +22 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +40 +Item 8 Financial Statements and Supplementary Data +41 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +72 +Item 9A Controls and Procedures +72 +Item 9B Other Information +72 +Part III +Item 10 Directors, Executive Officers and Corporate Governance +72 +Item 11 Executive Compensation +72 +Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +73 +Item 13 Certain Relationships and Related Transactions, and Director Independence +72 +Item 14 Principal Accountant Fees and Services +72 +Item 15 Exhibits and Financial Statement Schedules +73 +EX-10.38 +EX-13 +EX-21 +EX-23 +EX-31.1 +EX-31.2 +EX-32 +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. Except for +historical information, this Annual Report on Form 10-K contains forward-looking statements within +the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the +Securities Exchange Act of 1934, as amended, which may be identified by words such as “estimates”, +“anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, +“should” and similar expressions or the negative versions thereof and which also may be identified +by their context. Such statements, whether expressed or implied, are based upon current +expectations of the Company and speak only as of the date made. The Company assumes no obligation +to publicly update any forward-looking statements whether as a result of new information or to +reflect events or circumstances arising after the date on which they are made. These statements are +subject to various risks, uncertainties and other factors that could cause actual results to differ +materially, including, without limitation, the following: 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. Changes in the relative strength or weakness of the US dollar can +change expected results. 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. In addition to the factors described in this paragraph, Part I, Item 1A Risk +Factors contains a list of uncertainties and risks that may affect the financial performance of the +Company. +-3- +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results +of operations that are subject to risks and uncertainties. See “Forward-Looking Statements” above. +Factors that could cause or contribute to such differences include those discussed in Item 1A. In +addition to the risk factors discussed herein, we are also subject to additional risks and +uncertainties not presently known to us or that we currently deem immaterial. If any of these +risks and uncertainties develops into actual events, our business, financial condition or results +of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” +“our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other biologicals +for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. By exploiting revenue opportunities across research, clinical diagnostics, and +therapeutics, we strive to maximize revenues, efficiently invest in research and development, and +increase profitability of our manufacturing operations. The company was incorporated in Ohio in +1976. +Operating Segments +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa +and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca +Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and bioresearch +reagents domestically and abroad. The Life Science operating segment also includes the contract +development and manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial +-4- +Table of Contents +information for Meridian’s operating segments is included in Note 7 to the consolidated financial +statements contained herein. +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 83% of consolidated net sales for fiscal 2008. Our diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) +have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic +products, and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. +Our website is +www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov . The information on +our website is not part of this Annual Report on Form 10-K. +US Diagnostics Operating Segment +Overview +Our US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $88,419,000, $74,845,000 and +$65,721,000 for fiscal 2008, 2007 and 2006, respectively, reflecting a three-year compound annual +growth rate of 18%. As of September 30, 2008, our US Diagnostics operating segment had 265 +employees. +Our diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, +stool, and other body fluids or tissue for the presence of antigens and antibodies of specific +infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits +include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. +-5- +Table of Contents +Our diagnostic products are used principally in the detection of respiratory diseases, such as +pneumonia, valley fever, influenza, and respiratory syncytial virus (RSV); gastrointestinal +diseases, such as stomach ulcers ( H. pylori ), antibiotic-associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower 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. +Sales and Marketing +Our US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and Canada and independent distributors in the US and abroad. The direct sales +force consists of three management personnel who oversee corporate health accounts and work with +managed-care institutions, and six management personnel who oversee 26 technical sales +representatives, three inside sales representatives, and independent distributors in over 25 +countries. We utilize two primary independent distributors in the US, who accounted for 54% of the +US Diagnostics operating segment’s third-party sales in fiscal 2008. We manage the selling effort +for key customers where these independent distributors are utilized. +Consolidation of the US healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to +-6- +Table of Contents +multi-year supply agreements with consolidated healthcare providers and major reference +laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety +of formats that satisfy customer needs and preferences, whether in a hospital, commercial or +reference laboratory or alternate site location. Our product offering consists of approximately +145 medical diagnostic products. +Research and Development +Our US Diagnostics operating segment’s research and development organization consists of 14 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2008, 2007 and 2006 were $4,878,000, $4,571,000 and $3,342,000, respectively. This research +and development organization focuses its activities on new applications for our existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. We believe that new product +development is a key source for sustaining revenue growth. Our internally developed products +include Premier ä Platinum HpSA PLUS, Premier ä Toxins A & B, and +Immuno Card Ò Toxins A & B, which together accounted for 38% of our US Diagnostics +operating segment’s third-party sales during fiscal 2008. +During fiscal 2008, we launched our first products under our recently developed and patented +TRU rapid test technology. This technology features improved safety for compliance +with CDC regulations by offering a closed system in which to perform the tests and space savings +for laboratory technicians. New products using this technology include TRU FLU ® , TRU +RSV ® , TRU EBV-M ® , and TRU EBV-G ® . +We also believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. We expect our second product in collaboration with Merck to launch during +the latter part of fiscal 2009. +-7- +Table of Contents +Over the last 27 months, we have begun exploring and developing a molecular-based diagnostic +testing technology to complement our existing antigen/antibody-based testing technologies. This +first look at molecular-based testing started in October 2006, when we executed a license agreement +with Eiken Chemical Co., Ltd. that provides rights to Eiken’s loop-mediated isothermal +amplification technology. This license provides us with rights for infectious disease testing in +the United States and 18 other geographic markets. We currently have one product in active +development using this molecular technology for C. difficile , for which we are now completing beta +site evaluations. We have successfully completed our FDA pre-submission activities and expect to +initiate clinical trials in January 2009 with a 510(k) application to follow within 90-120 days +thereafter. International revenues are likely in the second half of fiscal 2009, with US sales to +follow FDA clearance. Several other infectious diseases have been identified for future +development using this technology. +Manufacturing +Our immunodiagnostic products require the production of highly specific and sensitive antigens and +antibodies. We produce substantially all of our own requirements including monoclonal antibodies +and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens. We believe +that we have sufficient manufacturing capacity for anticipated growth in the near term. +Intellectual Property, Patents, and Licenses +We own or license US and foreign patents for approximately 20 products manufactured by our US +Diagnostics operating segment. These patented products represented approximately 19% of +consolidated sales in fiscal 2008. In the absence of patent protection, we may be vulnerable to +competitors who successfully replicate our production and manufacturing technologies and processes. +Our employees are required to execute confidentiality and non-disclosure agreements designed to +protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +that most, but not +-8- +Table of Contents +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. +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our US Diagnostics operating segment and by third-party +vendors. Approximately 73% of third-party sales for fiscal 2008 for this operating segment were +products purchased from our US Diagnostics operating segment. Third-party sales for this operating +segment were $27,980,000, $23,563,000 and $19,828,000 for fiscal 2008, 2007 and 2006, respectively, +reflecting a three-year compound annual growth rate of 16%. As of September 30, 2008, the European +Diagnostics operating segment had 39 employees, including 15 employees in the direct sales force. +Our European Diagnostics operating segment’s sales and distribution network consists of direct +sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European +countries, Africa and the Middle East. The European Diagnostics operating segment maintains a +distribution center in Milan, Italy. The primary markets and customers for this operating segment +are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services under clinical cGMP +conditions. Third-party sales for this operating segment were $23,240,000, $24,555,000 and +$22,864,000 for fiscal 2008, 2007 and 2006, respectively, reflecting a three-year compound annual +growth rate of 2%. As of September 30, 2008, our Life Science operating segment had 107 employees. +-9- +Table of Contents +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2008, 21% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that have annual, +automatic renewal provisions. We have a long-standing relationship with this customer; and +although there can be no assurances, we intend to renew these supply agreements in the normal +course of business. During fiscal 2008, sales to three other customers comprised 17% of +third-party sales for the Life Science operating segment. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than bioresearch +reagents and bulk antigens and antibodies, as well as buying patterns of major customers. See Note +1(i) to the Consolidated Financial Statements herein for revenue recognition policies. Our +revenues for contract services were $1,477,000, $765,000, and $2,537,000 in fiscal 2008, 2007, and +2006, respectively. +During fiscal 2008, we acquired certain technologies and products from Vybion, Inc., including +infectious disease recombinant proteins and cardiac antigens. This acquisition adds important +technologies and capabilities to our Life Science business and will add to our expanding life +science brands. The acquired technologies will add proprietary manufacturing know-how and access to +important patent licenses for the development and production of recombinant proteins, an emerging +technology in life sciences. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, and, most recently, OEM Concepts in +fiscal 2005). Historically, these businesses were run autonomously. Recently, growth strategies +have been developed around sales and marketing integration, new product development integration, +and four product brands. Our Life Science operating segment’s four product brands can be described +as follows: +• +BIODESIGN – Antibodies, antigens and assay development reagents +• +Viral Antigens – Custom infectious disease antigens +• +OEM Concepts – Custom antibody development and manufacturing, in vivo or in vitro +• +Meridian Biologics – Development and manufacturing of cGMP clinical grade biologicals +-10- +Table of Contents +We believe that the business and growth prospects for all four product brands are favorable. +Products from the BIODESIGN, OEM Concepts, and Viral Antigens brands are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These markets are highly fragmented; however, we +believe we can be successful through product and marketing integration and customer penetration +across these three brands. These three brand names were aligned with the predecessor company +names, prior to acquisition, as we believe that there is value in the names of these long-standing +businesses. Sales efforts are focused on multi-year supply agreements in order to provide +stability in volumes and pricing. We believe this benefits both us and our customers. +With respect to our Meridian Biologics brand and contract services, we believe that the business +prospects are also favorable despite our recent revenue trends for this brand. In August 2007, we +were awarded a five-year contract (base year plus four option years) for the manufacturing of +experimental clinical vaccines for the National Institutes of Allergy and Infectious Diseases of +the National Institutes of Health. This contract provides an opportunity for steady production +work over a five-year period. We recognized revenue related to this contract of $265,000 in fiscal +2008 and expect to have revenues related to this contract of approximately $500,000 to $700,000 in +fiscal 2009. We also currently have three other vaccine projects in progress or within our +business development pipeline that are expected to contribute approximately $2,100,000 in revenues +for fiscal 2009. +Research and Development +Our Life Science operating segment’s research and development organization consists of four +research scientists. Research and development expenses for our Life Science operating segment for +fiscal 2008, 2007 and 2006 were $1,305,000, $1,514,000 and $1,457,000, respectively. This research +and development organization has integrated its activities around the four product brands +previously discussed and also is heavily involved in vaccine development and production activities +for our cGMP facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles”, and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +All of the Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved. +-11- +Table of Contents +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger with greater financial, research, manufacturing +and marketing resources. Important competitive factors for 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 our +product lines do not reflect technological advances, our ability to compete in those product lines +could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Quidel Corporation and +Inverness Medical Innovations. +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply arrangements do not exist. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than purchase from outside +vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service, and +price. Although the product application for this facility was built from our existing expertise in +cell culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings, (ii) improving +product distribution +-12- +Table of Contents +capabilities, (iii) providing access to new markets, and/or (iv) providing access to key +biologicals or new technologies that lead to new products. Although we cannot provide any +assurance that we will consummate any acquisitions in the future, we expect that the potential for +acquisitions will continue to serve as an opportunity for new revenues and earnings growth in the +future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $44,430,000 +or 32% of total fiscal 2008 sales, $38,691,000 or 31% of total fiscal 2007 sales and $34,557,000 or +32% of total fiscal 2006 sales. Domestic exports for our US Diagnostics and Life Science operating +segments were $16,450,000, $15,128,000 and $14,729,000 in fiscal 2008, 2007 and 2006, respectively. +We expect to continue to look to international markets as a source of new revenues and growth in +the future. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a US EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. +ITEM 1A. +RISK FACTORS +In addition to the other information set forth in this report, you should carefully consider the +following factors which could materially affect our business, financial condition, cash flows or +future results. Any one of these factors could cause our actual results to vary materially from +recent results or from anticipated future results. The risks described below are not the only +risks facing our Company. Additional risks and uncertainties not currently known to us or that we +currently deem to be immaterial also may materially adversely affect our business, financial +condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable +terms. +The medical diagnostic and life science industries are characterized by ongoing technological +developments and changing customer requirements. As such, our results of operations and continued +growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and +successfully introduce into the marketplace, enhancements of existing products and services or new +products and services that incorporate technological advances, meet customer requirements, and +respond to products developed by our competition. +-13- +Table of Contents +We cannot provide any assurance that we will be successful in developing or acquiring such rights +to products and services on a timely basis, or that such products and services will adequately +address the changing needs of the marketplace, either of which could adversely affect our results +of operations. +In addition, we must regularly allocate considerable resources to research and development of new +products, services, and technologies. The research and development process generally takes a +significant amount of time from design stage to product launch. This process is conducted in +various stages. During each stage, there is a risk that we will not achieve our goals on a timely +basis, or at all, and we may have to abandon a product in which we have invested substantial +resources. +During 2008, 2007, and 2006, we incurred $6,183,000, $6,085,000, and $4,799,000, respectively, in +research and development expenses. We expect to continue to invest in our research and development +activities. +We may be unable to successfully integrate operations or to achieve expected cost savings from +acquisitions we make. +One of our main growth strategies is the acquisition of companies and/or products. Although +additional acquisitions of companies and products may enhance the opportunity to increase net +earnings over time, such acquisitions could result in greater administrative burdens, increased +exposure to the uncertainties inherent in marketing new products, and financial risks of additional +operating costs. The principal benefits expected to result from any acquisitions we make will not +be achieved fully unless we are able to successfully integrate the operations of the acquired +entities with our operations and realize the anticipated synergies, cost savings, and growth +opportunities from integrating these businesses into our existing businesses. We cannot provide any +assurance that we will be able to identify and complete additional acquisitions on terms we +consider favorable or that, if completed, will be successfully integrated into our operations. +Revenues for our diagnostic operating segments may be impacted by our reliance upon two key +distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our US Diagnostic operating segment’s sales through two distributors were 54% and 50%, +respectively, of the US Diagnostics operating segment’s total sales for fiscal 2008 and fiscal +2007, or 34% and 31%, respectively, of consolidated total sales for fiscal 2008 and fiscal 2007. +These parties distribute our products and other laboratory products to end-user customers. The loss +of either of these distributors could negatively impact our sales and results of operations unless +suitable alternatives were timely found or lost sales to one distributor were absorbed by another +distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our +industry’s competitive environment. As an alternative, we could expand our efforts to distribute +and market our products directly. This alternative, however, would require substantial investment +in additional sales, marketing, and logistics resources, including hiring additional sales and +customer service personnel, which would significantly increase our future selling, general, and +administrative expenses. +-14- +Table of Contents +In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, +potentially leading to uneven concentration levels on a quarterly basis. However, we expect that, +over a 12-month period, these distributors’ orders would follow a normal buying pattern. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common upper +respiratory, gastrointestinal, viral, and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses. While we believe that the breadth of our diagnostic product lines reduces +the risk that infections subject to seasonality and sporadic outbreaks will cause variability in +diagnostic revenues, we can make no assurance that revenues will not be negatively impacted period +over period by such factors. +Changing Diagnostic Market Conditions +Changes in the healthcare delivery system have resulted in major consolidation among reference +laboratories and in the formation of multi-hospital alliances, reducing the number of institutional +customers for diagnostic test products. Due to such consolidation, we may not be able to enter +into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory +commercial basis with institutional customers, which could adversely affect our results of +operations. +Third-party payers for medical products and services, including state and federal governments, are +increasingly concerned about escalating health care costs and can indirectly affect the pricing or +the relative attractiveness of our products by regulating the maximum amount of reimbursement they +will provide for diagnostic testing services. If reimbursement amounts for diagnostic testing +services are decreased in the future, such decreases may reduce the amount that will be reimbursed +to hospitals or physicians for such services and consequently could place constraints on the levels +of overall pricing, which could have a material effect on our sales and/or profit margins. +Revenues for our Life Science operating segment may be impacted by customer concentrations and +buying patterns. +Our Life Science operating segment’s sales of purified antigens and reagents to one customer were +21% and 27%, respectively, of the Life Science operating segment’s total sales for fiscal 2008 and +fiscal 2007, or 3% and 5%, respectively, of our consolidated total sales for fiscal 2008 and fiscal +2007. A substantial portion of these sales are under exclusive supply agreements that have annual, +automatic renewal provisions. Although we have a long-standing relationship with this customer, we +cannot provide any assurance that we will be able to renew these supply agreements, which could +adversely affect our sales and results of operations. +Our Life Science operating segment has three other significant customers who purchase antigens, +antibodies and reagents, which together comprised 17% and 20%, respectively, of the operating +segment’s total sales for +-15- +Table of Contents +fiscal 2008 and 2007. Any significant alteration of buying patterns from these customers could +adversely affect our period over period sales and results of operations. +Revenues relating to research, development and manufacturing services for our Life Science +operating segment are generated on a contract by contract basis. The nature of this business is +such that each contract provides a unique product and/or service and corresponding revenue stream. +Although we believe that future prospects for this business will generate targeted growth rates, +there can be no assurance that future contracts will be secured, and if secured, will be +profitable. +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid +change. Hundreds of companies in the United States supply immunodiagnostic tests and purified +reagents. These companies range from multinational healthcare entities, for which +immunodiagnostics is one line of business, to small start-up companies. Many of our competitors +have significantly greater financial, technical, manufacturing, and marketing resources than we do. +We cannot provide any assurance that our products and services will be able to compete +successfully with the products and services of our competitors. +We are dependent on international sales, and our financial results may be adversely impacted by +foreign currency, regulatory or other developments affecting international markets. +We sell products and services into approximately 60 countries. Approximately 32% of our net sales +for fiscal 2008 and approximately 31% of our net sales for fiscal 2007 were attributable to +international markets. For fiscal 2008, 54% of our international sales were made in Euros, with the +remaining 46% made in US dollars. We are subject to the risks associated with fluctuations in the +US dollar-Euro exchange rates. We are also subject to other risks associated with international +operations, including longer customer payment cycles, tariff regulations, requirements for export +licenses, stability of foreign governments, and governmental requirements with respect to the +importation and distribution of medical devices and antigens, antibodies and reagents, all of which +may vary by country. +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by +these regulations. +Medical device diagnostics and the manufacture, sale, and distribution of bulk antigens, +antibodies, and reagents are highly regulated industries. We cannot provide any assurance that we +will be able to obtain necessary governmental clearances or approvals or timely clearances or +approvals to market future products in the United States and other countries. Costs and +difficulties in complying with laws and regulations administered by the US Food and Drug +Administration, the US Department of Agriculture, the US Department of Commerce, the US Drug +Enforcement Agency, or the Centers for Disease Control can result in +-16- +Table of Contents +unanticipated expenses and delays and interruptions to the sale of new and existing products. +Contract manufacturing of proteins and other biologicals is regulated by the US Food and Drug +Administration. +Regulatory approval can be a lengthy, expensive, and uncertain process, making the timing and costs +of approvals difficult to predict. The failure to comply with these regulations can result in +delay in obtaining authorization to sell products, seizure or recall of products, suspension or +revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or +third-party manufacturing facilities would adversely affect our business and operating results. +Products and services manufactured at our Cincinnati, Ohio, Boca Raton, Florida, Memphis, +Tennessee, and Saco, Maine facilities comprised 77% of our diagnostics revenues and 71% of our Life +Science revenues. Our global supply of these products and services is dependent on the +uninterrupted and efficient operation of these facilities. In addition, we currently rely on a +small number of third-party manufacturers to produce certain of our diagnostic products. The +operations of our facilities or these third-party manufacturing facilities could be adversely +affected by power failures, natural or other disasters, such as earthquakes, floods, tornadoes or +terrorist threats. Although we carry insurance to protect against certain business interruptions +at our facilities, there can be no assurance that such coverage will be adequate or that such +coverage will continue to remain available on acceptable terms, if at all. Any significant +interruption in the Company’s or third-party manufacturing capabilities could materially and +adversely affect our operating results. +We are dependent on sole-source suppliers for certain critical components and products. A supply +interruption could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +alternate sources of supply. However, certain critical raw materials and supplies required for the +production of some of our principal products are available only from a single supplier. In +addition, certain finished products, for which we act as a distributor, are available only from a +single supplier. If these suppliers become unable or unwilling to supply the required raw +materials or products, we would need to find another source, and perform additional development +work and obtain regulatory approvals for the use of the alternative raw materials for our products. +Completing that development and obtaining such approvals could require significant time and +resources, and may not occur at all. Any disruption in the supply of these raw materials or +finished products could have a material adverse affect on us. +Four respiratory products sourced from one vendor accounted for 14% and 11% of third-party sales +for our US Diagnostics operating segment in fiscal 2008 and 2007, respectively. During fiscal +2008, we launched our own internally-developed products that compete with these products in the +market. In order to mitigate the supply risk associated with these products, we have signed a +minimum purchase agreement with the vendor to fulfill our projected needs through June 30, 2009. +-17- +Table of Contents +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented +technologies. In addition, we have licensed, and expect to continue to license, various +complementary technologies and methods from academic institutions and public and private companies. +We cannot provide any assurance that the technologies that we own or license provide protection +from competitive threats or from challenges to our intellectual property. In addition, we cannot +provide any assurances that we will be successful in obtaining licenses or proprietary or patented +technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our +ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the +market for diagnostics continues to grow and the number of participants in the market increases, we +may increasingly be subject to patent infringement claims. It is possible that a third-party may +claim infringement against us. If found to infringe, we may attempt to obtain a license to such +intellectual property, however, we may be unable to do so on favorable terms, or at all. +Additionally, if our products are found to infringe on third-party intellectual property, we may be +required to pay damages for past infringement and lose the ability to sell certain products, +causing our revenues to decrease. We currently carry intellectual property insurance that covers +damages and defense costs from our potential infringement on other third-party patents at levels +that we believe are commercially reasonable, although there is no assurance that it will be +adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a +claim could have a material adverse affect on our profitability and the damage to our reputation in +the industry could have a material adverse affect on our business. +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing, and marketing of medical diagnostic products involves an inherent risk +of product liability claims. If we cannot successfully defend ourselves against product liability +claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially +reasonable, although there is no assurance that it will be adequate to cover claims that may arise. +In certain customer contracts, we indemnify third parties for certain product liability claims +related to our products. These indemnification obligations may cause us to pay significant sums of +money for claims that are covered by these indemnifications. In addition, a defect in the design +or manufacture of our products could have a material adverse affect on our reputation in the +industry and subject us to claims of liability for injury and otherwise. Any substantial +underinsured loss resulting from +-18- +Table of Contents +such a claim could have a material adverse affect on our profitability and the damage to our +reputation in the industry could have a material adverse affect on our business. +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire, and retain key +personnel. +Our future success depends on our continued ability to attract, hire, and retain highly qualified +personnel, including our executive officers and scientific, technical, sales, and marketing +employees, and their ability to manage growth successfully. If such key employees were to leave +and we were unable to obtain adequate replacements, our operating results could be adversely +affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain +financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we +would be in default under the credit agreement. If an event of default is not cured or waived, it +could result in acceleration of any indebtedness under our credit agreement, which could have a +material adverse effect on our business. At the present time, no borrowings are outstanding under +our bank credit agreement. +In recent months, the credit markets and the banking industry have been experiencing a period of +unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of +various financial institutions. In response, the United States federal government has put into +place a number of economic measures designed to stabilize the markets. While the ultimate outcome +of these events cannot be predicted, they may have a material adverse effect on our results of +operations should our ability to borrow money to finance our operations from our existing lenders +under our bank credit agreement or obtain credit from trade creditors be impaired. As our credit +agreement is in place through September 2012, we believe that the current economic conditions in +the credit markets will not have an adverse effect on our business. +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred +stock and to determine the rights, preferences, privileges and restrictions, including voting +rights, of such shares without any future vote or action by the shareholders. The issuance of +preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage +takeover bids for our company that have not been negotiated with the board of directors. Such +provisions could limit the price that investors might be willing to pay in the future for shares of +our common stock. In addition, sales of substantial amounts of such shares in the public market +could adversely affect the market price of our common stock and our ability to raise additional +capital at a price favorable to us. +-19- +Table of Contents +ITEM 1B. +UNRESOLVED STAFF COMMENTS +Not applicable. +ITEM 2. +PROPERTIES +Our corporate offices, US Diagnostics manufacturing facility and US Diagnostics 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, Ohio. These properties are owned by us. We have +approximately 51,000 square feet of manufacturing space and 9,000 square feet of warehouse space in +these facilities. +Our European Diagnostics distribution center in Italy conducts its operations in a two-story +building in Milan, consisting of approximately 18,000 square feet. This facility is owned by our +wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in +France and Belgium for sales and administrative functions. +Our Life Science operations are conducted in several facilities in Saco, Maine, Memphis, Tennessee, +and Boca Raton, Florida. Our facility in Saco, Maine presently contains approximately 23,000 +square feet for manufacturing, sales, distribution and administrative functions, and is owned by +us. Our facility in Memphis, Tennessee consists of two buildings totaling approximately 34,000 +square feet, including approximately 27,000 square feet of manufacturing space, and is owned by us. +Our leased facility in Boca Raton, Florida contains approximately 11,000 square feet of +manufacturing space. +ITEM 3. +LEGAL PROCEEDINGS +We are a party to litigation that we believe is in the normal course of business. The ultimate +resolution of these matters is not expected to have a material adverse effect on our financial +position, results of operations or cash flows. No provision has been made in the accompanying +consolidated financial statements for these matters. +ITEM 4. +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +Not applicable. +-20- +Table of Contents +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY +SECURITIES +Please refer to “Forward Looking Statements” following the Index in front of the Form 10-K. +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2008 +and “Quarterly Financial Data” relating to our dividends in Note 9 to the Consolidated Financial +Statements are incorporated herein by reference. There are no restrictions on cash dividend +payments. +Our cash dividend policy is to set the indicated annual dividend rate between 75% and 85% of each +fiscal year’s 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. +We paid dividends of $0.53 per share, $0.40 per share, and $0.28 per share in fiscal 2008, fiscal +2007, and fiscal 2006, respectively. +On May 11, 2007, we affected a three-for-two stock split for shareholders of record on May 4, 2007. +All references in this Annual Report to number of shares and per share amounts reflect the effects +of this stock split. +As of September 30, 2008, there were approximately 900 holders of record and approximately 26,000 +beneficial owners of its common shares. +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2008. +-21- +Table of Contents +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors” on pages 13 through 19 of this Annual Report. +Overview: +Despite the turmoil of the US economy and financial markets, we delivered our sixth consecutive +year of double-digit revenue and earnings growth in fiscal 2008, driven by new product launches and +market and market share expansions in certain product families in our diagnostics operating +segments. Our diagnostics operating segments continue to provide the largest share of consolidated +revenues, 83%, 80%, and 79% for fiscal 2008, 2007, and 2006, respectively. During fiscal 2008, we +launched four new diagnostic tests on our recently developed and patented TRU rapid +test technology. Revenues for our four major infectious disease categories, C. difficile, H. +pylori , upper respiratory and foodborne, all grew at double-digit rates during fiscal 2008. +As we look forward, we continue to see growth opportunities in the C . difficile and H. pylori +testing markets where such markets are well established and we hold market leadership positions. +The C. difficile market has experienced more virulent strains of this toxin and heightened focus by +hospitals on this dangerous pathogen. New AGA guidelines are creating increased focus on direct +antigen testing for H. pylori , as this infection is a known cause of ulcers. Our managed care +efforts are also expected to continue to contribute to volume growth in H. pylori products. Our +line of patented H. pylori products includes two direct testing formats. We also expect to see +growth in molecular technologies, with new product launches planned for fiscal 2009, including our +new molecular ILLUMIgene TM C. difficile test. We have successfully completed our FDA +pre-submission activities and expect to initiate clinical trials in January with a 510(k) +application to follow within 90-120 days thereafter. International revenues are likely in the +second half of fiscal 2009, with US sales to follow FDA clearance. +We also see growth opportunities in our other two major infectious disease markets, upper +respiratory and foodborne. In the foodborne market, we intend to develop and launch other +infectious disease products that will complement our existing E. coli products. In the upper +respiratory market, we expect to see market share gains from the penetration of our recently +developed and launched influenza and respiratory syncytial virus products using our patented +TRU rapid test technology, as well as improvements in gross margins related to our +internally-developed tests. +Revenues for our Life Science operating segment were disappointing in fiscal 2008 as they were 5% +lower than fiscal 2007. This reduction was primarily due to demand and buying patterns of certain +of our bulk viral protein and reagent customers. At this time, we believe such demand and buying +patterns have reached a point where we do not expect any further year-over-year revenue reductions. +-22- +Table of Contents +Financial discipline continues to be one of our fundamental principles in running the day-to-day +business. The following table illustrates key income and expense elements as a percentage of +sales. We look for continued improvement in each of these measures each year, in spite of +macro-economic market conditions. +2008 +2007 +2006 +Gross profit +62 +% +61 +% +60 +% +Operating expenses +30 +% +32 +% +35 +% +Operating income +32 +% +28 +% +25 +% +Preservation of the capital of our investment portfolio is also a fundamental principle in our cash +management philosophy. During October 2008, we moved substantially all of our investments in +municipal variable rate demand notes to institutional money market mutual funds invested in either +US Treasuries, or repurchase agreements collateralized by US Treasuries. Existing investments in +institutional tax-exempt money market mutual funds are covered under the US Treasury’s Temporary +Guarantee Program for Money Market Funds. This program provides a guarantee to money market mutual +fund shareholders of $1 per share net asset value for funds invested as of September 19, 2008, if +the fund were to liquidate its assets as a result of its net asset value falling below $0.995. As +we look forward, we will continue to manage the holdings of our investment portfolio with +preservation of capital being the primary objective. +Operating Segments: +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +Revenues for the Diagnostics operating segments, in the normal course of business, may be affected +by buying patterns of major distributors, seasonality and strength of certain diseases and foreign +currency exchange rates. Revenues for the Life Science operating segment, in the normal course of +business, may be affected by the timing and nature of arrangements for contract services work, +which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, +as well as buying patterns of major customers. We believe that the overall breadth of our product +lines serves to reduce the variability in consolidated revenues. +-23- +Table of Contents +Results of Operations: +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2008 increased 19% to $7,684,000, or $0.19 per +diluted share (increased 19%) from net earnings for the fourth quarter of fiscal 2007 of +$6,444,000, or $0.16 per diluted share. This increase is primarily attributable to increased sales +and continuing efforts to improve operating efficiency across all businesses. Net sales for the +fourth quarter of fiscal 2008 were $36,475,000, an increase of $4,089,000 or 13% compared to the +fourth quarter of fiscal 2007. +Net sales for the US Diagnostics operating segment for the fourth quarter of fiscal 2008 increased +24% compared to the fourth quarter of fiscal 2007, and benefited from volume increases in influenza +and respiratory syncitial virus products in advance of the 2008-2009 upper respiratory season in +the amount of approximately $1,500,000. The early start to the season was driven by the timing of +promotions offered by a third-party manufacturer of certain products, which are passed along to our +customers. We expect that the US Diagnostics operating segment’s sales of these products during +the first quarter of fiscal 2009 will be flat compared to the first quarter of fiscal 2008 as a +result of the timing of this third-party manufacturer promotion. We ultimately measure our growth +and level of success for upper respiratory products based on the full selling season, which +typically runs from August through March, also taking into consideration the relative strength of +the season. Net sales for our European Diagnostics and Life Science operating segments increased +9% and decreased 13%, respectively, during the fourth quarter of fiscal 2008 compared to the fourth +quarter of fiscal 2007. +Fiscal Year +Net earnings for fiscal 2008 increased 13% to $30,202,000, or $0.74 per diluted share (increased +12%) from net earnings for fiscal 2007 of $26,721,000, or $0.66 per diluted share including the tax +benefit of $2,425,000, described below. Results of operations for fiscal 2008 compared to fiscal +2007 are discussed below. +Net earnings and earnings per share for fiscal 2007 include the effects of a tax benefit in the +amount of $2,425,000, or $0.06 per basic and diluted share, related to a discrete adjustment to tax +reserves that was recorded in the third quarter upon the expiration of the statute of limitations +on certain income tax returns (see Note 5 to the consolidated financial statements herein). The +tables below provide information on net earnings, basic earnings per share, and diluted earnings +per share, excluding this tax benefit, as well as reconciliations to amounts reported under US +Generally Accepted Accounting Principles. We believe that this information is useful to those who +read our financial statements and evaluate our operating results because: +1. These measures help to appropriately evaluate and compare the results of operations from period +to period by removing the favorable impact of a discrete material item that is not expected to +recur in the future; and +-24- +Table of Contents +2. These measures are used by our management for various purposes, including evaluating performance +against incentive bonus achievement targets, comparing performance from period to period in +presentations to our Board of Directors, and as a basis for strategic planning and forecasting. +2008 +2007 +Change +Net Earnings - +US GAAP basis +$ +30,202,000 +$ +26,721,000 +13 +% +Tax benefit not expected to recur in the future +— +(2,425,000 +) +100 +% +Excluding tax benefit +$ +30,202,000 +$ +24,296,000 +24 +% +2008 +2007 +Change +Net Earnings per Basic Common Share - +US GAAP basis +$ +0.75 +$ +0.67 +12 +% +Tax benefit not expected to recur in the future +— +(0.06 +) +100 +% +Excluding tax benefit +$ +0.75 +$ +0.61 +23 +% +2008 +2007 +Change +Net Earnings per Diluted Common Share - +US GAAP basis +$ +0.74 +$ +0.66 +12 +% +Tax benefit not expected to recur in the future +— +(0.06 +) +100 +% +Excluding tax benefit +$ +0.74 +$ +0.60 +23 +% +Prior to July 1, 2007, the cost of certain inventories within the Life Science operating segment +was determined by the last-in, first-out (“LIFO”) method. Effective July 1, 2007, we changed our +method of accounting for this inventory from the LIFO method to the FIFO method, and now +substantially all of our inventories are reflected at the lower of cost or market with cost +determined by the FIFO method. We changed to the FIFO method for these inventories because it +conforms substantially all of our worldwide inventories to a consistent basis of accounting; and it +provides better comparability to our industry peers, many of whom use the FIFO method of accounting +for inventories. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, +Accounting Changes and Error Corrections , the change in accounting has been retrospectively applied +to all prior periods presented herein. +-25- +Table of Contents +Fiscal Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30, 2007 and Fiscal +Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30, 2006. +Net sales +2008 vs. +2007 vs. +2007 +2006 +2008 +2007 +2006 +Inc (Dec) +Inc (Dec) +US Diagnostics +$ +88,419,000 +$ +74,845,000 +$ +65,721,000 +18 +% +14 +% +European Diagnostics +27,980,000 +23,563,000 +19,828,000 +19 +% +19 +% +Life Science +23,240,000 +24,555,000 +22,864,000 +(5 +)% +7 +% +Consolidated +$ +139,639,000 +$ +122,963,000 +$ +108,413,000 +14 +% +13 +% +International - +Exported from US +$ +16,450,000 +$ +15,128,000 +$ +14,729,000 +9 +% +3 +% +European Diagnostics +27,980,000 +23,563,000 +19,828,000 +19 +% +19 +% +Total +$ +44,430,000 +$ +38,691,000 +$ +34,557,000 +15 +% +12 +% +% of total sales +32 +% +31 +% +32 +% +Sales growth for US Diagnostics was primarily driven by volume increases across our four major +infectious disease categories, C. difficile , H. pylori , upper respiratory and foodborne in both +fiscal 2008 and 2007. Each of these product families experienced double-digit growth rates in +fiscal 2008 and 2007. New product sales contributions in fiscal 2008 came from our upper +respiratory TRU products for influenza and respiratory syncytial virus launched in the first +quarter of fiscal 2008, and our Immuno Card STAT! ® EHEC product launched in fiscal 2007. +The EHEC product was developed in collaboration with Merck for detection of toxin-producing E. coli +in patients that may have ingested contaminated produce or meat products. We also saw market share +expansions in fiscal 2008 and 2007 in infectious diseases where we have established leadership +positions, C. difficile and H. pylori . The identification of more virulent strains of C. difficile +has led to increased testing in hospitals. New AGA guidelines have created increased focus on +direct antigen testing for H. pylori , as this infection is a known cause of ulcers. Our managed +care efforts are also contributing to volume growth in H. pylori products. Two national +distributors accounted for 54%, 50% and 46% of total third-party sales for the US Diagnostics +operating segment for fiscal 2008, 2007, and 2006, respectively. +The 2007-2008 upper respiratory season was relatively strong, which also contributed to the volume +growth in influenza and respiratory syncytial virus products during the first half of fiscal 2008. +Although we cannot predict the strength of the 2008-2009 upper respiratory season and its impact on +sales volumes, to date, we have experienced healthy orders for our upper respiratory products. +Sales growth for the European Diagnostics operating segment includes currency translation gains in +the amounts of $2,743,000 and $1,510,000, for fiscal 2008 and 2007, respectively. Organic sales +growth, which excludes the effects of currency translation, was 7% and 11% during fiscal 2008 and +2007, respectively. The organic growth in fiscal 2008 and 2007 was driven by volume increases in +C. difficile products, principally +-26- +Table of Contents +Immuno Card Ò Toxins A & B, as well as the third quarter fiscal 2008 launch of +TRU EBV-M ® and TRU EBV-G ® . +Fiscal 2008 sales for the Life Science operating segment reflect changes in demand and buying +patterns of certain of our major diagnostic manufacturing customers and non-renewal of a supply +contract with the US Department of Defense. Changes in the US Department of Defense’s Critical +Reagents program led to non-renewal of this contract after fiscal 2007. Fiscal 2007 sales for the +Life Science operating segment reflect volume growth in make-to-order bulk antigens and antibodies, +offset by lower sales activity from contract research and development and contract manufacturing +services. +We sell three main products to a major diagnostic manufacturing customer, who accounted for 21%, +27%, and 18% of total sales for the Life Science operating segment for fiscal 2008, 2007 and 2006, +respectively. During the first quarter of fiscal 2008, this customer reduced its forecasted +requirements for two antigen products due to its internal inventory management initiatives and its +market factors. The impact of this reduction was partially offset by the customer’s increased +purchases of a bulk reagent product. For fiscal 2008, these demand changes and buying patterns +resulted in a net revenue reduction of approximately $1,800,000. +Gross Profit +2008 vs. +2007 vs. +2007 +2006 +2008 +2007 +2006 +Inc (Dec) +Inc (Dec) +Gross Profit +$ +86,480,000 +$ +74,940,000 +$ +64,684,000 +15 +% +16 +% +Gross Profit Margin +62 +% +61 +% +60 +% +1 +% +1 +% +The increases in gross profit margins from 2006 to 2008 reflect a stronger mix of sales from our +diagnostic operating segments, including higher margins on rapid tests, and production efficiencies +from automation initiatives in our diagnostics manufacturing facility. +Our overall operations consist of the sale of diagnostic test kits for various disease states and +in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, +proficiency panels, and contract research and development and contract manufacturing services. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +-27- +Table of Contents +Operating Expenses +Research & +Selling & +General & +Development +Marketing +Administrative +2006 Expenses +$ +4,799,000 +$ +16,698,000 +$ +16,293,000 +% of Sales +4 +% +15 +% +15 +% +Fiscal 2007 Increases (Decreases): +US Diagnostics +1,229,000 +(9,000 +) +1,606,000 +European Diagnostics +— +469,000 +(392,000 +) +Life Science +57,000 +(34,000 +) +(806,000 +) +2007 Expenses +$ +6,085,000 +$ +17,124,000 +$ +16,701,000 +% of Sales +5 +% +14 +% +14 +% +% Increase (Decrease) +27 +% +3 +% +3 +% +Fiscal 2008 Increases (Decreases): +US Diagnostics +307,000 +1,523,000 +(293,000 +) +European Diagnostics +— +423,000 +389,000 +Life Science +(209,000 +) +(300,000 +) +380,000 +2008 Expenses +$ +6,183,000 +$ +18,770,000 +$ +17,177,000 +% of Sales +4 +% +13 +% +12 +% +% Increase (Decrease) +2 +% +10 +% +3 +% +Operating expenses increased 6% for both fiscal 2008 and fiscal 2007. The overall increase in +operating expenses for both periods is discussed below. +The increase in research and development expenses for the US Diagnostics operating segment during +fiscal 2008 reflects additional salaries and benefits related to a new vice president hired in May +2007, planned staff headcount additions, and development costs for our ILLUMIgene TM +molecular technology and other products in development. These increases were partially offset by +decreased professional fees and clinical trial costs related to new products which were launched +during the first fiscal quarter of 2008. The increase in research and development expenses for +the US Diagnostics operating segment during fiscal 2007 were primarily attributable to clinical +trial and other costs associated with new product development, including planned headcount +additions, as well as increased stock-based compensation expense. The decrease in research and +development expenses for the Life Science operating segment during fiscal 2008 primarily related +to retirements of staff personnel that occurred during fiscal 2007 and lower incentive +compensation. +Selling and marketing expenses for the US Diagnostics operating segment for fiscal 2008 increased +primarily due to costs for new product launches, increased salaries and benefits related to planned +headcount additions, and higher incentive compensation from sales growth. The decrease for the US +Diagnostics operating segment for fiscal 2007 was primarily attributable to lower costs for sales +promotions, advertising, and distributor incentives, offset by increased salaries and benefits +related to headcount additions and stock-based +-28- +Table of Contents +compensation costs. Selling and marketing expenses for the European Diagnostics operating segment +increased primarily as a result of fluctuations in the Euro currency for both fiscal 2008 and 2007, +and one planned headcount addition in fiscal 2007. The decrease in selling and marketing expenses +for the Life Science operating segment for fiscal 2008 primarily related to lower incentive +compensation and staff reductions. +The decrease in general and administrative expenses for fiscal 2008 for the US Diagnostics +operating segment was primarily attributable to reduced incentive compensation costs, both +corporate incentive bonus and stock-based compensation. These decreases were partially offset by +increased salaries and benefits related to planned headcount additions. The increase in general +and administrative expenses for the US Diagnostics operating segment for fiscal 2007 was primarily +attributable to higher costs for stock-based compensation, an insurance recovery in fiscal 2006, +and increased salaries and benefits, including the effects of planned headcount additions. The +increase for the Life Science operating segment for fiscal 2008 reflects severance costs for +certain personnel changes and increased salaries and benefits. The decrease for the Life Science +operating segment for fiscal 2007 was primarily attributable to the 2006 impairment of the supply +contract with the United States Department of Defense. See Note 1(h) to the consolidated +financial statements contained herein. The increase for the European Diagnostics operating +segment for fiscal 2008 was primarily attributable to currency fluctuations, as well as increased +salaries and benefits. The decrease for the European Diagnostics operating segment for fiscal +2007 was primarily attributable to expenses connected with an employee matter in fiscal 2006, +which were covered by the aforementioned insurance recovery. +We account for our stock option plans pursuant to SFAS No. 123(R), Share-Based Payment . The amount +of stock-based compensation expense reported for fiscal 2008, fiscal 2007, and fiscal 2006 was +$1,772,000, $2,632,000, and $1,082,000, respectively. During November 2007, we granted to certain +employees stock options that were contingent upon Meridian achieving a specified net earnings level +for fiscal 2008. Because Meridian’s fiscal 2008 net earnings did not reach the minimum level, +these stock options were not earned. No stock-based compensation has been recorded for these +options. Similarly, during November 2006, we granted to certain employees stock options that were +contingent upon Meridian achieving a specified net earnings level for fiscal 2007. Because +Meridian’s fiscal 2007 net earnings surpassed the minimum level, these stock options were earned +and are now exercisable over a vesting period. +Operating Income +Operating income increased 27% and 30% in fiscal 2008 and 2007, respectively, as a result of the +factors discussed above. +-29- +Table of Contents +Other Income and Expense +Interest income was $1,533,000, $1,642,000, and $1,123,000 for fiscal 2008, 2007, and 2006, +respectively. The decrease during fiscal 2008 was driven by lower interest yields in the current +interest rate environment, somewhat offset by higher average investment balances. The increase +during fiscal 2007 was driven by higher interest yields and higher investment balances in fiscal +2007. See Note 1(e) to the consolidated financial statements herein for discussion of our +investment portfolio. +Income Taxes +The effective rate for income taxes was 34%, 27%, and 35% for fiscal 2008, 2007, and 2006, +respectively. Both the increase in the effective tax rate for fiscal 2008 and the decrease in the +effective tax rate for fiscal 2007 were primarily attributable to a discrete adjustment to tax +reserves in the third quarter of fiscal 2007 in the amount of $2,425,000. This discrete adjustment +reduced the effective tax rate for fiscal 2007 by 7 points. See Note 5 to the consolidated +financial statements included herein for a complete discussion of this matter. +Effective October 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in +Income Taxes (FIN 48). FIN 48 prescribes a comprehensive model for the recognition, measurement, +presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant +facts by the applicable tax authorities. The cumulative effect of adopting FIN 48, $305,000, was +charged to opening retained earnings. See Note 5 to the consolidated financial statements herein. +Impact of Inflation +To the extent feasible, we have consistently followed the practice of adjusting our prices to +reflect the impact of inflation on salaries and fringe benefits for employees and the cost of +purchased materials and services. Inflation and changing prices did not have a material adverse +impact our gross margin, revenue or operating income in fiscal 2008, 2007 or 2006. +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Our cash flow and financing requirements are determined by analyses of operating and capital +spending budgets, consideration of acquisition plans, and consideration of common share dividends. +We have historically maintained a credit facility to augment working capital requirements and to +respond quickly to acquisition opportunities. This credit facility has been supplemented by the +proceeds from a September 2005 common share offering, which during the course of fiscal 2008, were +invested in fixed income securities such +-30- +Table of Contents +as overnight repurchase agreements, institutional money-market mutual funds, municipal variable +rate demand notes with a seven-day put feature and tax-exempt auction-rate securities. +We have an investment policy that guides the holdings of our investment portfolio. Our objectives +in managing the investment portfolio are to (i) preserve capital, (ii) provide sufficient liquidity +to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) +capture a market rate of return commensurate with market conditions and our policy’s investment +eligibility criteria. As a result of current conditions in the financial markets, during October +2008, we moved substantially all of our investments in municipal variable rate demand notes to +institutional money market mutual funds invested in either US Treasuries, or repurchase agreements +collateralized by US Treasuries. Existing investments in institutional tax-exempt money market +mutual funds are covered under the US Treasury’s Temporary Guarantee Program for Money Market +Funds. This program provides a guarantee to money market mutual fund shareholders of $1 per share +net asset value for funds invested as of September 19, 2008, if the fund were to liquidate its +assets as a result of its net asset value falling below $0.995. As we look forward, we will +continue to manage the holdings of our investment portfolio with preservation of capital being the +primary objective. +We do not expect current conditions in the financial markets, or overall economic conditions to +have a significant impact on our liquidity needs, financial condition, or results of operations. +We intend to continue to fund our working capital requirements and dividends from current cash +flows from operating activities. We also have additional sources of liquidity through our +investment portfolio and $30,000,000 bank credit facility, if needed. To date, we have not +experienced any significant deterioration in the aging of our customer accounts receivable nor in +our vendors’ ability to supply raw materials and services and extend normal credit terms. Our +liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within +the financial markets remains tight for an extended period of time, and such conditions impact the +collectability of our customer accounts receivable, impact credit terms with our vendors or disrupt +the supply of raw materials and services. +Overall stock market valuations have significantly declined in recent months, which may raise +questions around the potential impairment of goodwill and other long-lived assets. Our annual +goodwill impairment review under SFAS No. 142, Goodwill and Other Intangible Assets , takes place as +of June 30 th each year. There have been no impairments from these annual reviews. +Despite the overall decline in stock market valuations, as of October 31, 2008, our stock price was +$24.58 per share, compared to our book value per share of $3.19 as of September 30, 2008. This +relationship, stock price trading at 7.7x book value, is an indicator that the decline in overall +stock market valuations, and its impact on our stock price, has not been a triggering event for +impairment of our goodwill and other long-lived assets. +Net cash provided by operating activities increased 12% to $29,883,000 in fiscal 2008. This +increase was primarily attributable to higher earnings levels, somewhat offset by prepaid taxes of +$1,007,000 and other +-31- +Table of Contents +changes in working capital items related to higher sales levels in fiscal 2008. The discrete tax +reserve adjustment in fiscal 2007 in the amount of $2,425,000 was non-cash in nature. +Net cash used in investing activities was $13,230,000 for fiscal 2008, compared to $443,000 for +fiscal 2007. This increase was primarily attributable to purchases of property, plant, and +equipment, purchases of investments, and purchases of intangible assets related to patents and an +acquired recombinant viral protein product line. +Net cash used in financing activities was $16,693,000 for fiscal 2008, compared to $13,291,000 for +fiscal 2007. This increase was primarily attributable to a 34% increase in dividend payments, +offset by $1,989,000 in additional proceeds and tax benefits from the exercise of stock options. +Dividend payments in fiscal 2008 reflect increased dividend rates and common shares outstanding +related to stock option exercises. +Net cash flows from operating activities are anticipated to fund working capital requirements and +dividends during the next twelve months. +Capital Resources +We have a $30,000,000 credit facility with a commercial bank which expires September 15, 2012. +As of November 26, 2008, there were no borrowings outstanding under this facility. +As of September 30, 2006, Meridian had outstanding $1,803,000 principal amount of 5% debentures, +convertible, at the option of the holder, into common shares at a price of $6.45. During fiscal +2007, these debentures were either converted into common shares at the direction of the holders or +redeemed by Meridian. +Our acquisition of Viral Antigens in fiscal 2000 provided for additional purchase consideration, +contingent upon Viral Antigens’ future earnings through September 30, 2006. Final earnout +consideration in the amount of $853,000 relating to fiscal 2006 was paid from operating cash +flows during the second quarter of fiscal 2007. +Our acquisition of OEM Concepts in fiscal 2005 provides for additional purchase consideration up to +a maximum remaining amount of $1,814,000, contingent upon future calendar-year sales and gross +profit of OEM Concepts products through December 31, 2008. Earnout consideration is payable each +year, following the period earned. Earnout consideration in the amount of $157,000 related to +calendar 2007 was paid from operating cash flows during the second quarter of fiscal 2008. Earnout +consideration in the amount of $3,000 for the first nine months of calendar 2008 is accrued in the +accompanying consolidated balance sheet. +-32- +Table of Contents +Our capital expenditures are estimated to be approximately $4,000,000 to $5,000,000 for fiscal +2009, and may be funded with cash and equivalents on hand, operating cash flows, and/or +availability under the $30,000,000 credit facility discussed above. Capital expenditures relate +to manufacturing and other equipment of a normal and recurring nature, as well as completion of +our facility expansion in Saco, Maine. +Student Loan Auction-Rate Securities +Our investment portfolio includes student loan auction-rate securities with a par value amount of +$7,750,000, which are long-term student loan revenue bonds whose interest rates are reset every 35 +days via a Dutch auction process. All of our auction-rate securities are backed by pools of +student loans originated under the Federal Family Education Loan Program (FFELP). FFELP student +loans are guaranteed by state guarantors who have reinsurance agreements with the US Department of +Education. All of our student loan auction-rate securities were rated Aaa and AAA by Moody’s and +Standard & Poor’s, respectively, at the time of purchase, and have continued to maintain these +credit ratings through the present time. +The Dutch auction process historically provided the necessary liquidity mechanism to either +purchase or sell these securities. Beginning in mid-February 2008, liquidity issues in the US +credit markets resulted in the failure of auctions across a broad spectrum of tax-exempt +securities, including student loan revenue bonds. Auctions for the student loan revenue bonds that +we hold have continued to fail through the present time. +The consequence of a failed auction is that we do not have access to the principal amount of our +investments. Issuers are still required to make interest payments when due in the event of failed +auctions. We have not experienced any missed interest payments to date. Our most recent interest +payment date was November 3, 2008. +Our auction-rate securities were purchased through UBS Financial Services, Inc. During November +2008, we accepted an offer from UBS, AG (UBS) of Auction Rate Security Rights. These rights permit +us to require UBS between June 30, 2010 and July 2, 2012 (the exercise period) to purchase our +auction-rate securities at par value. In exchange, UBS is granted the right, at their sole +discretion, to sell or otherwise dispose of our auction-rate security investments until July 2, +2012 as long as we receive a payment of par value upon the sale or disposition. In addition, the +rights permit us to establish a demand revolving credit line in an amount equal to the par value of +the securities at a net no cost. We are still able to sell the auction-rate securities on our own, +but in such a circumstance, we would lose the par value support from UBS. +As of September 30, 2008, the carrying value of our auction-rate securities was reduced by +$270,000. We consider this adjustment to be temporary under SFAS No. 115, Accounting for Certain +Investments in Debt and Equity Securities, and accordingly, it has been recorded as a component of +other comprehensive income in shareholders’ equity. This adjustment was based upon a valuation +prepared by an independent appraisal firm. Our investments in student loan auction-rate securities +are included in other long-term assets in the +-33- +Table of Contents +accompanying consolidated balance sheet based on the maturities of the student loan revenue bonds +(2029 to 2037). +We do not believe that the recent auction failures and our inability to liquidate these investments +for some period of time will have any material impact on our ability to fund our operating +requirements, capital expenditures, dividend payments, acquisitions, if any, or other business +requirements. +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2008 +(dollars in thousands): +Less than +More than +Total +1 Year +1-3 Years +4-5 Years +5 Years +Operating leases (1) +$ +1,695 +$ +602 +$ +939 +$ +154 +$ +— +Purchase obligations (2) +13,179 +12,793 +386 +— +— +OEM Concepts earnout (3) +1,814 +1,814 +— +— +— +FIN 48 liability and +interest (4) +779 +779 +— +— +— +Total +$ +17,467 +$ +15,988 +$ +1,325 +$ +154 +$ +— +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in +Florida, Belgium, and France; (ii) automobiles for use by the diagnostic direct sales +forces in the US and Europe; and (iii) certain office equipment such as facsimile machines +and copier machines across all business units, under operating lease agreements that expire +at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory +and service items. These contractual commitments are not in excess of expected production +requirements over the next twelve months. +(3) +OEM Concepts earnout obligation is contingent upon future calendar-year sales and gross +profit of OEM Concepts products through December 31, 2008. +(4) +As of September 30, 2008, our FIN 48 liability and FIN 48 net interest payable were +$731,000 and $48,000, respectively. Due to inherent uncertainties in the timing of +settlement of tax positions, we are unable to estimate the timing of the effective +settlement of these obligations. +-34- +Table of Contents +Other Commitments and Off-balance Sheet Arrangements: +License Agreements +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 $514,000 in fiscal 2009. These royalty payments +primarily relate to the US Diagnostics operating segment. +During October 2006, Meridian entered into a license agreement with Eiken Chemical Co., Ltd., that +provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious disease +testing in the United States and 18 other geographic markets. The agreement calls for payments of +up to 200,000,000 Japanese Yen (approximately $1,889,000) based on the achievement of certain +milestones and on-going royalties once products are available for commercial sale. Payments made +during product development are expected to occur over a five-year period, which began in fiscal +2007. A payment equal to 20,000,000 Japanese Yen or $169,000 was made during fiscal 2007. +During the fourth quarter of fiscal 2007, we began seeking recovery of approximately $1,400,000 of +past royalties paid and interest under a license agreement around certain rapid diagnostic testing +technology. This license agreement covered patent rights that were narrowed in scope via other +litigation with the licensor that did not involve Meridian. We strongly believe that the licensed +patent, as reissued, does not cover any of our products. We also ceased further royalty payments +under this license agreement. The licensor to this agreement disputes our position that the +patent, as reissued, does not cover our products. Although we believe that our position is very +strong, we are unable to predict the outcome of this matter. No provision has been made in the +accompanying financial statements for on-going royalties, if any, nor has any accrual or income +been recorded for recovery of past royalties paid. +Derivative financial instruments +Meridian accounts for its derivative financial instruments in accordance with SFAS No. 133, +Accounting for Derivative Instruments and Hedging Activities , as amended. These instruments are +designated as cash flow hedges, and therefore, the effective portion of the net gain or loss on the +derivative instrument is reported as a component of accumulated other comprehensive income (loss) +and reclassified into earnings in the same period or periods during which the hedged transaction +affects earnings. For the ineffective portion of the hedge, gains or losses are charged to +earnings in the current period. All derivative instruments are recognized as either assets or +liabilities at fair value in the consolidated balance sheets. See Note 4 to the consolidated +financial statements contained herein. +-35- +Table of Contents +Off-balance sheet arrangements +We have no off-balance sheet arrangements. +Market Risk Exposure: +Foreign Currency Risk +We have market risk exposure related to foreign currency transactions. Meridian is exposed to +foreign currency risk related to its European distribution operations, including foreign currency +denominated intercompany sales and receivables. We enter into forward exchange contracts to hedge +cash flows from intercompany sales between our US parent company and its Italian affiliate. The +counterparties to these contracts are commercial banks. Hedging activities are further discussed +in Note 4 to the consolidated financial statements. +Concentration of Customers/Products Risk +Our US Diagnostic operating segment’s sales through two distributors were 54% of the US Diagnostics +operating segment’s total sales for fiscal 2008 or 34% of consolidated total sales for fiscal 2008. +Three internally developed products, Premier ä Platinum HpSA PLUS, Premier ä Toxins A & +B, and Immuno Card Ò Toxins A & B, accounted for 38% of our US Diagnostics operating +segment’s third-party sales during fiscal 2008. These same three products accounted for 30% of our +European Diagnostics operating segment’s third-party sales and 32% of our total consolidated sales +for fiscal 2008. +Our Life Science operating segment’s sales of purified antigens and reagents to one customer were +21% of the Life Science operating segment’s total sales for fiscal 2008 or 3% of our consolidated +total sales for fiscal 2008. Our Life Science operating segment has three other significant +customers who purchase antigens, antibodies and reagents, which together comprised 17% of the +operating segment’s total sales for fiscal 2008. +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 require management to make judgments about estimates and assumptions that +affect the reported amounts 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. +-36- +Table of Contents +Revenue Recognition +Our revenues are derived primarily from product sales. Revenue is generally recognized when +product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating +segment is reduced at the date of sale for estimated rebates 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 +rebate accruals based on historical statistics, current trends, and other factors. Changes to +these rebate accruals are recorded in the period that they become known. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work followed +by larger-scale manufacturing (both contract research and development services and contract +manufacturing services). Revenue is recognized based on the nature of the arrangements, using the +principles in EITF 00-21, Revenue Arrangements with Multiple Deliverables . The framework in EITF +00-21 is based on each of the multiple deliverables in a given arrangement having distinct and +separate fair values. Fair values are determined via consistent pricing between standalone +arrangements and multiple deliverable arrangements, as well as a competitive bidding process. +Contract research and development services may be performed on a “time and materials” basis or +“fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and +acceptance by the customer. For contract manufacturing services, revenue is generally recognized +upon delivery of product and acceptance by the customer. In some cases, customers may request that +we store on their behalf clinical grade biologicals that we produce under contract manufacturing +agreements. These cases arise when customers do not have clinical grade storage facilities or do +not want to risk contamination during transport. For such cases, revenue may be recognized on a +bill-and-hold basis pursuant to the satisfaction of criteria in SEC Staff Accounting Bulletins Nos. +101 and 104 related to bill-and-hold revenue recognition. +Inventories +Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, +first-out basis. We establish 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 these reserves based on assumptions about future demand and market conditions. +If actual demand and market conditions were to be less favorable than such estimates, additional +inventory write-downs would be required and recorded in the period known. Such adjustments would +negatively affect gross profit margin and overall results of operations. +-37- +Table of Contents +Intangible Assets +Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles +include customer lists, supply agreements, manufacturing technologies, patents, licenses, and trade +names. All of Meridian’s identifiable intangibles have finite lives. +SFAS No. 142 provides that goodwill and intangible assets with indefinite lives are subject to an +annual impairment review (or more frequently if impairment indicators arise) by applying a +fair-value based test. There have been no impairments from the analyses required by SFAS No. 142. +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 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. During fiscal 2006, Meridian determined that +the carrying value of a supply contract related to the Life Science operating segment had become +impaired and recorded such impairment in the amount of $826,000 to general and administrative +expenses. The contract provided for the supply of biological materials to the United States +Department of Defense. Changes in the Department’s Critical Reagents Program lowered the amount of +materials to be supplied under the contract and ultimately led to the contract having a shorter +life than originally expected. There were no events or circumstances in fiscal 2008 or 2007 +indicating that the carrying value of other such assets may not be recoverable. +Our ability to recover 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, impairment of intangible assets could +take place. If impairment were to occur, this would negatively affect overall results of +operations. +-38- +Table of Contents +Income Taxes +Pursuant to SFAS No. 109, Accounting for Income Taxes , our 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. We +prepare estimates of permanent and temporary differences between income for financial reporting +purposes and income for tax purposes. These differences are adjusted to actual upon filing of our +tax returns, typically occurring in the third and fourth quarters of the current fiscal year for +the preceding fiscal year’s estimates. +Effective October 1, 2007, we adopted FIN 48, which prescribes a comprehensive model for the +recognition, measurement, presentation and disclosure of uncertain tax positions, assuming full +knowledge of all relevant facts by the applicable tax authorities. The cumulative effect of +adopting FIN 48, $305,000, was charged to opening retained earnings. See Note 5 to the +consolidated financial statements herein. +Our 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 assets considered realizable could be reduced +in future years if estimates of future taxable income during the carryforward period are reduced. +Undistributed earnings in our Italian subsidiary are considered by management to be permanently +re-invested in such subsidiary. 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 locally in Italy. +From time to time, our tax returns in federal, state, and foreign jurisdictions are examined by the +applicable tax authorities. To the extent that adjustments result from the completion of these +examinations or the passing of statutes of limitation, they will affect tax liabilities in the +period known. We believe that the results of any tax authority examinations would not have a +significant adverse impact on financial condition or results of operation. +Recent Accounting Pronouncements: +See Note 1(p) to the Consolidated Financial Statements. +-39- +Table of Contents +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +-40- +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +42 +Report of Independent Registered Public Accounting Firm +43 +Consolidated Statements of Operations for the years ended September 30, 2008, 2007 and 2006 +45 +Consolidated Statements of Cash Flows for the years ended September 30, 2008, 2007 and 2006 +46 +Consolidated Balance Sheets as of September 30, 2008 and 2007 +47 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2008, 2007 and 2006 +49 +Notes to Consolidated Financial Statements +50 +Schedule No. II — Valuation and Qualifying Accounts for the years ended September 30, 2008, 2007 +and 2006 +79 +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. +-41- +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles, and that receipts and expenditures of the +Company are being made only in accordance with authorizations of management and directors of the +Company; and (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and may not prevent or detect misstatements. Also, projections of any +evaluation of effectiveness to future periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree or compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and criteria in Internal Control +— Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2008. +The company’s independent registered public accounting firm has issued an attestation report on the +registrant’s internal control over financial reporting. +/s/ John A. Kraeutler +Chief Executive Officer +November 24, 2008 +/s/ Melissa Lueke +Melissa Lueke +Vice President and +Chief Financial Officer +November 24, 2008 +-42- +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Shareholders +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio +corporation) and subsidiaries as of September 30, 2008 and 2007, and the related consolidated +statements of operations, shareholders’ equity, and cash flows for each of the three years in the +period ended September 30, 2008. Our audits of the basic financial statements included the +financial statement schedule listed in the index appearing under Schedule No. II. We also have +audited Meridian Bioscience, Inc.’s internal control over financial reporting as of September 30, +2008, based on criteria established in Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO). Meridian Bioscience, +Inc.’s management is responsible for these financial statements and financial statement schedule, +for maintaining effective internal control over financial reporting, and for its assessment of the +effectiveness of internal control over financial reporting, included in the accompanying +Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express +an opinion on these financial statements and financial statement schedule and an opinion on the +Company’s internal control over financial reporting based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight +Board (United States). Those standards require that we plan and perform the audits to obtain +reasonable assurance about whether the financial statements are free of material misstatement and +whether effective internal control over financial reporting was maintained in all material +respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining +an understanding of internal control over financial reporting, assessing the risk that a material +weakness exists, and testing and evaluating the design and operating effectiveness of internal +control based on the assessed risk. Our audits also included performing such other procedures as +we considered necessary in the circumstances. We believe that our audits provide a reasonable +basis for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable +assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in accordance with generally accepted accounting principles. A +company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; (2) provide reasonable assurance that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of +-43- +Table of Contents +the company +are being made only in accordance with authorizations of management and directors of the company; +and (3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, +use, or disposition of the company’s assets that could have a material effect on the financial +statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are +subject to the risk that controls may become inadequate because of changes in conditions, or that +the degree of compliance with the policies or procedures may deteriorate. +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, +2008 and 2007, and the results of their operations and their cash flows for each of the three years +in the period ended September 30, 2008 in conformity with accounting principles generally accepted +in the United States of America. Also, in our opinion, the related financial statement schedule, +when considered in relation to the basic financial statements taken as a whole, presents fairly, in +all material respects, the information set forth therein. +Also in our opinion, Meridian Bioscience, Inc. and subsidiaries maintained, in all material +respects, effective internal control over financial reporting as of September 30, 2008, based on +criteria established in Internal Control—Integrated Framework issued by COSO. +We do not express an opinion or any other form of assurance on Management’s Report on Internal +Control over Financial Reporting. +/s/ GRANT THORNTON LLP +Cincinnati, OH +November 24, 2008 +-44- +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2008 +2007 +2006 +Net Sales +$ +139,639 +$ +122,963 +$ +108,413 +Cost of Sales +53,159 +48,023 +43,729 +Gross Profit +86,480 +74,940 +64,684 +Operating Expenses: +Research and development +6,183 +6,085 +4,799 +Selling and marketing +18,770 +17,124 +16,698 +General and administrative +17,177 +16,701 +16,293 +Total operating expenses +42,130 +39,910 +37,790 +Operating Income +44,350 +35,030 +26,894 +Other Income (Expense): +Interest income +1,533 +1,642 +1,123 +Interest expense +— +(38 +) +(128 +) +Other, net +109 +48 +177 +Total other income +1,642 +1,652 +1,172 +Earnings Before Income Taxes +45,992 +36,682 +28,066 +Income Tax Provision +15,790 +9,961 +9,733 +Net Earnings +$ +30,202 +$ +26,721 +$ +18,333 +Earnings Per Share Data: +Basic earnings per common share +$ +0.75 +$ +0.67 +$ +0.47 +Diluted earnings per common share +0.74 +0.66 +0.46 +Common shares used for basic earnings per common share +40,093 +39,584 +39,132 +Effect of dilutive stock options +936 +1,154 +1,032 +Common shares used for diluted earnings per common share +41,029 +40,738 +40,164 +Dividends declared per common share +$ +0.53 +$ +0.40 +$ +0.28 +Anti-dilutive Securities: +Common share options +67 +— +32 +Convertible debentures +— +— +279 +All share and per share data has been adjusted for a three-for-two stock split that occurred on May +11, 2007. +The accompanying notes are an integral part of these consolidated financial statements. +-45- +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2008 +2007 +2006 +Cash Flows From Operating Activities +Net earnings +$ +30,202 +$ +26,721 +$ +18,333 +Non-cash items: +Depreciation of property, plant and equipment +2,857 +2,764 +2,717 +Amortization of intangible assets and debt issuance costs +1,612 +1,635 +2,572 +Deferred income taxes +976 +800 +47 +Stock compensation expense +1,772 +2,632 +1,082 +Tax reserve adjustment +— +(2,425 +) +— +Loss on disposition of fixed assets +9 +5 +38 +Change in current assets +(5,147 +) +(3,011 +) +(3,146 +) +Change in current liabilities +(2,967 +) +(2,145 +) +920 +Other, net +569 +(374 +) +(408 +) +Net cash provided by operating activities +29,883 +26,602 +22,155 +Cash Flows From Investing Activities +Acquisition earnout payments +(157 +) +(971 +) +(1,494 +) +Purchases of property, plant and equipment +(4,219 +) +(3,211 +) +(3,120 +) +Proceeds from dispositions of property, plant and equipment +4 +4 +47 +Purchases of investments +(7,750 +) +— +(6,000 +) +Proceeds from sales of investments +— +4,000 +2,000 +Other intangibles acquired +(1,108 +) +(265 +) +(122 +) +Net cash used in investing activities +(13,230 +) +(443 +) +(8,689 +) +Cash Flows From Financing Activities +Repayment of debt obligations +— +(29 +) +(790 +) +Dividends paid +(21,256 +) +(15,836 +) +(11,095 +) +Proceeds and tax benefits from exercises of stock options +4,563 +2,574 +1,660 +Net cash used in financing activities +(16,693 +) +(13,291 +) +(10,225 +) +Effect of Exchange Rate Changes on Cash and Equivalents +(63 +) +184 +22 +Net Increase in Cash and Equivalents +(103 +) +13,052 +3,263 +Cash and Equivalents at Beginning of Period +49,400 +36,348 +33,085 +Cash and Equivalents at End of Period +$ +49,297 +$ +49,400 +$ +36,348 +The accompanying notes are an integral part of these consolidated financial statements. +-46- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2008 +2007 +Assets +Current Assets: +Cash and equivalents +$ +49,297 +$ +49,400 +Accounts receivable, less allowances of $230 in 2008 and $258 in 2007 +25,098 +22,651 +Inventories +19,945 +18,171 +Prepaid expenses and other current assets +3,382 +2,147 +Deferred income taxes +1,736 +1,376 +Total current assets +99,458 +93,745 +Property, Plant and Equipment, at Cost: +Land +892 +890 +Buildings and improvements +16,977 +16,907 +Machinery, equipment and furniture +26,458 +24,619 +Construction in progress +3,391 +1,290 +Subtotal +47,718 +43,706 +Less-accumulated depreciation and amortization +28,043 +25,395 +Net property, plant and equipment +19,675 +18,311 +Other Assets: +Goodwill +9,861 +9,964 +Other intangible assets, net +8,786 +9,457 +Restricted cash +1,000 +1,000 +Investments in auction-rate securities +7,480 +— +Other assets +171 +221 +Total other assets +27,298 +20,642 +Total assets +$ +146,431 +$ +132,698 +The accompanying notes are an integral part of these consolidated financial statements. +-47- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2008 +2007 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +4,777 +$ +4,704 +Accrued payroll costs +6,777 +7,541 +Purchase business combination liability +3 +152 +Other accrued expenses +3,613 +4,008 +Income taxes payable +891 +662 +Total current liabilities +16,061 +17,067 +Deferred Income Taxes +1,881 +2,683 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 40,313,656 +and 39,847,391 shares issued +— +— +Additional paid-in capital +89,107 +82,209 +Retained earnings +39,016 +30,375 +Accumulated other comprehensive income +366 +364 +Total shareholders’ equity +128,489 +112,948 +Total liabilities and shareholders’ equity +$ +146,431 +$ +132,698 +The accompanying notes are an integral part of these consolidated financial statements. +-48- +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Dollars and shares in thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Additional +Accumulated Other +Common +Shares Held +Treasury +Paid-in +Retained +Comprehensive +Comprehensive +Shares Issued +in Treasury +Stock +Capital +Earnings +Income (Loss) +Income (Loss) +Total +Balance at September 30, 2005 +38,910 +(18) +$ +(32) +$ +71,568 +$ +12,252 +$ +(455) +$ +83,333 +Cash dividends paid — $0.28 per share +— +— +— +— +(11,095) +— +(11,095) +Exercise of stock options +245 +— +— +1,722 +— +— +1,722 +Stock compensation expense +— +— +— +1,082 +— +— +1,082 +Debenture conversions +99 +— +— +610 +— +— +610 +Retirement of treasury shares +(18) +18 +32 +(32) +— +— +— +Comprehensive income: +Net earnings +— +— +— +— +18,333 +— +$ +18,333 +18,333 +Hedging activity +— +— +— +— +— +13 +13 +13 +Other comprehensive income taxes +— +— +— +— +— +50 +50 +50 +Foreign currency translation adjustment +— +— +— +— +— +302 +302 +302 +Comprehensive income +$ +18,698 +Balance at September 30, 2006 +39,236 +— +— +74,950 +19,490 +(90) +94,350 +Cash dividends paid — $0.40 per share +— +— +— +— +(15,836) +— +(15,836) +Exercise of stock options +336 +— +— +2,950 +— +— +2,950 +Stock compensation expense +— +— +— +2,632 +— +— +2,632 +Debenture conversions +275 +— +— +1,677 +— +— +1,677 +Comprehensive income: +Net earnings +— +— +— +— +26,721 +— +$ +26,721 +26,721 +Hedging activity +— +— +— +— +— +(283) +(283) +(283) +Other comprehensive income taxes +— +— +— +— +— +(244) +(244) +(244) +Foreign currency translation adjustment +— +— +— +— +— +981 +981 +981 +Comprehensive income +$ +27,175 +Balance at September 30, 2007 +39,847 +— +— +82,209 +30,375 +364 +112,948 +Adoption of FASB Interpretation No. 48 +— +— +— +— +(305) +— +(305) +Cash dividends paid — $0.53 per share +— +— +— +— +(21,256) +— +(21,256) +Exercise of stock options +467 +— +— +5,126 +— +— +5,126 +Stock compensation expense +— +— +— +1,772 +— +— +1,772 +Comprehensive income: +Net earnings +— +— +— +— +30,202 +$ +30,202 +30,202 +Hedging activity +— +— +— +— +— +273 +273 +273 +Unrealized loss on investments +— +— +— +— +— +(270) +(270) +(270) +Other comprehensive income taxes +— +— +— +— +— +(4) +(4) +(4) +Foreign currency translation adjustment +— +— +— +— +— +3 +3 +3 +Comprehensive income +$ +30,204 +Balance at September 30, 2008 +40,314 +— +$ +— +$ +89,107 +$ +39,016 +$ +366 +$ +128,489 +The accompanying notes are an integral part of these consolidated financial statements. +-49- +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(1) Summary of Significant Accounting Policies +(a) +Nature of Business — Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +(b) +Principles of Consolidation — The consolidated financial statements include the accounts of +Meridian Bioscience, Inc. and its subsidiaries. All significant intercompany accounts and +transactions have been eliminated. Unless the context requires otherwise, references to +“Meridian,” “we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its +subsidiaries. +(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 1(f), 1(g), 1(h), 1(i), 1(k), 1(l), 5 and 6(b). +(d) +Foreign Currency Translation — 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 or loss. Revenues and expenses +are translated using exchange rates prevailing during the year. We also recognize 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) +Cash, Cash Equivalents and Investments — We consider short-term investments with original +maturities of 90 days or less to be cash equivalents, including overnight repurchase +agreements, investments in municipal variable rate demand notes that have a seven-day put +feature and institutional money market funds. +Our investments in debt securities are accounted for as available-for-sale under SFAS No. 115, +Accounting for Certain Investments in Debt and Equity Securities . As such, unrealized holding +gains and losses are reported as a component of other comprehensive income or loss within +shareholders’ equity until realized, +-50- +Table of Contents +except where losses are considered to be +other-than-temporary, in which case they would be recorded to other income and expense, net. +The carrying value of securities classified as cash equivalents was equal to their fair value as +of September 30, 2008 and 2007. There were no realized gains or losses from the sales of +securities classified as cash equivalents during fiscal 2008 or fiscal 2007. As of September +30, 2008, accumulated other comprehensive income included $270,000 of current year unrealized +holding losses related to student loan auction-rate securities, which are discussed below. +Our investment portfolio includes the following components (dollars in thousands): +September 30, 2008 +September 30, 2007 +Cash and +Other +Cash and +Other +Equivalents +Assets +Equivalents +Assets +Taxable investments – +Repurchase agreements +$ +6,711 +$ +7,751 +Tax-exempt investments – +Money market funds +12,848 +2,536 +Variable rate demand notes +23,948 +36,069 +Student loan auction-rate securities +— +$ +7,480 +— +Cash on hand – +Restricted +— +1,000 +— +$ +1,000 +Unrestricted +5,790 +— +3,044 +— +Total +$ +49,297 +$ +8,480 +$ +49,400 +$ +1,000 +The primary objectives of our investment activities are to preserve capital and provide +sufficient liquidity to meet operating requirements and fund strategic initiatives such as +acquisitions. We maintain a written investment policy that governs the management of our +investments in fixed income securities. This policy, among other things, provides that we may +purchase only high credit-quality securities, that have short-term ratings of at least A-1 and +P-1 or better, and long-term ratings of at least A-2 and A or better, by Moody’s and Standard & +Poor’s, respectively, at the time of purchase. +Our investments in repurchase agreements are with a commercial bank pursuant to an overnight +sweep/liquidity arrangement with our operating cash accounts. Our investments in variable rate +demand notes contain a seven-day put feature. +As a result of current conditions in the financial markets, during October 2008, we moved +substantially all of our investments in municipal variable rate demand notes to institutional +money market mutual funds invested in either US Treasuries, or repurchase agreements +collateralized by US Treasuries. Existing investments in institutional tax-exempt money market +mutual funds are covered under the US Treasury’s Temporary Guarantee Program for Money Market +Funds. This program provides a guarantee to money market mutual +-51- +Table of Contents +fund shareholders of $1 per +share net asset value for funds invested as of September 19, 2008, if the fund were to liquidate +its assets as a result of its net asset value falling below $0.995. +Our investment portfolio also includes student loan auction-rate securities, which are long-term +student loan revenue bonds whose interest rates are reset every 35 days via a Dutch auction +process. All of our auction-rate securities are backed by pools of student loans originated +under the Federal Family Education Loan Program (FFELP). FFELP student loans are guaranteed by +State guarantors who have reinsurance agreements with the US Department of Education. All of +our student loan auction-rate securities were rated Aaa and AAA by Moody’s and Standard & +Poor’s, respectively, at the time of purchase, and have continued to maintain these credit +ratings through the present time. +The Dutch auction process historically provided the necessary liquidity mechanism to either +purchase or sell these securities. Beginning in mid-February 2008, liquidity issues in the US +credit markets resulted in the failure of auctions across a broad spectrum of tax-exempt +securities, including student loan revenue bonds. Auctions for the student loan revenue bonds +that we hold have continued to fail through the present time. +The consequence of a failed auction is that we do not have access to the principal amount of our +investments. Issuers are still required to make interest payments when due in the event of +failed auctions. We have not experienced any missed interest payments to date. +Our auction-rate securities were purchased through UBS Financial Services, Inc. During November +2008, we accepted an offer from UBS, AG (UBS) of Auction Rate Security Rights. These rights +permit us to require UBS between June 30, 2010 and July 2, 2012 (the exercise period) to +purchase our auction-rate securities at par value. In exchange, UBS is granted the right, at +their sole discretion, to sell or otherwise dispose of our auction-rate security investments +until July 2, 2012 as long as we receive a payment of par value upon the sale or disposition. +In addition, the rights permit us to establish a demand revolving credit line in an amount equal +to the par value of the securities at a net no cost. We are still able to sell the auction-rate +securities on our own, but in such a circumstance, we would lose the par value support from UBS. +As of September 30, 2008, the carrying value of our auction-rate securities was reduced by +$270,000. We consider this adjustment to be temporary under SFAS No. 115, Accounting for +Certain Investments in Debt and Equity Securities , and accordingly, it has been recorded as a +component of other comprehensive income in shareholders’ equity. This adjustment was based upon +a valuation prepared by an independent appraisal firm. Our investments in student loan +auction-rate securities are included in other long-term assets in the accompanying consolidated +balance sheet based on the maturities of the student loan revenue bonds (2029 to 2037). +-52- +Table of Contents +We do not believe that the recent auction failures and our inability to liquidate these +investments for some period of time will have any material impact on our ability to fund our +operating requirements, capital expenditures, dividend payments, acquisitions, if any, or other +business requirements. +(f) +Inventories — Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO) for substantially all of our inventories. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf +life may expire before sale to customers, and other identified exposures. Such reserves were +$1,103,000 and $1,162,000 at September 30, 2008 and 2007, respectively. Management estimates +these reserves based on assumptions about future demand and market conditions. If actual demand +and market conditions were to be less favorable than such estimates, additional inventory +write-downs would be required and recorded in the period known. Such adjustments would +negatively affect gross profit margin and overall results of operations. +Prior to July 1, 2007, the cost of certain inventories within the Life Science operating segment +was determined by the last-in, first-out (“LIFO”) method. Effective July 1, 2007, we changed +our method of accounting for this inventory from the LIFO method to the FIFO method, and now +substantially all of our inventories are reflected at the lower of cost or market with cost +determined by the FIFO method. We changed to the FIFO method for these inventories because: it +conforms substantially all of our worldwide inventories to a consistent basis of accounting; and +it provides better comparability to our industry peers, many of whom use the FIFO method of +accounting for inventories. In accordance with Statement of Financial Accounting Standards +(“SFAS”) No. 154, Accounting Changes and Error Corrections , the change in accounting has been +retrospectively applied to all prior periods presented herein. The impact was not material to +our results of operations or financial position. +(g) +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 - 18 to 40 years +Machinery, equipment, and furniture - 3 to 10 years +(h) +Intangible Assets and Application of SFAS Nos. 142 and 144 — SFAS No. 142, Goodwill and Other +Intangible Assets, addresses accounting and reporting for acquired goodwill and other +intangible assets. SFAS No. 142 provides that goodwill and other intangible assets with +indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based +-53- +Table of Contents +test. We perform our annual impairment +review as of June 30, the end of our third fiscal quarter. We have no intangible assets with +indefinite lives other than goodwill. There have been no impairments from the analyses +prepared pursuant to SFAS No. 142. During fiscal 2008, the change in goodwill was a decrease +of $103,000. This change consisted of an increase related to the OEM Concepts earnout +obligations for calendar 2007 and the first nine months of calendar 2008 in the amount of +$7,000 (Life Science operating segment), offset by a decrease of $110,000 related to +recognition of acquired tax benefits (US Diagnostics operating segment). During fiscal 2007, +the change in goodwill was an increase of $100,000. This change consisted of an increase +related to the OEM Concepts earnout obligations for calendar 2006 and the first nine months of +calendar 2007 in the amount of $186,000 (Life Science operating segment), offset by a decrease +of $86,000 related to recognition of acquired tax benefits (US Diagnostics operating segment). +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2008 and 2007 is as follows (dollars in thousands). +Wtd Avg +2008 +2007 +Amort +Gross +2008 +Gross +2007 +Period +Carrying +Accumulated +Carrying +Accumulated +As of September 30, +(Yrs) +Value +Amortization +Value +Amortization +Core products and cell lines +15 +$ +4,698 +$ +2,602 +$ +4,698 +$ +2,313 +Manufacturing technologies +14 +6,057 +4,440 +5,907 +4,089 +Trademarks, licenses and patents +8 +2,663 +1,843 +2,270 +1,694 +Customer lists and supply +agreements +13 +11,039 +6,786 +10,641 +5,963 +$ +24,457 +$ +15,671 +$ +23,516 +$ +14,059 +The actual aggregate amortization expense for these intangible assets for fiscal 2008, 2007, and +2006 was $1,612,000, $1,632,000, and $2,560,000, respectively. The amortization expense for +fiscal 2006 included an impairment charge of $826,000 on a supply agreement discussed below. +The estimated aggregate amortization expense for these intangible assets for each of the five +succeeding fiscal years is as follows: fiscal 2009 - $1,574,000, +fiscal 2010 - $1,412,000, +fiscal 2011 - $1,297,000, fiscal 2012- $1,152,000 and fiscal 2013 - $1,152,000. +SFAS No. 144, Accounting for Impairment or Disposal of Long-lived Assets, establishes a single +model for accounting for impairment or disposal of long-lived assets. 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 asset’s future cash flows to its carrying value. If impairment has +occurred, it is measured by a fair-value based test. During fiscal 2006, we determined that the +carrying value of a supply contract with the US Department of Defense (the “Department”) related +to the Life Science operating segment had become impaired and recorded such impairment in the +amount of $826,000 to general and administrative expenses. The impairment was measured by +comparing the present value of expected future cash flows to the carrying value of the contract. +The contract provided for the supply of biological materials during a base period and also +contained four optional 12-month renewal periods through March 31, 2009. Changes in the +Department’s Critical Reagents +-54- +Table of Contents +Program lowered the amount of materials to be supplied under the +contract. During March 2007, the Department informed us that it would not be exercising the +optional renewal period from April 1, 2007 through March 31, 2008. We do not expect to supply +any more materials under this contract, and as of September 30, 2008 and September 30, 2007, the +carrying value of this contract was zero. There have been no events or circumstances indicating +that the carrying value of other such assets may not be recoverable. +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 and fixed assets, 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. +(i) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at +the date of sale for estimated rebates that will be claimed by customers. Management +estimates accruals for rebate agreements based on historical statistics, current trends, and +other factors. Changes to the accruals are recorded in the period that they become known. +Our rebate accruals were $3,259,000 at September 30, 2008 and $2,415,000 at September 30, +2007. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work +followed by larger-scale manufacturing (both contract research and development services and +contract manufacturing services). Revenue is recognized based on the nature of the +arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple +Deliverables . The framework in EITF 00-21 is based on each of the multiple deliverables in a +given arrangement having distinct and separate fair values. Fair values are determined via +consistent pricing between standalone arrangements and multiple deliverable arrangements, as +well as a competitive bidding process. Contract research and development services may be +performed on a “time and materials” basis or “fixed fee” basis. For “time and materials” +arrangements, revenue is +-55- +Table of Contents +recognized as services are performed and billed. For “fixed fee” +arrangements, revenue is recognized upon completion and acceptance by the customer. For +contract manufacturing services, revenue is generally recognized upon delivery of product and +acceptance by the customer. In some cases, customers may request that we store on their behalf, +clinical grade biologicals that we produce under contract manufacturing agreements. These cases +arise when customers do not have clinical grade storage facilities or do not want to risk +contamination during transport. For such cases, revenue may be recognized on a bill-and-hold +basis pursuant to the satisfaction of criteria in SEC Staff Accounting Bulletins Nos. 101 and +104 related to bill-and-hold revenue recognition. +Trade accounts receivable are recorded in the accompanying consolidated balance sheet at +invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents our estimate of probable credit losses and is based on historical write-off +experience. The allowance for doubtful accounts and related metrics, such as days’ sales +outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed +individually for collectibility. Customer invoices are charged off against the allowance when +we believe it is probable the invoices will not be paid. +(j) +Research and Development Costs — Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, costs for +clinical trials, and costs for facilities and equipment. +(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. We prepare estimates of permanent +and temporary differences between income for financial reporting purposes and income for tax +purposes. These differences are adjusted to actual upon filing of our tax returns, typically +occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal +year’s estimates. See Note 5. +On October 1, 2007, we began accounting for uncertain tax positions in accordance with FASB +Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 requires use +of a benefit recognition model with a two-step approach: (i) a more-likely-than-not recognition +criterion and (ii) a measurement attribute that measures the position as the largest amount of +tax benefit that is greater than 50% likely of being ultimately realized upon ultimate +settlement. If it is not more likely than not that the benefit will be sustained on its +technical merits, no benefit is recorded. We recognize accrued interest related to unrecognized +tax benefits as a portion of our income tax provision in the consolidated statements of +operations. See Note 5. +(l) +Stock-based Compensation — We account for stock-based compensation pursuant to SFAS No. 123R, +Share-Based Payment . SFAS No. 123R requires recognition of compensation expense for all +share-based +-56- +Table of Contents +awards made to employees, based upon the fair value of the share-based award on +the date of the grant. Meridian elected to adopt the provisions of SFAS No. 123R, utilizing +the modified prospective method, which required compensation expense be measured and +recognized based on grant-date fair value for stock option awards granted after July 1, 2005, +our adoption date, and the non-vested portions of stock options awards granted prior to July +1, 2005. See Note 6(b). +(m) +Derivative Financial Instruments — We account for our derivative financial instruments in +accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as +amended. These instruments are designated as cash flow hedges, and therefore, the effective +portion of the net gain or loss on the derivative instrument is reported as a component of +accumulated other comprehensive income (loss) and reclassified into earnings in the same +period or periods during which the hedged transaction affects earnings. For the ineffective +portion of the hedge, gains or losses are charged to earnings in the current period. All +derivative instruments are recognized as either assets or liabilities at fair value in the +consolidated balance sheets. Cash flows from our hedging instruments are classified in +operating activities, consistent with cash flows from the related items being hedged. See +Note 4. +(n) +Comprehensive Income (Loss) — Comprehensive income (loss) represents the net change in +shareholders’ equity during a period from sources other than transactions with shareholders. +Our comprehensive income or loss is comprised of net earnings, foreign currency translation, +changes in the fair value of forward exchange contracts accounted for as cash flow hedges, and +changes in the fair value of available-for-sale (AFS) fixed income securities. Components of +beginning and ending accumulated other comprehensive income or loss, and related activity, are +shown in the following table (in thousands): +Foreign +Accumulated +Currency +Cash +Unrealized Loss +Other +Translation +Flow +Income +on AFS +Comprehensive +Adjustment +Hedges +Taxes +Securities +Income (Loss) +Balance at September 30, 2007 +$ +828 +$ +(270) +$ +(194) +$ +— +$ +364 +Currency translation +3 +— +— +— +3 +Reclassifications to earnings of hedging +activity +— +599 +— +— +599 +Net unrealized losses on hedging instruments +— +(326) +— +— +(326) +Net unrealized losses on auction-rate securities +— +— +— +(270) +(270) +Taxes +— +— +(4) +— +(4) +Balance at September 30, 2008 +$ +831 +$ +3 +$ +(198) +$ +(270) +$ +366 +-57- +Table of Contents +(o) +Supplemental Cash flow Information — Supplemental cash flow information is as follows for fiscal +2008 , 2007 and 2006 (dollars in thousands): +Year Ended September 30, +2008 +2007 +2006 +Cash paid for - +Income taxes +$ +15,365 +$ +12,412 +$ +6,734 +Interest +— +37 +106 +Non-cash items - +Debenture conversions +— +1,775 +648 +(p) +Recent Accounting Pronouncements — During September 2006, the FASB issued SFAS No. 157, Fair +Value Measurements . SFAS No. 157 defines fair value and provides a framework for measuring +fair value, including a hierarchy that prioritizes the inputs to valuation techniques into +three broad levels. This fair value hierarchy gives the highest priority to quoted prices in +active markets for identical assets and liabilities and the lowest priority to unobservable +inputs. We are required to adopt SFAS No. 157 in fiscal 2009. We are currently in the +process of evaluating the impact of SFAS No. 157 on our financial statements. +During February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and +Financial Liabilities – Including an Amendment of FASB Statement No. 115 . SFAS No. 159 permits +an entity to choose to measure certain financial instruments and other items at fair value where +such financial instruments and other items are not currently required to be measured at fair +value. For financial instruments and other items where the fair value option is elected, +unrealized gains and losses are reported in earnings. We are required to adopt SFAS No. 159 in +fiscal 2009. We are currently in the process of evaluating the impact of SFAS No. 159 on our +financial statements. +In December 2007, the FASB issued SFAS No. 141(R), Business Combinations , as part of a joint +project with the International Accounting Standards Board. SFAS No. 141(R) provides for several +significant changes to existing accounting practices for business combinations. Most notably, +(i) acquisition-related transaction costs, such as legal and professional fees, shall be expensed +rather than accounted for as part of the acquisition cost; (ii) acquired in-process research and +development shall be capitalized rather than expensed at the acquisition date; and (iii) +contingent consideration shall be recorded at fair value at the acquisition date rather than the +points in time that payment becomes probable. SFAS No. 141(R) is effective for fiscal years +beginning after December 15, 2008. Thus, for Meridian, it will affect any acquisitions completed +on or after October 1, 2009. +In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of +Intangible Assets . This statement provides guidance on the determination of the useful life of +intangible assets in accordance with SFAS No. 142 . For intangible assets acquired after the +effective date, a company is not required to consider renewal or extension at substantial cost +or with material modification of existing terms to be factors that limit the useful life of the +asset. Instead, the company must consider its own historical +-58- +Table of Contents +experience in renewing or +extending similar arrangements, adjusted by certain company-specific factors. FSP 142-3 is +effective for fiscal years beginning after December 15, 2008 and for interim periods within +those fiscal years, which, for Meridian, would be fiscal 2010. Early adoption is prohibited. +We do not expect the adoption of this standard to have a material effect on our results of +operations. +In June 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging +Activities – an amendment of FASB Statement No. 133 . This statement requires additional +disclosures regarding the effect of hedging activities on a company’s results. This statement +is effective for financial statements issued for fiscal years and interim periods beginning +after November 15, 2008, which for Meridian would be the second quarter of fiscal 2009. We have +elected to early-adopt this statement, as permitted. See Note 4. +(q) +Shipping and Handling costs — Shipping and handling costs invoiced to customers are included +in net sales. Costs to distribute products to customers, including inbound freight costs, +warehousing costs, and other shipping and handling activities are included in cost of goods +sold. +(r) +Non-income Government-Assessed Taxes — We classify all non-income, government-assessed taxes +(sales, use, and value-added) collected from customers and remitted by us to appropriate +revenue authorities, on a net basis (excluded from net sales) in the accompanying consolidated +statements of operations. +(s) +Reclassifications — Certain reclassifications have been made to the prior year financial +statements to conform to the current year presentation. +(2) Inventories +Inventories are comprised of the following (dollars in thousands): +As of September 30, +2008 +2007 +Raw materials +$ +5,238 +$ +4,816 +Work-in-process +4,867 +5,141 +Finished goods +9,840 +8,214 +$ +19,945 +$ +18,171 +(3) Bank Credit Arrangements +We have a $30,000,000 credit facility with a commercial bank, which expires in September 2012. +This credit facility is collateralized by our business assets except for those of non-domestic +subsidiaries. There were no borrowings outstanding on this credit facility at September 30, 2008 +or September 30, 2007. Available borrowings under this credit facility were $30,000,000 at +September 30, 2008. In connection with this bank credit arrangement, we are required to comply +with financial covenants that limit the amount of debt obligations, +-59- +Table of Contents +require a minimum amount of +tangible net worth, and require a minimum amount of fixed charge coverage. We are in compliance +with all covenants. We are also required to maintain a cash compensating balance with the bank in +the amount of $1,000,000, pursuant to this bank credit arrangement. +(4) Hedging Transactions +From time to time, we manage exchange rate risk related to forecasted intercompany sales +denominated in the Euro currency through the use of forward exchange contracts. In accordance with +SFAS No. 133, we designate such forward contracts as cash flow hedges. As such, the effective +portion of the gain or loss on the derivative instrument is reported as a component of other +comprehensive income and reclassified into earnings in the same period or periods during which the +hedged transaction affects earnings. Gains and losses on the derivative instruments representing +either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are +recognized in current earnings. All such forward contracts are recognized as either other assets +or accrued expenses at fair value in the statement of financial position. +The following table presents our hedging portfolio as of September 30, 2008 (in thousands). +Notional +Contract +Estimated Fair +Average +Amount +Value +Value +Exchange Rate +Maturity +€ 2,900 +$ +4,118 +$ +4,091 +1.4199 +FY 2009 +At September 30, 2008, $3,000 of unrealized gains were included in accumulated other comprehensive +income in the consolidated balance sheet, compared to unrealized losses of $270,000 at September +30, 2007. This amount is expected to be reclassified into net earnings during the next 12 months. +The fair value of our hedging portfolio, comprised solely of foreign exchange contracts, was an +asset of $27,000 at September 30, 2008, compared to a liability of $256,000 at September 30, 2007. +The amount of gain (loss) recognized in other comprehensive income on the effective portion of +these foreign exchange contracts was $(326,000), $(377,000), and $19,000 in fiscal 2008, 2007, and +2006, respectively. The amount of gain (loss) reclassified from accumulated other comprehensive +income into income on the effective portion of these foreign exchange contracts was $(599,000), +$(94,000), and $6,000, for fiscal 2008, 2007, and 2006, respectively. No portion of the gain/loss +was excluded from other comprehensive income due to effectiveness testing. +The estimated fair value of forward contracts outstanding at September 30, 2008, and September 30, +2007 is based on quoted amounts provided by the counterparties to these contracts. +-60- +Table of Contents +(5) Income Taxes +(a) Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2008, 2007 and 2006 were as follows (dollars in thousands): +Year Ended September 30, +2008 +2007 +2006 +Earnings before income taxes - +Domestic +$ +42,187 +$ +33,324 +$ +25,365 +Foreign +3,805 +3,358 +2,701 +Total +$ +45,992 +$ +36,682 +$ +28,066 +Provision (credit) for income taxes - +Federal – +Current provision +$ +14,307 +$ +11,179 +$ +8,902 +Temporary differences +Fixed asset basis differences and depreciation +(108 +) +(105 +) +(65 +) +Intangible asset basis differences and amortization +(249 +) +(249 +) +(588 +) +Currently non-deductible expenses and reserves +(286 +) +238 +(88 +) +Stock based compensation +(610 +) +(678 +) +(339 +) +Other, net +231 +(258 +) +2 +Tax contingency reserve adjustment +— +(2,425 +) +— +Subtotal +13,285 +7,702 +7,824 +State and local +1,303 +1,250 +814 +Foreign +1,202 +1,009 +1,095 +Total +$ +15,790 +$ +9,961 +$ +9,733 +(b) The following is a 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): +Year Ended September 30, +2008 +2007 +2006 +Computed income taxes at statutory rate +$ +16,097 +35.0 +% +$ +12,839 +35.0 +% +$ +9,824 +35.0 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +902 +2.0 +835 +2.3 +685 +2.4 +Federal and state tax credits +(34 +) +(0.1 +) +(213 +) +(0.6 +) +(88 +) +(0.3 +) +Foreign tax rate differences +196 +0.4 +170 +0.5 +145 +0.5 +Valuation allowance reversal — France +— +— +(309 +) +(0.8 +) +— +— +Extra territorial income exclusion +— +— +(56 +) +(0.2 +) +(275 +) +(1.0 +) +Qualified domestic production incentives +(715 +) +(1.6 +) +(290 +) +(0.8 +) +(236 +) +(0.8 +) +Tax exempt interest +(417 +) +(0.9 +) +(418 +) +(1.1 +) +(281 +) +(1.0 +) +Tax contingency reserve adjustment +— +— +(2,425 +) +(6.6 +) +— +— +Other, net +(239 +) +(0.5 +) +(172 +) +(0.5 +) +(41 +) +(0.1 +) +$ +15,790 +34.3 +% +$ +9,961 +27.2 +% +$ +9,733 +34.7 +% +-61- +Table of Contents +(c) The components of net deferred tax liabilities were as follows (dollars in thousands): +As of September 30, +2008 +2007 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +951 +$ +922 +Stock compensation expense not deductible +1,527 +1,237 +Net operating loss carryforwards +865 +920 +Inventory basis differences +779 +472 +Other +6 +90 +Subtotal +4,128 +3,641 +Less valuation allowance +(466 +) +(569 +) +Deferred tax assets +3,662 +3,072 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(639 +) +(711 +) +Intangible asset basis differences and amortization +(2,680 +) +(2,918 +) +Other +(488 +) +(750 +) +Deferred tax liabilities +(3,807 +) +(4,379 +) +Net deferred tax liabilities +$ +(145 +) +$ +(1,307 +) +For income tax purposes, we have tax benefits related to operating loss carryforwards in the +countries of Belgium and France. These net operating loss carryforwards have no expiration date. +We have recorded deferred tax assets for these carryforwards, inclusive of valuation allowances for +the country of Belgium at September 30, 2008. These valuation allowances are for pre-acquisition +net operating loss carryforwards. If tax benefits are recognized in future years for these +pre-acquisition net operating loss carryforwards, such benefits will be allocated to reduce +goodwill and acquired intangible assets. The valuation allowance recorded against deferred tax +assets at September 30, 2007 related solely to net operating loss carryforwards in Belgium. +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. +Undistributed earnings re-invested indefinitely in the Italian operation were approximately +$16,900,000 at September 30, 2008. US deferred tax liabilities of approximately $6,249,000 on such +earnings have not been +-62- +Table of Contents +recorded. Management believes that such US taxes would be largely offset by +foreign tax credits for taxes paid in Italy. +Effective October 1, 2007, we adopted FIN 48, which prescribes a comprehensive model for the +recognition, measurement, presentation and disclosure of uncertain tax positions, assuming full +knowledge of all relevant facts by the applicable tax authorities. The cumulative effect of +adopting FIN 48, $305,000, was charged to opening retained earnings. The total amount of +unrecognized tax benefits at September 30, 2008 and October 1, 2007 was $779,000 and $856,000, +respectively, of which the full amounts would favorably affect the effective tax rate if +recognized. We recognize interest and penalties related to uncertain tax positions as a component +of our income tax provision. During fiscal 2008, we charged approximately $60,000 in interest and +penalties to our tax provision. We had approximately $147,000 for the payment of interest and +penalties accrued at September 30, 2008. The amount of our liability for uncertain tax positions +expected to be paid or settled in the next 12 months is uncertain. +A +reconciliation of the beginning and ending amount of unrecognized tax +benefits is as follows (dollars in thousands): +Unrecognized income tax benefits at October 1, 2007 +$ +856 +Additions for tax positions related to the current year +123 +Additions for tax positions of prior years +125 +Reductions for tax positions of prior years +(13) +Settlements +(20) +Expiration of statute of limitations +(292) +Unrecognized income tax benefits at September 30, 2008 +$ +779 +We are subject to examination by the tax authorities in the US (both federal and state) and the +countries of Belgium, France, Holland and Italy. In the US, open tax years are for fiscal 2005 and +forward, although, we completed an examination by the IRS for fiscal 2006 in February 2008. In +countries outside the US, open tax years generally range from fiscal 2003 and forward. However, in +Belgium, the utilization of local net operating loss carryforwards extends the statute of +limitations for examination well into the foreseeable future. Tax examinations in France were +completed for fiscal years 2004-2006 during fiscal 2007. +In fiscal 2000, we recorded a tax benefit related to the insolvency of a foreign subsidiary that +has since been liquidated and dissolved. At that time, a reserve was also provided for future +resolution of uncertainties related to this matter. During June 2007, the statute of limitations +expired on the tax returns affected by this matter, and consequently, the adjustment to tax +reserves resulted in a tax benefit of $2,425,000. +-63- +Table of Contents +(6) +Employee Benefits +(a) +Savings and Investment Plan — We have a profit sharing and retirement savings plan covering +substantially all full-time US employees. Profit sharing contributions to the plan, which are +discretionary, are approved by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an +employee’s contributions, up to maximum match of 3% of eligible compensation. Our +discretionary and matching contributions to the plan amounted to approximately $1,214,000, +$1,132,000, and $1,066,000, during fiscal 2008, 2007 and 2006, respectively. +(b) +Stock-Based Compensation Plans — We have one active stock-based compensation plan, the 2004 +Equity Compensation plan, which became effective December 7, 2004, as amended (the “2004 +Plan”) and an Employee Stock Purchase Plan (the “ESP Plan”), which became effective October 1, +1997. Effective October 1, 1997, we began selling shares of stock to our 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. +We may grant new shares for options for up to 3,000,000 shares under the 2004 Plan, of which we +have granted 1,075,000 through September 30, 2008. Options may be granted at exercise prices +not less than 100% of the closing market value of the underlying common shares on the date of +grant and have maximum terms up to ten years. Vesting schedules are established at the time of +grant and may be set based on future service periods, achievement of performance targets, or a +combination thereof. 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. We have granted options for 5,407,000 shares under similar plans that have +expired. +On November 14, 2007, we granted 252,000 options to certain employees subject to attainment of a +specified earnings target for fiscal 2008. As the target was not met and the options forfeited, +they have been excluded from the tables below. +We adopted SFAS No. 123(R) as of July 1, 2005. SFAS No. 123(R) requires recognition of +compensation expense for all share-based payments made to employees, based upon the fair value +of the share-based payment on the date of the grant. We elected to adopt the provisions of SFAS +No. 123(R), pursuant to the modified prospective method, which requires compensation expense be +measured and recognized based on grant-date fair value for stock option awards granted after +July 1, 2005 and the non-vested portions of stock option awards granted prior to July 1, 2005. +The amount of stock-based compensation expense reported was $1,772,000, $2,632,000 and +$1,082,000 in fiscal 2008, fiscal 2007, and fiscal 2006, respectively. The total income tax +benefit recognized in the income statement for these stock-based compensation arrangements was +$610,000, $678,000, and $339,000, +-64- +Table of Contents +for fiscal 2008, fiscal 2007, and fiscal 2006, respectively. +We expect future stock compensation expense for unvested options as of September 30, 2008 to be +$1,547,000, which will be recognized during fiscal years 2009 through 2013. +SFAS No. 123(R) requires that we recognize compensation expense only for the portion of shares +that we expect to vest. As such, we apply estimated forfeiture rates to our compensation +expense calculations. These rates have been derived using historical forfeiture data, +stratified by several employee groups. During fiscal 2008 and fiscal 2007, we recorded $235,000 +and $210,000, respectively, in stock compensation expense to adjust estimated forfeiture rates +to actual. +We have elected to use the Black-Scholes option pricing model to determine grant-date fair +value, with the following assumptions: (i) expected share price volatility based on implied +volatility calculations using options for Meridian and a peer-group of companies; (ii) expected +life of options based on contractual lives, employees’ historical exercise behavior and +employees’ historical post-vesting employment termination behavior; (iii) risk-free interest +rates based on treasury rates that correspond to the expected lives of the options; and (iv) +dividend yield based on the expected yield on underlying Meridian common stock. +Year Ended September 30, +2008 +2007 +2006 +Risk-free interest rates +4.56 +% +4.64 +% +4.3%-4.4 +% +Dividend yield +1.45 +% +1.96 +% +1.55 +% +Life of option +5.70-7.30 yrs. +5.80-7.50 yrs. +5.70-7.50 yrs. +Share price volatility +44 +% +44 +% +46 +% +Forfeitures (by employee group) +0%-17 +% +0%-20 +% +0%-20 +% +A summary of the status of our stock option plans at September 30, 2008 and changes during the +year is presented in the table and narrative below: +Wtd Avg +Wtd Avg +Exercise +Remaining +Aggregate +Shares +Price +Life (Yrs) +Intrinsic Value +Outstanding +beginning of period +1,931,884 +$ +7.79 +Grants +100,950 +33.22 +Exercises +(468,559 +) +5.84 +Forfeitures +(13,714 +) +16.25 +Cancellations +(2,547 +) +16.68 +Outstanding end of period +1,548,014 +$ +9.95 +5.6 +$ +29,978,000 +Exercisable end of period +528,952 +$ +7.72 +5.2 +$ +11,355,000 +-65- +Table of Contents +A summary of the status of our nonvested shares as of September 30, 2008, and changes during the +year ended September 30, 2008, is presented below: +Weighted- +Average Grant +Date Fair +Shares +Value +Nonvested beginning of period +1,284,364 +$ +4.03 +Granted +100,950 +14.58 +Vested +(352,538 +) +4.75 +Forfeited +(13,714 +) +7.11 +Nonvested end of period +1,019,062 +$ +4.79 +The weighted average grant-date fair value of options granted was $14.58, $7.10, and $6.54 for +fiscal 2008, 2007, and 2006, respectively. The total intrinsic value of options exercised was +$11,405,000, $5,526,000 and $2,648,000, for fiscal 2008, 2007, and 2006, respectively. The +total grant-date fair value of options that vested during fiscal 2008, 2007, and 2006 was +$1,674,000, $721,000 and $296,000, respectively. +Cash received from options exercised was $2,668,000, $1,318,000, and $990,000 for fiscal 2008, +2007, and 2006, respectively. Tax benefits realized and recorded to additional paid-in capital +from option exercises totaled $2,458,000, $1,632,000, and $732,000 for fiscal 2008, 2007, and +2006 respectively. +(7) Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, development, +manufacturing, marketing and sales organization with primary emphasis in the field of life science. +Our principal businesses are (i) the development, manufacture and distribution of diagnostic test +kits primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract manufacture of proteins and +other biologicals under clinical cGMP conditions for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa, and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes +-66- +Table of Contents +the contract development and +manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Sales to individual customers constituting 10% or more of consolidated net sales were as follows +(dollars in thousands): +Year Ended September 30, +2008 +2007 +2006 +Customer A (US Diagnostics) +$ +31,285 +(22 +%) +$ +24,444 +(20 +%) +$ +19,543 +(18 +%) +Customer B (US Diagnostics) +$ +16,160 +(12 +%) +$ +13,340 +(11 +%) +$ +10,989 +(10 +%) +Combined export sales for the US Diagnostics and Life Science operating segments were $16,450,000, +$15,128,000 and $14,729,000 in fiscal years 2008, 2007 and 2006, respectively. Three products +accounted for 32%, 31%, and 28% of consolidated net sales in fiscal 2008, fiscal 2007, and fiscal +2006, respectively. Approximately 25% of the consolidated accounts receivable balance at September +30, 2008 is largely dependent upon funds from the Italian government. +Significant country information for the European Diagnostics operating segment is as follows +(dollars in thousands). Sales are attributed to the geographic area based on the location to which +the product is shipped. +Year Ended September 30, +2008 +2007 +2006 +Italy +$ +8,942 +$ +7,838 +$ +6,840 +France +3,263 +3,070 +2,387 +United Kingdom +2,655 +1,987 +1,571 +Holland +2,138 +1,610 +1,372 +Belgium +1,865 +1,558 +1,504 +Other countries +9,117 +7,500 +6,154 +Total European Operating Segment +$ +27,980 +$ +23,563 +$ +19,828 +Identifiable assets for our Italian distribution organization were $14,769,000, $12,811,000, and +$11,397,000 at September 30, 2008, 2007 and 2006, respectively. +-67- +Table of Contents +Segment information for the years ended September 30, 2008, 2007, and 2006 is as follows (dollars +in thousands): +US +European +Life +Diagnostics +Diagnostics +Science +Elim (1) +Total +Fiscal Year 2008 - +Net sales – +Third-party +$ +88,419 +$ +27,980 +$ +23,240 +$ +139,639 +Inter-segment +11,563 +2 +543 +$ +(12,108 +) +— +Operating income +36,095 +5,397 +3,186 +(328 +) +44,350 +Depreciation and amortization +2,745 +111 +1,614 +— +4,470 +Capital expenditures +2,193 +39 +1,987 +— +4,219 +Total assets +126,808 +15,955 +49,619 +(45,951 +) +146,431 +Fiscal Year 2007 - +Net sales – +Third-party +$ +74,845 +$ +23,563 +$ +24,555 +$ +122,963 +Inter-segment +8,872 +— +532 +$ +(9,404 +) +— +Operating income +26,454 +4,930 +3,795 +(149 +) +35,030 +Depreciation and amortization +2,641 +110 +1,648 +— +4,399 +Capital expenditures +1,645 +52 +1,514 +— +3,211 +Total assets +115,297 +13,600 +45,410 +(41,609 +) +132,698 +Fiscal Year 2006 - +Net sales – +Third-party +$ +65,721 +$ +19,828 +$ +22,864 +$ +108,413 +Inter-segment +7,171 +— +712 +$ +(7,883 +) +— +Operating income +19,881 +3,828 +3,144 +41 +26,894 +Depreciation and amortization +2,586 +129 +2,574 +— +5,289 +Capital expenditures +2,040 +37 +1,043 +— +3,120 +Total assets +109,678 +12,716 +41,751 +(43,617 +) +120,528 +(1) +Eliminations consist of intersegment transactions. +-68- +Table of Contents +Year Ended September 30, +2008 +2007 +2006 +Segment operating income +$ +44,350 +$ +35,030 +$ +26,894 +Interest income +1,533 +1,642 +1,123 +Interest expense +— +(38 +) +(128 +) +Other, net +109 +48 +177 +Consolidated earnings before income taxes +$ +45,992 +$ +36,682 +$ +28,066 +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science +operating segments include goodwill of $1,382,000 and $8,479,000, respectively at September 30, +2008, $1,492,000 and $8,472,000, respectively at September 30, 2007, and $1,578,000 and $8,286,000, +respectively at September 30, 2006. +(8) Commitments and Contingencies +(a) +Royalty Commitments — We have 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 $600,000, $739,000, and $866,000, respectively, for the fiscal years ended +September 30, 2008, 2007 and 2006. +During October 2006, we entered into a license agreement with Eiken Chemical Co., Ltd., that +provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious +disease testing in the United States and 18 other geographic markets. The agreement calls for +payments of up to 200,000,000 Japanese Yen (approximately $1,889,000 as of September 30, 2008) +based on the achievement of certain milestones and on-going royalties once products are +available for commercial sale. Payments made during product development are expected to occur +over a five-year period and began in fiscal 2007 with a payment equal to 20,000,000 Japanese Yen +or $169,000. +During the fourth quarter of fiscal 2007, we began seeking recovery of approximately $1,400,000 +of past royalties paid and interest under a license agreement around certain rapid diagnostic +testing technology. This license agreement covered patent rights that were narrowed in scope +via other litigation with the licensor that did not involve Meridian. We strongly believe that +the licensed patent, as reissued, does not cover any of our products. We also ceased further +royalty payments under this license agreement. The licensor to this agreement disputes our +position that the patent, as reissued, does not cover our products. Although we believe that +our position is very strong, we are unable to predict the outcome of this matter. +-69- +Table of Contents +No provision has been made in the accompanying financial statements for on-going royalties, if +any, nor has any accrual or income been recorded for recovery of past royalties paid. +(b) +Purchase Commitments — We have purchase commitments primarily for inventory and service items +as part of the normal course of business. Commitments made under these obligations are +$12,793,000, $187,000, and $199,000 for fiscal 2009, 2010, and 2011, respectively. No +commitments have been made beyond fiscal 2011. +(c) +Operating Lease Commitments — Meridian and its subsidiaries are lessees of (i) office and +warehouse buildings in Florida, Belgium, and France; (ii) automobiles for use by the direct +sales forces in the US and Europe; and (iii) certain office equipment such as facsimile +machines and copier machines across all business units, under operating lease agreements that +expire at various dates. Amounts charged to expense under operating leases were $674,000, +$696,000 and $686,000 for fiscal 2008, 2007 and 2006, respectively. Operating lease +commitments for each of the five succeeding fiscal years are as follows: fiscal 2009 - +$602,000, fiscal 2010 — $453,000, fiscal 2011 — $290,000, fiscal 2012 — $196,000, and fiscal +2013 — $154,000. +(d) +Litigation — We are a party to litigation that we believe is in the normal course of +business. The ultimate resolution of these matters is not expected to have a material adverse +effect on our financial position, results of operations or cash flows. No provision has been +made in the accompanying consolidated financial statements for these matters. +(e) +Indemnifications — In conjunction with certain contracts and agreements, we provide routine +indemnifications whose terms range in duration and in some circumstances are not explicitly +defined. The maximum obligation under some such indemnifications is not explicitly stated +and, as a result, cannot be reasonably estimated. We have not made any payments for these +indemnifications and no liability is recorded at September 30, 2008 or September 30, 2007. We +believe that if we were to incur a loss on any of these matters, the loss would not have a +material effect on our financial condition. +(f) +Viral Antigens Earnout +The purchase agreement for the Viral Antigens purchase acquisition provided for additional +consideration, contingent upon Viral Antigens’ earnings through September 30, 2006. Final +earnout consideration in the amount of $853,000 for fiscal 2006 was paid during the second +quarter of fiscal 2007. This amount is included in goodwill in the accompanying consolidated +balance sheets. +-70- +Table of Contents +(g) +OEM Concepts Earnout +The purchase agreement for the OEM Concepts acquisition provides for additional consideration, +up to a maximum remaining amount of $1,814,000 at September 30, 2008, contingent upon future +calendar year sales and gross profit of OEM Concepts’ products through December 31, 2008. +Earnout consideration in the amount of $275,000 has been paid to date for calendar 2006 and +2007. Earnout consideration in the amount of $3,000 has been accrued in the accompanying +consolidated balance sheet for calendar 2008 to date. Future earnout consideration, if any, +will be allocated to goodwill, and will be recorded in the period in which it is earned and +payable. +(9) Quarterly Financial Data (Unaudited) +All quarters of fiscal 2007 have been adjusted to reflect the July 1, 2007 change in accounting +for certain inventories within the Life Science operating segment from the LIFO method to the +FIFO method. +Amounts are in thousands except per share data. The sum of the earnings per common share and +cash dividends per share may not equal the corresponding annual amounts due to interim quarter +rounding. +For the Quarter Ended in Fiscal 2008 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +33,847 +$ +36,249 +$ +33,068 +$ +36,475 +Gross profit +21,752 +21,115 +21,287 +22,326 +Net earnings +7,456 +7,299 +7,763 +7,684 +Basic earnings per common share +0.19 +0.18 +0.19 +0.19 +Diluted earnings per common share +0.18 +0.18 +0.19 +0.19 +Cash dividends per common share +0.11 +0.14 +0.14 +0.14 +For the Quarter Ended in Fiscal 2007 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +28,720 +$ +32,094 +$ +29,763 +$ +32,386 +Gross profit +17,612 +18,838 +19,301 +19,189 +Net earnings +5,573 +5,890 +8,814 +6,444 +Basic earnings per common share +0.14 +0.15 +0.22 +0.16 +Diluted earnings per common share +0.14 +0.15 +0.22 +0.16 +Cash dividends per common share +0.08 +0.11 +0.11 +0.11 +(10) Stock Split +On April 19, 2007, we announced a three-for-two stock split, with fractional shares paid in +cash. This split was effective on May 11, 2007, for shareholders of record on May 4, 2007. All +references in this Annual Report on Form 10-K to number of shares and per share amounts reflect +this stock split. +-71- +Table of Contents +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2008, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2008. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2008. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” +ITEM 9B. +OTHER INFORMATION +Not applicable. +PART III +The information required by Items 10., 11., 13., and 14., of Part III are incorporated by reference +from the Registrant’s Proxy Statement for its 2009 Annual Shareholders’ Meeting to be filed with +the Commission pursuant to Regulation 14A. +-72- +Table of Contents +ITEM 12. +EQUITY +COMPENSATION PLAN INFORMATION +The following table presents summary information as of September 30, 2008 with respect to all of +our equity compensation plans. +(c) +Number of securities +(a) +remaining available +Number of +(b) +for future issuance +Securities to be +Weighted- +under equity +issued upon +average exercise +compensation plans +exercise of +price of +(excluding +outstanding +outstanding +securities +options, warrants +options, warrants +reflected in column +Plan Category +and rights +and rights +(a)) +Equity compensation +plans approved by +security +holders (1) +1,502,164 +$ +9.861 +1,985,609 +Equity compensation +plans not approved by +security holders +45,850 +12.810 +— +Total +1,548,014 +$ +9.949 +1,985,609 +(1) +1994 Director’s Stock Option Plan +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan, as amended +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(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 (c) under Item 15 are not applicable +to Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +3.1 +Articles of Incorporation, including amendments not related to Company name change +(Incorporated by reference to Registration Statement No. 333-02613 on Form S-3 filed +with the Securities and Exchange Commission on April 18, 1996 and Meridian’s Form 8-K +filed with the Securities and Exchange Commission on May 16, 2007) +3.2 +Code of Regulations (Incorporated by reference to Meridian’s Form 8-K filed with the +Securities and Exchange Commission on July 23, 2008) +10.5 +Sublicense Agreement dated June 17, 1993 among Johnson & Johnson, the Scripps Research +Institute and Meridian Concerning certain Patent Rights (Incorporated by reference to +Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 17, 1993) +10.6 +Assignment dated June 17, 1993 from Ortho Diagnostic Systems Inc. to Meridian +-73- +Table of Contents +Exhibit Number +Description of Exhibit +concerning certain Patent Rights (Incorporated by reference to Meridian’s Form 8-K +filed with the Securities and Exchange Commission on June 17, 1993) +10.9 +Merger Agreement among Gull Laboratories, Inc., Meridian Diagnostics, Inc. Fresenius AG +and Meridian Acquisition Co. dated as of September 15, 1998 (Incorporated by reference +to Meridian’s Form 8-K filed with the Securities and Exchange Commission on September +17, 1998) +10.10* +Savings and Investment Plan Prototype Adoption Agreement (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +10.14* +1994 Directors’ Stock Option Plan (Incorporated by reference to Registration Statement +No. 33-78868 on Form S-8 filed with the Securities and Exchange Commission on May 12, +1994) +10.15* +1996 Stock Option Plan (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 1996) +10.16* +Salary Continuation Agreement for John A. Kraeutler (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1995) +10.17 +Merger Agreement Among Gull Laboratories, Inc., Meridian Diagnostics, Inc. Fresenius AG +and Meridian Acquisition Co. dated as of September 15, 1998, as amended on October 22, +1998 (Incorporated by reference to Meridian’s Report on Form 8-K filed with the +Securities and Exchange Commission on September 17, 1998 and Meridian’s Report on Form +8-K filed with the Securities and Exchange Commission on November 13, 1998) +10.18* +1999 Directors’ Stock Option Plan (Incorporated by reference to Meridian’s Proxy +Statement filed with the Securities and Exchange Commission on December 21, 1998) +10.20 +Dividend Reinvestment Plan (Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 1999) +10.21 +Merger Agreement dated September 13, 2000 among Meridian and the Shareholders of Viral +Antigens, Inc. (Incorporated by reference to Meridian’s Form 8-K filed with the +Securities and Exchange Commission on September 29, 2000) +10.23* +Employment Agreement Dated February 15, 2001 between Meridian and John A. Kraeutler, +including the Addendum to Employment Agreement dated April 24, 2001 between Meridian +and John A. Kraeutler (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2001) +10.24* +Sample Option Agreement Dated October 1, 2001 (Incorporated by reference to Meridian’s +Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2001) +10.26* +1996 Stock Option Plan as Amended and Restated Effective January 23, 2001 (Incorporated +by reference to Meridian’s Proxy Statement filed with the Securities and Exchange +Commission on December 21, 1998) +10.27* +Sample Option Agreement Dated November 19, 2002 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +10.28* +Agreement Concerning Disability and Death dated September 10, 2003, between Meridian +and William J. Motto (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2003) +-74- +Table of Contents +Exhibit Number +Description of Exhibit +10.29* +Professional Services Agreement dated October 1, 2002 between Meridian and Antonio +Interno (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the +Fiscal Year Ended September 30, 2003) +10.31 +Stock Purchase Agreement of OEM Concepts, Inc. by Meridian Bioscience, Inc. dated +January 31, 2005 (Incorporated by reference to Meridian’s Annual Report on Form 10-K +for the Fiscal Year Ended September 30, 2005) +10.32* +Sample Option Agreement dated November 10, 2005 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2005) +10.33* +2004 Equity Compensation Plan, Amended and Restated through January 22, 2008 +(Incorporated by reference to Meridian’s Proxy Statement filed with the Securities and +Exchange Commission on December 19, 2007) +10.34* +Fiscal 2006 Officers’ Compensation Plan, Amended and Restated through January 19, 2006 +(Incorporated by reference to Meridian’s Form 8-K filed with the Securities and +Exchange Commission on January 19, 2006) +10.35* +Sample Option Agreement dated November 14, 2007 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +10.36* +Fiscal 2007 Officers’ Performance Compensation Plan (Incorporated by reference to +Meridian’s Form 8-K filed with the Securities and Exchange Commission on November 21, +2006) +10.37 +Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience +Corporation, Omega Technologies, Inc. Meridian Life Science, Inc. and Fifth Third Bank +dated August 1, 2007 (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2007) +10.37.1 +Amended and Restated Revolving Note with Fifth Third Bank dated August 1, (Incorporated +by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended +September 30, 2007) +10.38* +Sample Restricted Stock Agreement dated November 12, 2008 (Filed herewith) +13 +2008 Annual Report to Shareholders (1) +14 +Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form 10-K for +the Fiscal Year Ended September 30, 2003) +18 +Grant Thornton Preferability Letter (Incorporated by reference to Meridian’s Annual +Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +21 +Subsidiaries of the Registrant (Filed herewith) +23 +Consent of Independent Registered Public Accounting Firm (Filed herewith) +31.1 +Certification of Principal Executive Officer required by Rule 13a-14(a) (Filed herewith) +31.2 +Certification of Principal Financial Officer required by Rule 13a-14(a) (Filed herewith) +-75- +Table of Contents +Exhibit Number +Description of Exhibit +32 +Section 1350 Certification of Chief Executive Officer and Chief Financial Officer +(Filed herewith) +(1) +Only portions of the 2008 Annual Report to Shareholders specifically are incorporated by +reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2008 Annual Report +to Shareholders has been provided to the Securities and Exchange Commission for informational +purposes only. +* +Management Compensatory Contracts +Meridian will provide shareholders with any exhibit upon the payment of a specified reasonable fee, +which fee shall be limited to Meridian’s reasonable expenses in furnishing such exhibit. +-76- +Table of Contents +SIGNATURES +Pursuant to the requirements of Sections 13 or 15(d) 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/ John A. Kraeutler +Date: November 26, 2008 +John A. Kraeutler +Chief Executive Officer +-77- +Table of Contents +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 +William J. Motto +Chairman of the Board of Directors +November 26, 2008 +/s/ John A. Kraeutler +John A. Kraeutler +Chief Executive Officer, Director +November 26, 2008 +/s/ Melissa Lueke +Melissa Lueke +Vice President and Chief +Financial Officer +November 26, 2008 +/s/ James A. Buzard +James A. Buzard +Director +November 26, 2008 +/s/ Gary P. Kreider +Gary P. Kreider +Director +November 26, 2008 +/s/ David C. Phillips +David C. Phillips +Director +November 26, 2008 +/s/ Robert J. Ready +Robert J. Ready +Director +November 26, 2008 +-78- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended September 30, 2008, 2007 and 2006 +Charged +Balance at +to Costs +Balance +Beginning +and +at End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2008: +Allowance for doubtful accounts +$ +258 +$ +38 +$ +(70 +) +$ +4 +$ +230 +Inventory realizability reserves +1,162 +551 +(610 +) +— +1,103 +Valuation allowances – deferred taxes +569 +— +(115 +) +12 +466 +Year Ended September 30, 2007: +Allowance for doubtful accounts +$ +408 +$ +19 +$ +(200 +) +$ +31 +$ +258 +Inventory realizability reserves +1,158 +259 +(258 +) +3 +1,162 +Valuation allowances – deferred taxes +888 +— +(390 +) +71 +569 +Year Ended September 30, 2006: +Allowance for doubtful accounts +$ +360 +$ +132 +$ +(102 +) +$ +18 +$ +408 +Inventory realizability reserves +556 +822 +(221 +) +1 +1,158 +Valuation allowances – deferred taxes +927 +— +(32 +) +(7 +) +888 +(a) +Balances reflect the effects of currency translation. +-79- \ No newline at end of file diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/filing_metadata.csv b/raw/filings/0000794172/2008/0000950152-08-009754/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..39e0095b39e2c5f82da3d821798f23682830069e --- /dev/null +++ b/raw/filings/0000794172/2008/0000950152-08-009754/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2008-11-26,2008-09-30,2008-11-26T14:12:34.000Z,0000950152-08-009754,l34668ae10vk.htm,FORM 10-K,636020,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015208009754/l34668ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015208009754/,2008,2008,1 diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/item1.txt b/raw/filings/0000794172/2008/0000950152-08-009754/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..0506ba9fb637d2a4cefd56147ac8d79ed95663ca --- /dev/null +++ b/raw/filings/0000794172/2008/0000950152-08-009754/item1.txt @@ -0,0 +1,336 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other biologicals +for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. By exploiting revenue opportunities across research, clinical diagnostics, and +therapeutics, we strive to maximize revenues, efficiently invest in research and development, and +increase profitability of our manufacturing operations. The company was incorporated in Ohio in +1976. +Operating Segments +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa +and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca +Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and bioresearch +reagents domestically and abroad. The Life Science operating segment also includes the contract +development and manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial +-4- +Table of Contents +information for Meridian’s operating segments is included in Note 7 to the consolidated financial +statements contained herein. +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 83% of consolidated net sales for fiscal 2008. Our diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) +have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic +products, and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. +Our website is +www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov . The information on +our website is not part of this Annual Report on Form 10-K. +US Diagnostics Operating Segment +Overview +Our US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $88,419,000, $74,845,000 and +$65,721,000 for fiscal 2008, 2007 and 2006, respectively, reflecting a three-year compound annual +growth rate of 18%. As of September 30, 2008, our US Diagnostics operating segment had 265 +employees. +Our diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, +stool, and other body fluids or tissue for the presence of antigens and antibodies of specific +infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits +include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. +-5- +Table of Contents +Our diagnostic products are used principally in the detection of respiratory diseases, such as +pneumonia, valley fever, influenza, and respiratory syncytial virus (RSV); gastrointestinal +diseases, such as stomach ulcers ( H. pylori ), antibiotic-associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower 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. +Sales and Marketing +Our US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and Canada and independent distributors in the US and abroad. The direct sales +force consists of three management personnel who oversee corporate health accounts and work with +managed-care institutions, and six management personnel who oversee 26 technical sales +representatives, three inside sales representatives, and independent distributors in over 25 +countries. We utilize two primary independent distributors in the US, who accounted for 54% of the +US Diagnostics operating segment’s third-party sales in fiscal 2008. We manage the selling effort +for key customers where these independent distributors are utilized. +Consolidation of the US healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to +-6- +Table of Contents +multi-year supply agreements with consolidated healthcare providers and major reference +laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety +of formats that satisfy customer needs and preferences, whether in a hospital, commercial or +reference laboratory or alternate site location. Our product offering consists of approximately +145 medical diagnostic products. +Research and Development +Our US Diagnostics operating segment’s research and development organization consists of 14 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2008, 2007 and 2006 were $4,878,000, $4,571,000 and $3,342,000, respectively. This research +and development organization focuses its activities on new applications for our existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. We believe that new product +development is a key source for sustaining revenue growth. Our internally developed products +include Premier ä Platinum HpSA PLUS, Premier ä Toxins A & B, and +Immuno Card Ò Toxins A & B, which together accounted for 38% of our US Diagnostics +operating segment’s third-party sales during fiscal 2008. +During fiscal 2008, we launched our first products under our recently developed and patented +TRU rapid test technology. This technology features improved safety for compliance +with CDC regulations by offering a closed system in which to perform the tests and space savings +for laboratory technicians. New products using this technology include TRU FLU ® , TRU +RSV ® , TRU EBV-M ® , and TRU EBV-G ® . +We also believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. We expect our second product in collaboration with Merck to launch during +the latter part of fiscal 2009. +-7- +Table of Contents +Over the last 27 months, we have begun exploring and developing a molecular-based diagnostic +testing technology to complement our existing antigen/antibody-based testing technologies. This +first look at molecular-based testing started in October 2006, when we executed a license agreement +with Eiken Chemical Co., Ltd. that provides rights to Eiken’s loop-mediated isothermal +amplification technology. This license provides us with rights for infectious disease testing in +the United States and 18 other geographic markets. We currently have one product in active +development using this molecular technology for C. difficile , for which we are now completing beta +site evaluations. We have successfully completed our FDA pre-submission activities and expect to +initiate clinical trials in January 2009 with a 510(k) application to follow within 90-120 days +thereafter. International revenues are likely in the second half of fiscal 2009, with US sales to +follow FDA clearance. Several other infectious diseases have been identified for future +development using this technology. +Manufacturing +Our immunodiagnostic products require the production of highly specific and sensitive antigens and +antibodies. We produce substantially all of our own requirements including monoclonal antibodies +and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens. We believe +that we have sufficient manufacturing capacity for anticipated growth in the near term. +Intellectual Property, Patents, and Licenses +We own or license US and foreign patents for approximately 20 products manufactured by our US +Diagnostics operating segment. These patented products represented approximately 19% of +consolidated sales in fiscal 2008. In the absence of patent protection, we may be vulnerable to +competitors who successfully replicate our production and manufacturing technologies and processes. +Our employees are required to execute confidentiality and non-disclosure agreements designed to +protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +that most, but not +-8- +Table of Contents +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. +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our US Diagnostics operating segment and by third-party +vendors. Approximately 73% of third-party sales for fiscal 2008 for this operating segment were +products purchased from our US Diagnostics operating segment. Third-party sales for this operating +segment were $27,980,000, $23,563,000 and $19,828,000 for fiscal 2008, 2007 and 2006, respectively, +reflecting a three-year compound annual growth rate of 16%. As of September 30, 2008, the European +Diagnostics operating segment had 39 employees, including 15 employees in the direct sales force. +Our European Diagnostics operating segment’s sales and distribution network consists of direct +sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European +countries, Africa and the Middle East. The European Diagnostics operating segment maintains a +distribution center in Milan, Italy. The primary markets and customers for this operating segment +are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services under clinical cGMP +conditions. Third-party sales for this operating segment were $23,240,000, $24,555,000 and +$22,864,000 for fiscal 2008, 2007 and 2006, respectively, reflecting a three-year compound annual +growth rate of 2%. As of September 30, 2008, our Life Science operating segment had 107 employees. +-9- +Table of Contents +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2008, 21% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that have annual, +automatic renewal provisions. We have a long-standing relationship with this customer; and +although there can be no assurances, we intend to renew these supply agreements in the normal +course of business. During fiscal 2008, sales to three other customers comprised 17% of +third-party sales for the Life Science operating segment. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than bioresearch +reagents and bulk antigens and antibodies, as well as buying patterns of major customers. See Note +1(i) to the Consolidated Financial Statements herein for revenue recognition policies. Our +revenues for contract services were $1,477,000, $765,000, and $2,537,000 in fiscal 2008, 2007, and +2006, respectively. +During fiscal 2008, we acquired certain technologies and products from Vybion, Inc., including +infectious disease recombinant proteins and cardiac antigens. This acquisition adds important +technologies and capabilities to our Life Science business and will add to our expanding life +science brands. The acquired technologies will add proprietary manufacturing know-how and access to +important patent licenses for the development and production of recombinant proteins, an emerging +technology in life sciences. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, and, most recently, OEM Concepts in +fiscal 2005). Historically, these businesses were run autonomously. Recently, growth strategies +have been developed around sales and marketing integration, new product development integration, +and four product brands. Our Life Science operating segment’s four product brands can be described +as follows: +• +BIODESIGN – Antibodies, antigens and assay development reagents +• +Viral Antigens – Custom infectious disease antigens +• +OEM Concepts – Custom antibody development and manufacturing, in vivo or in vitro +• +Meridian Biologics – Development and manufacturing of cGMP clinical grade biologicals +-10- +Table of Contents +We believe that the business and growth prospects for all four product brands are favorable. +Products from the BIODESIGN, OEM Concepts, and Viral Antigens brands are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These markets are highly fragmented; however, we +believe we can be successful through product and marketing integration and customer penetration +across these three brands. These three brand names were aligned with the predecessor company +names, prior to acquisition, as we believe that there is value in the names of these long-standing +businesses. Sales efforts are focused on multi-year supply agreements in order to provide +stability in volumes and pricing. We believe this benefits both us and our customers. +With respect to our Meridian Biologics brand and contract services, we believe that the business +prospects are also favorable despite our recent revenue trends for this brand. In August 2007, we +were awarded a five-year contract (base year plus four option years) for the manufacturing of +experimental clinical vaccines for the National Institutes of Allergy and Infectious Diseases of +the National Institutes of Health. This contract provides an opportunity for steady production +work over a five-year period. We recognized revenue related to this contract of $265,000 in fiscal +2008 and expect to have revenues related to this contract of approximately $500,000 to $700,000 in +fiscal 2009. We also currently have three other vaccine projects in progress or within our +business development pipeline that are expected to contribute approximately $2,100,000 in revenues +for fiscal 2009. +Research and Development +Our Life Science operating segment’s research and development organization consists of four +research scientists. Research and development expenses for our Life Science operating segment for +fiscal 2008, 2007 and 2006 were $1,305,000, $1,514,000 and $1,457,000, respectively. This research +and development organization has integrated its activities around the four product brands +previously discussed and also is heavily involved in vaccine development and production activities +for our cGMP facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles”, and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +All of the Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved. +-11- +Table of Contents +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger with greater financial, research, manufacturing +and marketing resources. Important competitive factors for 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 our +product lines do not reflect technological advances, our ability to compete in those product lines +could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Quidel Corporation and +Inverness Medical Innovations. +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply arrangements do not exist. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than purchase from outside +vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service, and +price. Although the product application for this facility was built from our existing expertise in +cell culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings, (ii) improving +product distribution +-12- +Table of Contents +capabilities, (iii) providing access to new markets, and/or (iv) providing access to key +biologicals or new technologies that lead to new products. Although we cannot provide any +assurance that we will consummate any acquisitions in the future, we expect that the potential for +acquisitions will continue to serve as an opportunity for new revenues and earnings growth in the +future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $44,430,000 +or 32% of total fiscal 2008 sales, $38,691,000 or 31% of total fiscal 2007 sales and $34,557,000 or +32% of total fiscal 2006 sales. Domestic exports for our US Diagnostics and Life Science operating +segments were $16,450,000, $15,128,000 and $14,729,000 in fiscal 2008, 2007 and 2006, respectively. +We expect to continue to look to international markets as a source of new revenues and growth in +the future. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a US EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/item13.txt b/raw/filings/0000794172/2008/0000950152-08-009754/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4ac51b6c4d8eb5e062e832e3f6759690b95a1de5 --- /dev/null +++ b/raw/filings/0000794172/2008/0000950152-08-009754/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions, and Director Independence +72 \ No newline at end of file diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/item9a.txt b/raw/filings/0000794172/2008/0000950152-08-009754/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a4374442b7e8e6f0d88b042c194e05f01346aa55 --- /dev/null +++ b/raw/filings/0000794172/2008/0000950152-08-009754/item9a.txt @@ -0,0 +1,14 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2008, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2008. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2008. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” \ No newline at end of file diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/rp_note.txt b/raw/filings/0000794172/2008/0000950152-08-009754/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2008/0000950152-08-009754/rpt_disclosure.txt b/raw/filings/0000794172/2008/0000950152-08-009754/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..c0a8cbba396f204681add6755629b5f6e64303e9 --- /dev/null +++ b/raw/filings/0000794172/2008/0000950152-08-009754/rpt_disclosure.txt @@ -0,0 +1,27 @@ +TRANSACTIONS WITH RELATED PERSONS +Todd Motto, the adult son of William J. Motto, is Vice President, Sales and Marketing. Todd Motto +received $348,488 in compensation for fiscal 2008. This compensation consisted of base salary of +$186,157, bonus of $73,125 under the Officers’ Performance Compensation Plan, $8,850 of auto and +professional allowances, $12,401 of retirement plan contributions, and $67,955 related to stock +option awards. +Nasdaq rules require the Company to conduct an appropriate review of related party transactions +required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential +conflict of interest situations on an ongoing basis and that all such transactions must be approved +by the Audit Committee or another committee comprised of independent directors. As a result, the +Audit Committee annually reviews all such related party transactions and approves each related +party transaction if it determines that it is in the best interests of the Company. Additionally, +the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions +involving the Company and “related persons” (directors and executive officers or their immediate +family members, or shareholders owning five percent or greater of the Company’s outstanding stock). +This also covers any related person transaction that meets the minimum threshold for disclosure in +the proxy statement under the relevant SEC rules (generally, transactions involving amounts +exceeding $120,000 in which a related person has a direct or indirect material interest). In +considering the transaction, the Audit Committee may consider all relevant factors, including, as +applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the +alternatives to entering into a related person transaction; (iii) whether the transaction is on +terms comparable to those available to third parties, or in the case of employment relationships, +to employees generally; (iv) the potential for the transaction to lead to an actual or apparent +conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and +(v) the overall fairness of the transaction to the Company. This policy is included in the +Company’s Employee Handbook. The approval of such related person transactions are evidenced by +internal Company resolutions or memoranda. \ No newline at end of file diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/filing.txt b/raw/filings/0000794172/2009/0000950123-09-066890/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..8119ca622e35c2923a849d09a5d64752495a1840 --- /dev/null +++ b/raw/filings/0000794172/2009/0000950123-09-066890/filing.txt @@ -0,0 +1,4898 @@ +10-K +1 +c93071e10vk.htm +FORM 10-K +Form 10-K +Table of Contents +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 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2009. +o +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. +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID No. 31-0888197 +Incorporated under the Laws of Ohio +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange of which registered +Common Shares, No Par Value +The NASDAQ Stock Market LLC +(NASDAQ Global Select Market) +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. +YES þ NO o +If this report is an annual or transition report, indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange +Act. +YES o NO þ +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 þ NO o +Indicate by check mark whether the registrant has submitted electronically and posted on +its corporate Web site, if any, every Interactive Data File required to be submitted and +posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such +shorter period that the registrant was required to submit and post such files). +YES o NO o +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. +YES o NO þ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated +filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large +accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of +the Exchange Act. +Large accelerated filer þ +Accelerated filer o +Non-accelerated filer o +Smaller reporting company o +(Do not check if a smaller reporting company) +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +YES o NO þ +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2009 +was $714,090,011 based on a closing sale price of $18.12 per share on March 31, 2009. As +of October 31, 2009, 40,571,220 no par value Common Shares were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended +September 30, 2009 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 2010 Annual +Shareholders’ Meeting are incorporated by reference in Part III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +4 +Item 1A Risk Factors +14 +Item 1B Unresolved Staff Comments +21 +Item 2 Properties +21 +Item 3 Legal Proceedings +22 +Item 4 Submission of Matters to a Vote of Security Holders +22 +Part II +Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of +Equity +Securities +22 +Item 6 Selected Financial Data +23 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations +23 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +41 +Item 8 Financial Statements and Supplementary Data +42 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +72 +Item 9A Controls and Procedures +73 +Item 9B Other Information +73 +Part III +Item 10 Directors, Executive Officers and Corporate Governance +74 +Item 11 Executive Compensation +74 +Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +74 +Item 13 Certain Relationships and Related Transactions, and Director Independence +74 +Item 14 Principal Accountant Fees and Services +74 +Item 15 Exhibits and Financial Statement Schedules +75 +Exhibit 10.16 +Exhibit 10.23 +Exhibit 10.38 +Exhibit 10.39 +Exhibit 13 +Exhibit 21 +Exhibit 23 +Exhibit 31.1 +Exhibit 31.2 +Exhibit 32 +Table of Contents +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. Except for +historical information, this report contains forward-looking statements within the meaning of +Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange +Act of 1934, which may be identified by words such as “estimates”, “anticipates”, “projects”, +“plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “should” and similar expressions +or the negative versions thereof and which also may be identified by their context. Such +statements, whether expressed or implied, are based upon current expectations of the Company and +speak only as of the date made. The Company assumes no obligation to publicly update or revise any +forward-looking statements even if experience or future changes make it clear that any projected +results expressed or implied therein will not be realized. These statements are subject to various +risks, uncertainties and other factors that could cause actual results to differ materially, +including, without limitation, the following: 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. Recessionary pressures on the +economy and the markets in which our customers operate, as well as adverse trends in buying +patterns from customers can change expected results. 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. +Changes in the relative strength or weakness of the U.S. dollar can also change expected results. +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. The +Company cannot predict the possible effects of potential healthcare reform in the United States and +similar initiatives in other countries on its results of operations. In addition to the factors +described in this paragraph, Part I, Item 1A Risk Factors contains a list and description of +uncertainties, risks and other matters that may affect the Company. +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results +of operations that are subject to risks and uncertainties. See “Forward Looking Statements” above. +Factors that could cause or contribute to such differences include those discussed in Item 1A. In +addition to the risk factors discussed herein, we are also subject to additional risks and +uncertainties not presently known to us or that we currently deem immaterial. If any of these +risks and uncertainties develops into actual events, our business, financial condition or results +of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” +“our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +In the discussion that follows, all amounts are in thousands (both tables and text), except per +share and employee data and square footage and acreage data related to properties . +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other biologicals +for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. By exploiting revenue opportunities across research, clinical diagnostics, and +therapeutics, we strive to maximize revenues, efficiently invest in research and development, and +increase profitability of our manufacturing operations. The company was incorporated in Ohio in +1976. +Operating Segments +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial information for +Meridian’s operating segments is included in Note 8 to the consolidated financial statements +contained herein. +- 4 - +Table of Contents +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 84% of consolidated net sales for fiscal 2009. Our diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) +have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic +products, and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov . The information on +our website is not part of this Annual Report on Form 10-K. +US Diagnostics Operating Segment +Overview +Our US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $98,970, $88,419 and $74,845 for fiscal +2009, 2008 and 2007, respectively, reflecting a three-year compound annual growth rate of 15%. As +of September 30, 2009, our US Diagnostics operating segment had 275 employees. +Our diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, +stool, and other body fluids or tissue for the presence of antigens and antibodies of specific +infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits +include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of respiratory diseases, such as +pneumonia, valley fever, influenza, and respiratory syncytial virus (RSV); gastrointestinal +diseases, such as stomach ulcers ( H. +pylori ), antibiotic-associated diarrhea (C. difficile ) and pediatric diarrhea (Rotavirus and +Adenovirus); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken Pox and Shingles +(Varicella-Zoster) and Cytomegalovirus (organ transplant infections); and parasitic diseases, such +as Giardiasis, Cryptosporidiosis and Lyme. The primary markets and customers for these products are +reference laboratories and hospitals. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital group purchasing organizations 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. +Sales and Marketing +Our US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and Canada and independent distributors in the US and abroad. The direct sales +force consists of three management personnel who oversee corporate health accounts and work with +managed-care institutions, and six management personnel who oversee 24 technical sales +representatives, three inside sales representatives, and independent distributors in over 25 +countries. +Our only customers who accounted for 10% or more of consolidated sales in fiscal 2009, 2008 and +2007 were two independent distributors in the US for our US Diagnostics operating segment: Cardinal +Healthcare Corporation and Fisher Scientific. Our sales to Cardinal were $37,876, $31,285, and +$24,444 during fiscal 2009, fiscal 2008, and fiscal 2007, respectively. Our sales to Fisher were +$19,063, $16,160, and $13,340 during fiscal 2009, fiscal 2008, and fiscal 2007, respectively. +By design, we do +not have distribution agreements in place with these customers because we manage the selling efforts +for key end-users where these distributors are utilized. +- 6 - +Table of Contents +Consolidation of the US healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to multi-year supply agreements with consolidated healthcare providers and +major reference laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety +of formats that satisfy customer needs and preferences, whether in a hospital, commercial or +reference laboratory or alternate site location. Our product offering consists of approximately +135 medical diagnostic products. +We had three products that accounted for 30%, 32%, and 31% of consolidated net sales in fiscal +2009, fiscal 2008, and fiscal 2007, respectively: Immuno Card ® Toxins A&B, Premier TM +Toxins A&B, and Premier TM Platinum HpSA ® PLUS. +Immuno Card ® Toxins A&B and Premier TM Toxins A&B are part of our C. difficile +product family. Immuno Card ® Toxins A&B is a rapid enzyme immunoassay used for the +detection of C. difficile toxins A and B in stool specimens. Premier TM Toxins A&B is an +ELISA test in a batch microwell format for the detection of C. difficile toxins A and B in stool +specimens. Both of the products were internally developed and are manufactured in our Cincinnati, +Ohio facility. As members of our C. difficile product family relating to hospital-acquired +infections, both Immuno Card ® Toxins A&B and Premier TM Toxins A&B participate +in the organic growth of our Diagnostics business units, US Diagnostics and European Diagnostics. +Premier TM Platinum HpSA ® PLUS is an ELISA test in a microwell format for the +detection of Heliobacter pylori antigens in stool specimens for diagnosis and monitoring and is a +part of our H. pylori family of products. This product was internally developed and is +manufactured in our Cincinnati, Ohio facility. We hold both US and European patents for this +product. +- 7 - +Table of Contents +Research and Development +Our US Diagnostics operating segment’s research and development organization consists of 26 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +parasitology, and molecular biology. Research and development expenses for the US Diagnostics +operating segment for fiscal 2009, 2008 and 2007 were $7,209, $4,878 and $4,571, respectively. +This research and development organization focuses its activities on new applications for our +existing technologies, improvements to existing products and development of new technologies. +Research and development efforts may occur in-house or with collaborative partners. We believe +that new product development is a key source for sustaining revenue growth. Our internally +developed products include Premier ä Platinum HpSA PLUS, Premier ä Toxins A&B, and +Immuno Card Ò Toxins A&B, which together accounted for 35% of our US Diagnostics +operating segment’s third-party sales during fiscal 2009. +During fiscal 2008, we launched our first products under our recently developed and patented TRU +rapid test technology. The design of this technology enhances laboratory safety by containing the +specimen in a closed system during testing as recommended by CDC guidelines. TRU tests also use +less space than other technologies, which is an advantage in space-constrained clinical +laboratories. New products using this technology include TRU FLU ® , TRU RSV ® , +TRU EBV-M ® , and TRU EBV-G ® . +We also believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. We launched our second product in collaboration with Merck, Immuno Card +STAT! ® CAMPY, during the third quarter of fiscal 2009. +Over the last three fiscal years, we have been exploring and developing a molecular-based +diagnostic testing technology to complement our existing antigen/antibody-based testing +technologies. This first look at molecular-based testing started in October 2006, when we executed +a license agreement that provides rights to certain loop-mediated isothermal amplification +technology. This license provides us with rights for infectious disease testing in the United +States, Europe, and other geographic markets. We have branded our technology platform with the +name illumi gene TM . We currently are in active development using this molecular +technology for C. difficile , and are now completing beta site +evaluations and have recent data that meets or exceeds our +expectations. We intend to initiate +clinical trials in the second fiscal quarter of 2010 with a 510(k) application to follow +immediately thereafter. International revenues are likely in the late second quarter of fiscal +2010, with US sales to follow FDA clearance. Several other infectious diseases have been +identified for future development using this technology. +- 8 - +Table of Contents +Manufacturing +Our immunodiagnostic products require the production of highly specific and sensitive antigens and +antibodies. We produce substantially all of our own requirements including monoclonal antibodies +and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens. We believe +that we have sufficient manufacturing capacity for anticipated growth in the near term. +Intellectual Property, Patents, and Licenses +We own or license US and foreign patents, most of which are for products manufactured by our US +Diagnostics operating segment. Sales of these products are as follows: +Number of +% of consolidated sales +products +2009 +2008 +Product Family +H. pylori +2 +12 +% +11 +% +Upper respiratory +2 +4 +% +1 +% +Other +8 +2 +% +2 +% +Total patented products +12 +18 +% +14 +% +Patents for the two H. pylori products expire between 2016 and 2017, while patents for the two +upper respiratory products expire in 2022 and 2027. The remaining eight patented products for +which we own or license patents are spread over three product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate +our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +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. +- 9 - +Table of Contents +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our US Diagnostics operating segment and by third-party +vendors. Approximately 75% of third-party sales for fiscal 2009 for this operating segment were +products purchased from our US Diagnostics operating segment. Third-party sales for this operating +segment were $25,870, $27,980, and $23,563 for fiscal 2009, 2008 and 2007, respectively. As of +September 30, 2009, the European Diagnostics operating segment had 40 employees, including 15 +employees in the direct sales force. Our European Diagnostics operating segment’s sales and +distribution network consists of direct sales forces in Belgium, France, Holland, and Italy, and +independent distributors in other European countries, Africa and the Middle East. The European +Diagnostics operating segment maintains a distribution center in Milan, Italy. The primary markets +and customers for this operating segment are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services under clinical cGMP +conditions. Third-party sales for this operating segment were $23,434, $23,240, and $24,555 for +fiscal 2009, 2008 and 2007, respectively. As of September 30, 2009, our Life Science operating +segment had 107 employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2009, 30% of third-party sales for this segment were to two +customers. For one of these two customers, we have exclusive supply agreements that have annual, +automatic renewal provisions. We have a +long-standing relationship with this customer; and although there can be no assurances, we intend +to renew these supply agreements in the normal course of business. +- 10 - +Table of Contents +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than bioresearch +reagents and bulk antigens and antibodies, as well as buying patterns of major customers. See Note +1 (i) to the Consolidated Financial Statements herein for revenue recognition policies. Our +revenues for contract services were $1,635, $1,477, and $765 in fiscal 2009, 2008 and 2007, +respectively. +During fiscal 2008, we acquired certain technologies and products from Vybion, Inc., including +infectious disease recombinant proteins and cardiac antigens. This acquisition added important +technologies and capabilities to our Life Science business and expanded our Life Science brands. +The acquired technologies added proprietary manufacturing know-how and access to important patent +licenses for the development and production of recombinant proteins, an emerging technology in life +sciences. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, and, most recently, OEM Concepts in +fiscal 2005). Historically, these businesses were run autonomously. In recent years, growth +strategies have been developed around sales and marketing integration, new product development +integration, and the acquisition of complementary product lines, such as the recombinant antigen +products acquired from Vybion, Inc. in fiscal 2008. +Antibodies, antigens and reagents are marketed primarily to diagnostic manufacturing customers as a +source of raw materials for their products, or as an outsourced step in their manufacturing +processes. These products are typically sold in bulk quantities, and may also be custom-designed +for a particular manufacturer’s requirements. Sales efforts are focused on multi-year supply +agreements in order to provide stability in volumes and pricing. We believe this benefits both us +and our customers. +With respect to our contract cGMP services, we believe that the business prospects are also +favorable despite our recent revenue trends for this brand. During fiscal 2009 and going into +fiscal 2010, we either completed services or had services in progress for 7 vaccine projects. +- 11 - +Table of Contents +Research and Development +Our Life Science operating segment’s research and development organization consists of four +research scientists. Research and development expenses for our Life Science operating segment for +fiscal 2009, 2008 and 2007 were $1,219, $1,305, and $1,514, respectively. This research and +development organization is heavily involved in vaccine development and production activities for +our cGMP facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles”, and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +All of the Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger than we are with greater financial, research, +manufacturing and marketing resources. Important competitive factors for 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 our product lines do not reflect technological advances, our ability to compete in those +product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Quidel Corporation and +Inverness Medical Innovations. +- 12 - +Table of Contents +C. difficile is one of our primary disease categories. Over the last 12-18 months, considerable +confusion has developed in this market over the relative benefits of the various test methods +available (toxin testing, antigen testing and molecular testing). Several new competitive +products, including molecular assays, have recently been introduced into this market, causing +competitive pressures for our products. We expect to combat these competitive pressures with our +strong position in toxin testing and the development of our illumi gene TM molecular C. +difficile product. Upon launch of illumi gene TM C. difficile, we will be the only +manufacturer offering toxin, antigen, and molecular products for C. difficile testing . +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply arrangements do not exist. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than purchase from outside +vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service, and +price. Although the product application for this facility was built from our existing expertise in +cell culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings, (ii) improving +product distribution capabilities, (iii) providing access to new markets, and/or (iv) providing +access to key biologicals or new technologies that lead to new products. Although we cannot +provide any assurance that we will consummate any acquisitions in the future, we expect that the +potential for acquisitions will continue to serve as an opportunity for new revenues and earnings +growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $41,438 or +28% of consolidated fiscal 2009 sales, $44,430 or 32% of consolidated fiscal 2008 sales and $38,691 +or 31% of consolidated fiscal 2007 sales. Domestic exports for our US Diagnostics and Life Science +operating segments were $15,568, $16,450, +and $15,128 in fiscal 2009, 2008 and 2007, respectively. We expect to continue to look to +international markets as a source of new revenues and growth in the future. +- 13 - +Table of Contents +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a US EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. +ITEM 1A. +RISK FACTORS +In addition to the other information set forth in this report, you should carefully consider the +following factors which could materially affect our business, financial condition, cash flows or +future results. Any one of these factors could cause our actual results to vary materially from +recent results or from anticipated future results. The risks described below are not the only +risks facing our Company. Additional risks and uncertainties not currently known to us or that we +currently deem to be immaterial also may materially adversely affect our business, financial +condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable +terms. +The medical diagnostic and life science industries are characterized by ongoing technological +developments and changing customer requirements. As such, our results of operations and continued +growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and +successfully introduce into the marketplace, enhancements of existing products and services or new +products and services that incorporate technological advances, meet customer requirements, and +respond to products developed by our competition. We cannot provide any assurance that we will be +successful in developing or acquiring such rights to products and services on a timely basis, or +that such products and services will adequately address the changing needs of the marketplace, +either of which could adversely affect our results of operations. +In addition, we must regularly allocate considerable resources to research and development of new +products, services, and technologies. The research and development process generally takes a +significant amount of time from design stage to product launch. This process is conducted in +various stages. During each stage, there is a risk that we will not achieve our goals on a timely +basis, or at all, and we may have to abandon a product in which we have invested substantial +resources. +During 2009, 2008, and 2007, we incurred $8,428, $6,183, and $6,085, respectively, in research and +development expenses. We expect to continue to invest in our research and development activities. +- 14 - +Table of Contents +We may be unable to successfully integrate operations or to achieve expected cost savings from +acquisitions we make. +One of our main growth strategies is the acquisition of companies and/or products. Although +additional acquisitions of companies and products may enhance the opportunity to increase net +earnings over time, such acquisitions could result in greater administrative burdens, increased +exposure to the uncertainties inherent in marketing new products, and financial risks of additional +operating costs. The principal benefits expected to result from any acquisitions we make will not +be achieved fully unless we are able to successfully integrate the operations of the acquired +entities with our operations and realize the anticipated synergies, cost savings, and growth +opportunities from integrating these businesses into our existing businesses. We cannot provide any +assurance that we will be able to identify and complete additional acquisitions on terms we +consider favorable or that, if completed, will be successfully integrated into our operations. +Revenues for our diagnostic operating segments may be impacted by our reliance upon two key +distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our US Diagnostic operating segment’s sales through two distributors were 58% and 54%, +respectively, of the US Diagnostics operating segment’s total sales for fiscal 2009 and fiscal +2008, or 38% and 34%, respectively, of our consolidated sales for fiscal 2009 and fiscal 2008. +These parties distribute our products and other laboratory products to end-user customers. The loss +of either of these distributors could negatively impact our sales and results of operations unless +suitable alternatives were timely found or lost sales to one distributor were absorbed by another +distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our +industry’s competitive environment. As an alternative, we could expand our efforts to distribute +and market our products directly. This alternative, however, would require substantial investment +in additional sales, marketing, and logistics resources, including hiring additional sales and +customer service personnel, which would significantly increase our future selling, general, and +administrative expenses. +In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, +potentially leading to uneven concentration levels on a quarterly basis. However, we expect that, +over a 12-month period, these distributors’ orders would follow a normal buying pattern. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common upper +respiratory, gastrointestinal, viral, and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses. While we believe that the breadth of our diagnostic product lines reduces the +risk that infections subject to seasonality and sporadic outbreaks will cause significant +variability in diagnostic revenues, we can make no assurance that revenues will not be negatively +impacted period over period by such factors. +- 15 - +Table of Contents +Changing Diagnostic Market Conditions +Changes in the healthcare delivery system have resulted in major consolidation among reference +laboratories and in the formation of multi-hospital alliances, reducing the number of institutional +customers for diagnostic test products. Due to such consolidation, we may not be able to enter +into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory +commercial basis with institutional customers, which could adversely affect our results of +operations. +We could be adversely affected by healthcare reform legislation. +Third-party payers for medical products and services, including state and federal governments, are +increasingly concerned about escalating health care costs and can indirectly affect the pricing or +the relative attractiveness of our products by regulating the maximum amount of reimbursement they +will provide for diagnostic testing services. In recent years, pressure has been increasing for +the US government to enact comprehensive healthcare reform. These proposals have been wide-ranging +on both state and federal levels. We are unable to predict whether any such legislation may be +enacted in the US or elsewhere or what effect such legislation may have on reimbursement rates for +our products. If reimbursement amounts for diagnostic testing services are decreased in the +future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for +such services and consequently could place constraints on the levels of overall pricing, which +could have a material effect on our sales and/or results of operations. +Revenues for our Life Science operating segment may be impacted by customer concentrations and +buying patterns. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +30% and 36%, respectively, of the Life Science operating segment’s total sales for fiscal 2009 and +fiscal 2008, or 5% and 6%, respectively, of our consolidated sales for fiscal 2009 and fiscal 2008. +For one of these two customers, we have exclusive supply agreements that have annual, automatic +renewal provisions. Although we have a long-standing relationship with this customer, we cannot +provide any assurance that we will be able to renew these supply agreements, which could adversely +affect our sales and results of operations. +Our Life Science operating segment has two other significant customers who purchase antigens, +antibodies and reagents, which together comprised 5% and 4%, respectively, of the operating +segment’s total sales for fiscal 2009 and 2008. Any significant alteration of buying patterns from +these customers could adversely affect our period over period sales and results of operations. +Revenues relating to research, development and manufacturing services for our Life Science +operating segment are generated on a contract by contract basis. The nature of this business is +such that each contract provides a unique product and/or service and corresponding revenue stream. +Although we believe that future prospects for this business will generate targeted growth rates, +there can be no assurance that future contracts will be secured, and if secured, will be +profitable. +- 16 - +Table of Contents +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid +change. Hundreds of companies in the United States supply immunodiagnostic tests and purified +reagents. These companies range from multinational healthcare entities, for which +immunodiagnostics is one line of business, to small start-up companies. Many of our competitors +have significantly greater financial, technical, manufacturing, and marketing resources than we do. +We cannot provide any assurance that our products and services will be able to compete +successfully with the products and services of our competitors. +During the last several months, molecular tests have been introduced for the first time into the C. +difficile market, which is a significant source of revenues for us. Our ability to continue to +successfully compete in the C. difficile market is partly dependent upon our ability to +successfully develop and market our own molecular test. We currently are in active development of +our own molecular C. difficile test under our illumigene TM brand, with clinical trials +expected to start in our second fiscal quarter of 2010. +We are dependent on international sales, and our financial results may be adversely impacted by +foreign currency, regulatory or other developments affecting international markets. +We sell products and services into approximately 60 countries. Approximately 28% of our net sales +for fiscal 2009 and approximately 32% of our net sales for fiscal 2008 were attributable to +international markets. For fiscal 2009, 53% of our international sales were made in Euros, with the +remaining 47% made in US dollars. We are subject to the risks associated with fluctuations in the +US dollar-Euro exchange rates. We are also subject to other risks associated with international +operations, including longer customer payment cycles, tariff regulations, requirements for export +licenses, instability of foreign governments, and governmental requirements with respect to the +importation and distribution of medical devices and antigens, antibodies and reagents, all of which +may vary by country. +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by +these regulations. +Medical device diagnostics and the manufacture, sale, and distribution of bulk antigens, +antibodies, and reagents are highly regulated industries. We cannot provide any assurance that we +will be able to obtain necessary governmental clearances or approvals or timely clearances or +approvals to market future products in the United States and other countries. Costs and +difficulties in complying with laws and regulations administered by the US Food and Drug +Administration, the US Department of Agriculture, the US Department of Commerce, the US Drug +Enforcement Agency, the Centers for Disease Control, or other regulators can result in +unanticipated expenses and delays and interruptions to the sale of new and existing products. +Contract manufacturing of proteins and other biologicals is regulated by the US Food and Drug +Administration. +- 17 - +Table of Contents +Regulatory approval can be a lengthy, expensive, and uncertain process, making the timing and costs +of approvals difficult to predict. The failure to comply with these regulations can result in +delay in obtaining authorization to sell products, seizure or recall of products, suspension or +revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or +third-party manufacturing facilities would adversely affect our business and operating results. +Products and services manufactured at our Cincinnati, Ohio, Boca Raton, Florida, Memphis, +Tennessee, and Saco, Maine facilities comprised 72% of our Diagnostics revenues and 75% of our Life +Science revenues. Our global supply of these products and services is dependent on the +uninterrupted and efficient operation of these facilities. In addition, we currently rely on a +small number of third-party manufacturers to produce certain of our diagnostic products. The +operations of our facilities or these third-party manufacturing facilities could be adversely +affected by power failures, natural or other disasters, such as earthquakes, floods, tornadoes or +terrorist threats. Although we carry insurance to protect against certain business interruptions +at our facilities, there can be no assurance that such coverage will be adequate or that such +coverage will continue to remain available on acceptable terms, if at all. Any significant +interruption in the Company’s or third-party manufacturing capabilities could materially and +adversely affect our operating results. +We are dependent on sole-source suppliers for certain critical components and products. A supply +interruption could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +multiple sources of supply. However, certain critical raw materials and supplies required for the +production of some of our principal products are available only from a single supplier. In +addition, certain finished products, for which we act as a distributor, are available only from a +single supplier. If these suppliers become unable or unwilling to supply the required raw +materials or products, we would need to find another source, and perform additional development +work and obtain regulatory approvals for the use of the alternative raw materials for our products. +Completing that development and obtaining such approvals could require significant time and +resources, and may not occur at all. Any disruption in the supply of these raw materials or +finished products could have a material adverse affect on us. +We have no individual products that represent greater than 10% of consolidated sales for which we +have a sole source supplier. We sell certain respiratory tests for influenza and respiratory +syncytial virus that we purchase from Inverness Medical Innovations. These products represented +13%, 14%, and 11%, respectively, of third-party sales for our US Diagnostics operating segment in +fiscal 2009, 2008, and 2007, respectively. While we do not have a long-term supply agreement with +this vendor for these products, during fiscal 2008, we launched our own internally-developed +products that compete with these products in the market. Two foodborne products +sourced from another vendor accounted for 7% and 5% of third-party sales for our US Diagnostics +operating segment in fiscal 2009 and 2008, respectively. +- 18 - +Table of Contents +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented +technologies. In addition, we have licensed, and expect to continue to license, various +complementary technologies and methods from academic institutions and public and private companies. +We cannot provide any assurance that the technologies that we own or license provide protection +from competitive threats or from challenges to our intellectual property. In addition, we cannot +provide any assurances that we will be successful in obtaining licenses or proprietary or patented +technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our +ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the +market for diagnostics continues to grow and the number of participants in the market increases, we +may increasingly be subject to patent infringement claims. It is possible that a third-party may +claim infringement against us. If found to infringe, we may attempt to obtain a license to such +intellectual property, however, we may be unable to do so on favorable terms, or at all. +Additionally, if our products are found to infringe on third-party intellectual property, we may be +required to pay damages for past infringement and lose the ability to sell certain products, +causing our revenues to decrease. We currently carry intellectual property insurance that covers +damages and defense costs from our potential infringement on other third-party patents at levels +that we believe are commercially reasonable, although there is no assurance that it will be +adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a +claim could have a material adverse affect on our profitability and the damage to our reputation in +the industry could have a material adverse affect on our business. +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing, and marketing of medical diagnostic products involves an inherent risk +of product liability claims. If we cannot successfully defend ourselves against product liability +claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially +reasonable, although there is no assurance that it will be adequate to cover claims that may arise. +In certain customer contracts, we indemnify third parties for certain product liability claims +related to our products. These indemnification obligations may cause us to pay significant sums of +money for claims that are covered by these indemnifications. In addition, a defect in the design +or manufacture of our products could have a material adverse affect on our reputation in the +industry and subject us to claims of liability for injury and otherwise. Any substantial +underinsured loss resulting from such a claim +could have a material adverse affect on our profitability and the damage to our reputation in the +industry could have a material adverse affect on our business. +- 19 - +Table of Contents +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire, and retain key +personnel. +Our future success depends on our continued ability to attract, hire, and retain highly qualified +personnel, including our executive officers and scientific, technical, sales, and marketing +employees, and their ability to manage growth successfully. If such key employees were to leave +and we were unable to obtain adequate replacements, our operating results could be adversely +affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain +financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we +would be in default under the credit agreement. If an event of default is not cured or waived, it +could result in acceleration of any indebtedness under our credit agreement, which could have a +material adverse effect on our business. At the present time, no borrowings are outstanding under +our bank credit agreement. +Over the last 12 to 24 months, the credit markets and the banking industry have gone through a +period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse, or +sale of various financial institutions. In response, the US federal government put into place a +number of economic measures designed to stabilize the markets, the ultimate effect of which cannot +yet be predicted. Should our ability to borrow money to finance our operations from our existing +lender under our bank credit agreement be impaired our results of operations could be materially +affected. +We face other risks related to the current credit crisis. +We currently generate significant operating cash flows, which combined with access to the credit +markets provides us with discretionary funding capacity for research and development and other +strategic activities. Current uncertainty in global economic conditions poses a risk to the +overall economy that could impact demand for our products, as well as our ability to manage normal +commercial relationships with our customers, suppliers and creditors, including financial +institutions. If the current situation deteriorates significantly, our business could be negatively +impacted, including such areas as reduced demand for our products from a slow-down in the general +economy, supplier or customer disruptions resulting from tighter credit markets and/or temporary +interruptions in our ability to conduct day-to-day transactions through our financial +intermediaries involving the payment to or collection of funds from our customers, vendors and +suppliers. If the current credit crisis were to continue to worsen such that we were unable to +access the credit market, it could impair our ability to fund discretionary spending. +- 20 - +Table of Contents +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred +stock and to determine the rights, preferences, privileges and restrictions, including voting +rights, of such shares without any future vote or action by the shareholders. The issuance of +preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage +takeover bids for our company that have not been negotiated with the board of directors. Such +provisions could limit the price that investors might be willing to pay in the future for shares of +our common stock. In addition, sales of substantial amounts of such shares in the public market +could adversely affect the market price of our common stock and our ability to raise additional +capital at a price favorable to us. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Our corporate offices, US Diagnostics manufacturing facility and US Diagnostics research and +development facility are located in three buildings totaling approximately 94,000 square feet on +6.2 acres of land in the Village of Newtown, a suburb of Cincinnati, Ohio. These properties are +owned by us. We have approximately 51,000 square feet of manufacturing space and 9,000 square feet +of warehouse space in these facilities. +In September 2009, we purchased a two-story building in the Village of Newtown, less than one mile +from our current facility, to augment our research and development, manufacturing, and +administrative capacity for our US Diagnostics operating segment. This facility consists of +approximately 22,000 square feet on 3.5 acres of land. We anticipate expanding a portion of our US +operations into this space during the next twelve months. +Our European Diagnostics distribution center in Italy conducts its operations in a two-story +building in Milan, consisting of approximately 18,000 square feet. This facility is owned by our +wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in +Nice, France and Nivelles, Belgium for sales and administrative functions. +Our Life Science operations are conducted in several facilities in Saco, Maine, Memphis, Tennessee, +and Boca Raton, Florida. Our facility in Saco, Maine presently contains approximately 23,000 +square feet for manufacturing, sales, distribution and administrative functions, and is owned by +us. Our facility in Memphis, Tennessee consists of two buildings totaling approximately 34,000 +square feet, including approximately 27,000 square feet of manufacturing space, and is owned by us. +Our leased facility in Boca Raton, Florida contains approximately 7,500 square feet of +manufacturing space. +- 21 - +Table of Contents +ITEM 3. +LEGAL PROCEEDINGS +We are a party to various litigation matters that we believe are in the normal course of business. +The ultimate resolution of these matters is not expected to have a material adverse effect on our +financial position, results of operations or cash flows. No provision has been made in the +accompanying consolidated financial statements for these matters. +ITEM 4. +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +Not applicable. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Refer to “Forward Looking Statements” following the Index in front of the Form 10-K and Item 1A +“Risk Factors” on Pages 14 through 21 of this Annual Report. +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2009 +and “Quarterly Financial Data” relating to our dividends in Note 10 to the Consolidated Financial +Statements are incorporated herein by reference. There are no restrictions on cash dividend +payments. +Our cash dividend policy is to set the indicated annual dividend rate between 75% and 85% of each +fiscal year’s 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. +We paid dividends of $0.65 per share, $0.53 per share, and $0.40 per share in fiscal 2009, fiscal +2008, and fiscal 2007, respectively. +On May 11, 2007, we affected a three-for-two stock split for shareholders of record on May 4, 2007. +All references in this Annual Report to number of shares and per share amounts reflect the effects +of this stock split. +As of September 30, 2009, there were approximately 950 holders of record and approximately 22,000 +beneficial owners of our common shares. +- 22 - +Table of Contents +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2009. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors” on pages 14 through 21 of this Annual Report. +Overview: +Our Diagnostics operating segments provide the largest share of our consolidated revenues, 84%, 83% +and 80% for fiscal 2009, 2008 and 2007, respectively. Sales from our four focus families ( C. +difficile , Upper Respiratory, H. pylori , and Foodborne) comprised 71% of our Diagnostics operating +segments’ revenues during fiscal 2009. +Revenue growth during the first half of fiscal 2009 for our Diagnostics operating segments was a +negative 3%, as a result of a weakened global economy, inventory de-stocking by our major +distributors and a relatively mild influenza season. Revenue growth during the second half of +fiscal 2009 was a positive 18%, primarily driven by the world-wide outbreak of novel A (H1N1) +influenza that began in April and continues today, and new product revenues in our foodborne +family. Revenue growth for the full fiscal year in 2009 was also impacted by foreign currency +translation, which contributed translation losses of approximately $2,400. The USD/Euro exchange +rate averaged approximately 1.35 during fiscal 2009, compared to 1.50 during fiscal 2008. +Upper Respiratory Products +During fiscal 2009, upper respiratory sales for our Diagnostics operating segments increased 24% +compared to fiscal 2008, driven by the outbreak of novel A (H1N1) influenza virus that began to +spread across countries in the northern hemisphere during the second half of fiscal 2009. The +novel A (H1N1) influenza outbreak created an early start to the 2009-2010 influenza season, +resulting in increased upper respiratory sales for influenza products in the third and fourth +quarters of fiscal 2009. This outbreak has also created an increased interest in influenza testing +in European markets where rapid testing has not been traditionally performed, resulting in revenue +growth of 55% in this operating segment on an organic basis. At the present time, seasonal +influenza has not yet emerged; however, novel A (H1N1) activity continues to be high in the United +States and Europe. Sales of our influenza products have remained steady during the first quarter +of fiscal 2010. +The 2008-09 respiratory season was the first full season in which we sold our internally developed +and manufactured TRU FLU ® and TRU RSV ® products. Our TRU FLU ® and +TRU RSV ® products represented approximately 25% of our total influenza and respiratory +syncytial virus product sales for fiscal 2009, compared to less than 10% in fiscal 2008. We expect +this percentage to continue to increase, yielding continuing improvements in gross profit margins. +Our TRU ® format, with its sample tube and test device, offers better +containment of the specimen sample compared to card-type devices. Customers are reacting +positively to this feature, especially in the current pandemic. +- 23 - +Table of Contents +Foodborne Products +Over the last three fiscal years, we have launched three foodborne products, Immuno Card +STAT! ® EHEC in fiscal 2007, and Premier TM CAMPY and Immuno Card +STAT! ® CAMPY in fiscal 2009. The volume growth from these new products has more than +doubled the global revenues for this disease family since fiscal 2007, and this is now a $10,000+ +product family. The disease family is expected to generate significant sales growth in fiscal +2010. +C. difficile products +Considerable confusion has developed in the C. difficile market over the +relative benefits of the various test methods available (toxin testing, antigen testing and +molecular testing). Several new competitive products, including molecular assays, have recently +been introduced into this market, causing competitive pressures for our products and slowing organic growth rates to single digits. We expect to +combat these competitive pressures with our strong position in toxin testing and the development of +our illumi gene TM molecular C. difficile product. Our new molecular test for C. +difficile on our illumi gene TM platform is in the final stages of product design. We are +currently conducting beta site evaluations and have recent data that meets or exceeds +our expectations. We are targeting revenue contributions from the launch of this technology later +in the first half of fiscal 2010. +H. pylori products +During fiscal 2009, sales of our H. pylori products grew 10% for our US Diagnostics +operating segment and 2% for our European Diagnostics operating segment on an organic basis. Our +partnerships with managed care companies in promoting the health and economic benefits of a test +and treat strategy is beginning to move physician behavior away from serology-based testing to +direct antigen testing. The modest level of growth for our European Diagnostics operating segment +reflects impact from pricing pressures from competitive products in European markets. +- 24 - +Table of Contents +Life Science Operating Segment +Sales for our Life Science operating segment increased 1% for fiscal 2009 compared to fiscal 2008. +This slight increase reflects buying patterns of our two largest diagnostic manufacturing +customers, who accounted for 30% +of the Life Science Operating segment’s sales in fiscal 2009 compared to 36% in fiscal 2008. We +expect high single-digit growth for this operating segment in fiscal 2010. Due to manufacturing +efficiency improvements at our Memphis, Tennessee facility, we have seen significant year-over-year +improvements in operating income contributions in fiscal 2009 compared to fiscal 2008. +All Segments +We have generated a consolidated gross profit margin of 63% for fiscal 2009. This level of gross +profit margin reflects favorable efficiencies from automation in our US Diagnostics manufacturing +plant, changing product mix in favor of higher margin manufactured products over lower margin +third-party influenza and RSV products within the upper respiratory product family, and improved +operating performance and utilization of our Life Science manufacturing facility in Memphis, +Tennessee. Although foreign currency exchange rates had a negative effect on sales of our European +Diagnostics operating segment, they had no significant effect on consolidated gross profit or +consolidated operating income due to natural hedges. Our US Diagnostics operating segment markets +and sells certain Meridian-branded diagnostic test kits that are sourced from European suppliers in +Spain and Germany. These kits are purchased in Euros, which provides a natural hedge to gross +profit and operating income on a consolidated basis. +The recessionary state of the economy during fiscal 2009 is affecting not only the US, but also +countries around the world. We cannot predict the timing or magnitude of recovery from this +recession. If economic conditions worsen or remain in a recessed state for an extended period of +time, our sales levels could be adversely affected by customer buying patterns in their efforts to +conserve cash and manage inventory levels. On a longer-term basis, in a recessed economic state, +our sales levels could be adversely impacted by the number of diagnostic tests performed in the +healthcare system, if, for example, there were declines in physician office visits and/or hospital +admissions. Our product portfolios, for both diagnostics and life science, deal with acute patient +symptoms and infectious diseases. To date, we have not seen any significant reduction in end-user +demand for our major products as a result of economic conditions. +From a cash flow perspective, we expect cash flows from operations to be sufficient to fund working +capital requirements, capital expenditure requirements and dividends over the next 12 months. +- 25 - +Table of Contents +Financial discipline is one of our fundamental principles in running the day-to-day business +regardless of the state of the business cycle and economy. The following table illustrates key +income and expense elements as a percentage of sales. We look for continued improvement in each of +these measures each year, regardless of macro-economic market conditions. +2009 +2008 +2007 +Gross profit +63 +% +62 +% +61 +% +Operating expenses +30 +% +30 +% +32 +% +Operating income +33 +% +32 +% +28 +% +Operating Segments: +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +Revenues for the Diagnostics operating segments, in the normal course of business, may be affected +by buying patterns of major distributors, seasonality and strength of certain diseases, and foreign +currency exchange rates. Revenues for the Life Science operating segment, in the normal course of +business, may be affected by the timing and nature of arrangements for contract services work, +which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, +as well as buying patterns of major customers. We believe that the overall breadth of our product +lines serves to reduce the variability in consolidated revenues. +Results of Operations: +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2009 increased 16% to $8,930, or $0.22 per diluted +share, from net earnings for the fourth quarter of fiscal 2008 of $7,684, or $0.19 per diluted +share. This increase is primarily attributable to increased sales coupled with management of +discretionary spending. Sales for the fourth quarter of fiscal 2009 were $42,461, an increase of +$5,986, or 16%, compared to the fourth quarter of fiscal 2008. +Sales for the US Diagnostics operating segment for the fourth quarter of fiscal 2009 increased 24% +compared to the fourth quarter of fiscal 2008, and benefited from volume increases in sales of +influenza products related to the novel A (H1N1) influenza outbreak, along with growth in our +Foodborne products. Importantly, sales of our TRU FLU ® and TRU RSV ® products +increased to approximately 30% of our total influenza and respiratory syncytial virus product sales +during the quarter. Sales for our European Diagnostics and Life Science operating segments +increased 5% and 1%, respectively, during the fourth quarter of fiscal 2009 compared to the fourth +quarter of fiscal 2008. On an organic basis, which excludes the effects of currency translation, +sales for our European Diagnostics operating segment increased 10% during the fourth quarter, +benefitting from sales of our TRU FLU ® and TRU RSV ® products. +- 26 - +Table of Contents +Fiscal Year +Net earnings for fiscal 2009 increased 8% to $32,759 or $0.80 per diluted share from net earnings +for fiscal 2008 of $30,202 or $0.74 per diluted share. Results of operations for fiscal 2009 +compared to fiscal 2008 are discussed below. +Net earnings and earnings per share for fiscal 2007 include the effects of a tax benefit in the +amount of $2,425, or $0.06 per basic and diluted share, related to a discrete adjustment to tax +reserves that was recorded in the third quarter upon the expiration of the statute of limitations +on certain income tax returns (see Note 6 to the consolidated financial statements herein). The +tables below provide information on net earnings, basic earnings per share, and diluted earnings +per share, excluding this tax benefit, as well as reconciliations to amounts reported under US +Generally Accepted Accounting Principles. We believe that this information is useful to those who +read our financial statements and evaluate our operating results because: +1. These measures help to appropriately evaluate and compare the results of operations from period +to period by removing the favorable impact of a discrete material item that is not expected to +recur in the future; and +2. These measures are used by our management for various purposes, including evaluating performance +against incentive bonus achievement targets, comparing performance from period to period in +presentations to our Board of Directors, and as a basis for strategic planning and forecasting. +2009 vs +2008 vs +2008 +2007 +2009 +2008 +2007 +Change +Change +Net Earnings — +US GAAP basis +$ +32,759 +$ +30,202 +$ +26,721 +8 +% +13 +% +Tax benefit not expected to recur in +the future +— +— +(2,425 +) +— +% +100 +% +Excluding tax benefit +$ +32,759 +$ +30,202 +$ +24,296 +8 +% +24 +% +2009 +2008 +2007 +Change +Change +Net Earnings per Basic Common Share — +US GAAP basis +$ +0.81 +$ +0.75 +$ +0.67 +8 +% +12 +% +Tax benefit not expected to recur in +the future +— +— +(0.06 +) +— +% +100 +% +Excluding tax benefit +$ +0.81 +$ +0.75 +$ +0.61 +8 +% +23 +% +2009 +2008 +2007 +Change +Change +Net Earnings per Diluted Common Share — +US GAAP basis +$ +0.80 +$ +0.74 +$ +0.66 +8 +% +12 +% +Tax benefit not expected to recur in +the future +— +— +(0.06 +) +— +% +100 +% +Excluding tax benefit +$ +0.80 +$ +0.74 +$ +0.60 +8 +% +23 +% +- 27 - +Table of Contents +Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008 and +Fiscal Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30, 2007. +2009 +2008 +vs. +vs. +2008 +2007 +Sales Breakdown +2009 +2008 +2007 +Inc (Dec) +Inc (Dec) +US Diagnostics +$ +98,970 +$ +88,419 +$ +74,845 +12 +% +18 +% +European Diagnostics +25,870 +27,980 +23,563 +(8 +)% +19 +% +Life Science +23,434 +23,240 +24,555 +1 +% +(5 +)% +Consolidated +$ +148,274 +$ +139,639 +$ +122,963 +6 +% +14 +% +International — +US Diagnostics +export +$ +5,657 +$ +6,643 +$ +6,558 +(15 +)% +1 +% +Life Science export +9,911 +9,807 +8,570 +1 +% +14 +% +European Diagnostics +25,870 +27,980 +23,563 +(8 +)% +19 +% +Total +$ +41,438 +$ +44,430 +$ +38,691 +(7 +)% +15 +% +% of total sales +28 +% +32 +% +31 +% +Growth for our Diagnostics operating segments was led by volume increases in upper respiratory +products driven by the outbreak of novel A (H1N1) influenza experienced in the United States +beginning in the spring of 2009. Sales for this product family increased approximately 23% over +fiscal 2008, which showed double-digit increases over fiscal 2007. Sales of upper respiratory +products grew 22% in fiscal 2009 for the US Diagnostics operating segment, and grew 55% for our +European Diagnostics operating segment on an organic basis. Sales increases for this product +family included sales from our new products launched during the first quarter of fiscal 2008, TRU +FLU ® and TRU RSV ® . These two products represented +approximately 25% of our total influenza and respiratory syncytial virus product sales for fiscal +2009, compared to less than 10% in fiscal 2008. +We also saw significant volume increases for our foodborne products family, specifically related to +our Immuno Card STAT! ® EHEC product. The EHEC product was developed in collaboration +with Merck for detection of toxin-producing E. coli in patients that may have ingested contaminated +produce or meat products and was launched in fiscal 2007. Two new Campylobacter products were +launched during fiscal 2009, which also contributed to volume growth. +Our H. pylori product family showed modest growth for fiscal 2009 after double-digit growth for +fiscal 2008 for our Diagnostics operating segments. For our US Diagnostics operating segment, +sales growth for this product family was 10% in fiscal 2009. Our partnerships with managed care +companies in promoting the health and economic benefits of a test and treat strategy is beginning +to move physician behavior away from serology-based testing to direct antigen testing. For our +European diagnostics operating segment, our sales growth for this product family was 2% for fiscal +2009 on an organic basis. This modest level of growth reflects the impact of pricing pressures +with competitive products in European markets. +- 28 - +Table of Contents +Considerable confusion has developed in the C. +difficile market over the relative benefits of the various test methods available (toxin testing, +antigen testing and molecular testing). Several new competitive products, including molecular +assays, have recently been introduced into this market, causing competitive pressures for our +products and slowing organic growth rates to single digits. We expect to combat these competitive pressures with our strong position in toxin +testing and the development of our illumi gene TM molecular C. difficile product. +We are currently conducting beta site evaluations and have recent data that meets or exceeds our expectations. We are targeting revenue +contributions from the launch of this technology later in the first half of fiscal 2010. +Sales growth for our European Diagnostics operating segment includes currency translation losses in +the amount of $2,419 for fiscal 2009 and gains in the amount of $2,743 for fiscal 2008. Organic +sales growth was 1% and 7% during fiscal 2009 and 2008, respectively. The organic growth in fiscal +2009 was driven by volume increases in upper respiratory related to the novel A (H1N1) influenza +outbreak. The organic growth in fiscal 2008 was driven by volume increases in C. difficile +products, principally Immuno Card Ò Toxins A & B, as well as the third quarter +fiscal 2008 launch of TRU EBV-M ® and TRU EBV-G ® . +Fiscal 2009 and fiscal 2008 sales for the Life Science operating segment reflect changes in demand +and buying patterns of certain of our major diagnostic manufacturing customers and non-renewal of a +supply contract with the US Department of Defense. Changes in the US Department of Defense’s +Critical Reagents program led to non-renewal of this contract after fiscal 2007. We sell three +main products to a major diagnostic manufacturing customer, who accounted for 16%, 21%, and 27% of +total sales for the Life Science operating segment for fiscal 2009, 2008 and 2007, respectively. +2009 vs. +2008 vs. +2008 +2007 +2009 +2008 +2007 +Inc (Dec) +Inc (Dec) +Gross Profit +$ +92,783 +$ +86,480 +$ +74,940 +7 +% +15 +% +Gross Profit Margin +63 +% +62 +% +61 +% +1 +% +1 +% +The increases in gross profit margins from 2007 to 2009 reflect a stronger mix of sales from our +Diagnostics operating segments, including higher margins on rapid tests, and production +efficiencies from automation initiatives in our diagnostics manufacturing facility. Manufacturing +efficiency improvements at our Memphis, Tennessee facility, have also contributed to year-over-year +improvements in gross profit in fiscal 2009 compared to fiscal 2008. +- 29 - +Table of Contents +Our overall operations consist of the sale of diagnostic test kits for various disease states and +in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, +proficiency panels, and contract research and development and contract manufacturing services. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +Research & +Selling & +General & +Total Operating +Development +Marketing +Administrative +Expenses +2007 Expenses +$ +6,085 +$ +17,124 +$ +16,701 +$ +39,910 +% of Sales +5 +% +14 +% +14 +% +32 +% +Fiscal 2008 +Increases +(Decreases): +US Diagnostics +307 +1,523 +(293 +) +1,537 +European Diagnostics +— +423 +389 +812 +Life Science +(209 +) +(300 +) +380 +(129 +) +2008 Expenses +$ +6,183 +$ +18,770 +$ +17,177 +$ +42,130 +% of Sales +4 +% +13 +% +12 +% +30 +% +% Increase (Decrease) +2 +% +10 +% +3 +% +6 +% +Fiscal 2009 +Increases +(Decreases): +US Diagnostics +2,331 +930 +(732 +) +2,529 +European Diagnostics +— +(321 +) +(20 +) +(341 +) +Life Science +(86 +) +(144 +) +(84 +) +(314 +) +2009 Expenses +$ +8,428 +$ +19,235 +$ +16,341 +$ +44,004 +% of Sales +6 +% +13 +% +11 +% +30 +% +% Increase (Decrease) +36 +% +2 +% +-5 +% +4 +% +Operating expenses for the US Diagnostics operating segment increased $2,529 for fiscal 2009 +compared to fiscal 2008 and $1,537 for fiscal 2008 compared to fiscal 2007. Increases in both +years were primarily attributable to development costs for our molecular C. difficile product and +additional salaries and benefits related to planned headcount additions. The fiscal 2009 period +also saw increased marketing and clinical trial expenses related to new products. These increases +were partially offset by decreased stock based compensation and decreased corporate incentive bonus +related to earnings achieved for fiscal 2009 and attainment of lower level bonus targets in fiscal +2008 compared to fiscal 2007. No corporate incentive bonus has been recorded for salaried +employees for fiscal 2009. +Operating expenses for the European Diagnostics operating segment decreased $341 for fiscal 2009 +compared to fiscal 2008 and increased $812 for fiscal 2008 compared to fiscal 2007. The +fluctuations for fiscal 2009 and fiscal 2008 were primarily attributable to currency fluctuations. +- 30 - +Table of Contents +Operating expenses for the Life Science Operating segment decreased $314 for fiscal 2009 compared +to fiscal 2008 and decreased $129 for fiscal 2008 compared to fiscal 2007. The fiscal 2009 +decrease was primarily attributable to reduced salaries and benefits related to lower headcount. +The amount of stock-based compensation expense reported for fiscal 2009, fiscal 2008, and fiscal +2007 was $1,092, $1,772, and $2,632, respectively. During November 2007 and November 2008, we +granted to certain employees stock options and restricted stock that were contingent upon Meridian +achieving a specified net earnings level for each fiscal year. Because Meridian’s fiscal net +earnings did not reach the minimum level in 2008 or 2009, these awards were not earned. No +stock-based compensation has been recorded for these awards. Similarly, during November 2006, we +granted to certain employees stock options that were contingent upon Meridian achieving a specified +net earnings level for fiscal 2007. Because Meridian’s fiscal 2007 net earnings surpassed the +minimum level, these stock options were earned and are now exercisable over a vesting period. +Operating Income +Operating income increased 10% and 27% in fiscal 2009 and 2008, respectively, as a result of the +factors discussed above. +Other Income and Expense +Interest income was $456, $1,533, and $1,642 for fiscal 2009, 2008, and 2007, respectively. The +decreases during fiscal 2009 and fiscal 2008 were driven by lower interest yields due to a higher +concentration of investments in money market funds in fiscal 2009 and lower interest rates in the +current interest rate environment, somewhat offset by higher average investment balances. +Income Taxes +The effective rate for income taxes was 34%, 34%, and 27% for fiscal 2009, 2008, and 2007, +respectively. The increase in the effective tax rate for fiscal 2008 was primarily attributable to +a discrete adjustment to tax reserves in the third quarter of fiscal 2007 in the amount of $2,425. +This discrete adjustment reduced the effective tax rate for fiscal 2007 by 7 points. +Impact of Inflation +To the extent feasible, we have consistently followed the practice of adjusting our prices to +reflect the impact of inflation on salaries and fringe benefits for employees and the cost of +purchased materials and services. Inflation and changing prices did not have a material adverse +impact our gross margin, revenue or operating income in fiscal 2009, 2008 or 2007. +- 31 - +Table of Contents +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Our cash flow and financing requirements are determined by analyses of operating and capital +spending budgets, consideration of acquisition plans, and consideration of common share dividends. +We have historically maintained a credit facility to augment working capital requirements and to +respond quickly to acquisition opportunities. This credit facility has been supplemented by the +proceeds from a September 2005 common share offering, which during most of fiscal 2009, were +invested in a non-interest bearing bank deposit account, overnight repurchase agreements, +institutional money-market mutual funds and tax-exempt auction-rate securities. +We have an investment policy that guides the holdings of our investment portfolio. Our objectives +in managing the investment portfolio are to (i) preserve capital, (ii) provide sufficient liquidity +to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) +capture a market rate of return commensurate with market conditions and our policy’s investment +eligibility criteria. As a result of conditions in the financial markets, we have chosen to keep +the maturity of our investment portfolio very short. As we look forward, we will continue to +manage the holdings of our investment portfolio with preservation of capital being the primary +objective. +Except as otherwise described herein, we do not expect current conditions in the financial markets, +or overall economic conditions to have a significant impact on our liquidity needs, financial +condition, or results of operations. We intend to continue to fund our working capital +requirements and dividends from current cash flows from operating activities. We also have +additional sources of liquidity through our investment portfolio and $30,000 bank credit facility, +if needed. To date, we have not experienced any significant deterioration in the aging of our +customer accounts receivable nor in our vendors’ ability to supply raw materials and services and +extend normal credit terms. Our liquidity needs may change if overall economic conditions worsen +and/or liquidity and credit within the financial markets remains tight for an extended period of +time, and such conditions impact the collectability of our customer accounts receivable, or impact +credit terms with our vendors, or disrupt the supply of raw materials and services. +Overall stock market valuations declined early in fiscal 2009 only to rebound in the latter part of +the year. These fluctuations may raise questions as to the potential impairment of goodwill and +other long-lived assets. Our annual goodwill impairment review takes place as of June +30 th each year. There have been no impairments from these annual reviews. Despite the +overall decline in stock market valuations, as of October 31, 2009, our stock price was $22.19 per +share, compared to our book value per share of $3.40 as of September 30, 2009. This relationship, +stock price trading at 6.5x book value, is an indicator that the decline in overall stock market +valuations, and its impact on our stock price, has not been a triggering event for impairment of +our goodwill and other long-lived assets. +- 32 - +Table of Contents +Net cash provided by operating activities increased 9% to $32,492 in fiscal 2009. This +increase was primarily attributable to higher earnings levels and timing of payments with +suppliers. +Net cash used for investing activities was $3,280 for fiscal 2009 compared to $13,230 for fiscal +2008. This decrease was primarily attributable to reduced purchases of property, plant, and +equipment in fiscal 2009, changes in our investment portfolio during fiscal 2009 and 2008, +including purchases of auction-rate securities in fiscal 2008, and purchases of intangible assets +related to patents and an acquired recombinant viral protein product line in fiscal 2008. +Net cash used for financing activities was $24,636 for fiscal 2009 compared to $16,693 for fiscal +2008. This increase was primarily attributable to a 24% increase in dividend payments and a +decrease of $2,939 in proceeds and tax benefits from the exercise of stock options. Dividend +payments in fiscal 2009 reflect increased dividend rates and common shares outstanding related to +stock option exercises. +Net cash flows from operating activities are anticipated to fund working capital requirements and +dividends during the next twelve months. +Capital Resources +We have a $30,000 credit facility with a commercial bank which expires September 15, 2012. As of +November 26, 2009, there were no borrowings outstanding under this facility. We did not have any +borrowing under this facility during fiscal 2009 or 2008. +Our capital expenditures are estimated to be approximately $5,000 for fiscal 2010, and +may be funded with cash and equivalents on hand, operating cash flows, and/or availability under +the $30,000 credit facility discussed above. Capital expenditures relate to manufacturing and +other equipment of a normal and recurring nature, as well as the build out of the recently +purchased property in the Village of Newtown. +Student Loan Auction-Rate Securities +Our investment portfolio includes student loan auction-rate securities, which are long-term student +loan revenue bonds whose interest rates are reset every 35 days via a Dutch auction process. All +of our auction-rate securities are backed by pools of student loans originated under the Federal +Family Education Loan Program (FFELP). FFELP student loans are guaranteed by State guarantors who +have reinsurance agreements with the US Department of Education. All of our student loan +auction-rate securities were rated Aaa and AAA by Moody’s +and Standard & Poor’s, respectively, at the time of purchase, and have continued to maintain these +credit ratings through the present time. +- 33 - +Table of Contents +The Dutch auction process historically provided the necessary liquidity mechanism to either +purchase or sell these securities. Beginning in mid-February 2008, liquidity issues in the US +credit markets resulted in the failure of auctions across a broad spectrum of tax-exempt +securities, including student loan revenue bonds. Auctions for the student loan revenue bonds that +we hold have continued to fail through the present time. The consequence of a failed auction is +that we do not have access to the principal amount of our investments. Issuers are still required +to make interest payments when due in the event of failed auctions. We have not experienced any +missed interest payments to date. +Our auction-rate securities were purchased through UBS Financial Services, Inc. During November +2008, we accepted an offer from UBS, AG (UBS) of Auction Rate Security Rights. These rights permit +us to require UBS between June 30, 2010 and July 2, 2012 (the exercise period) to purchase our +auction-rate securities at par value. In exchange, UBS is granted the right, at their sole +discretion, to sell or otherwise dispose of our auction-rate security investments until July 2, +2012 as long as we receive a payment of par value upon the sale or disposition. In addition, the +rights permit us to establish a demand revolving credit line in an amount equal to the par value of +the securities at a net no cost. We are still able to sell the auction-rate securities on our own, +but in such a circumstance, we would lose the par value support from UBS. +Upon executing the settlement agreement with UBS, we recognized the Auction Rate Security Rights as +a stand-alone financial instrument and elected the fair value option. We also transferred the +student loan auction-rate securities from the available-for-sale classification, to the trading +classification. Upon transfer to the trading classification, $270 in unrealized losses as of +September 30, 2008, were transferred from accumulated other comprehensive income to other income +and expense. Adjustments to the fair value of student loan auction-rate securities and Auction +Rate Security Rights are recorded to other income and expense in each accounting period. As of +September 30, 2009, the fair value of the student-loan auction rate securities was $6,708 compared +to a par value of $7,275. As of September 30, 2009, the fair value of the Auction Rate Security +Rights was $577. The student loan auction-rate securities and Auction Rate Security Rights are +included in current assets in the accompanying consolidated balance sheet based on the earliest +exercise date of June 30, 2010. +- 34 - +Table of Contents +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2009: +Less than 1 +More than 5 +Total +Year +1-3 Years +4-5 Years +Years +Operating leases (1) +$ +1,489 +$ +610 +$ +749 +$ +130 +$ +— +Purchase obligations (2) +13,688 +12,917 +771 +— +— +Uncertain income tax +positions liability and +interest (3) +572 +572 +— +— +— +Total +$ +15,749 +$ +14,099 +$ +1,520 +$ +130 +$ +— +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in Cincinnati, +Florida, Belgium, and France; (ii) automobiles for use by the diagnostic direct sales forces in the US +and Europe; and (iii) certain office equipment such as facsimile machines and copier machines across +all business units, under operating lease agreements that expire at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory and +service items. These contractual commitments are not in excess of expected production requirements +over the next twelve months. +(3) +As of September 30, 2009, our liabilities for uncertain tax positions and related interest and +penalties were $470 and $102, respectively. Due to inherent uncertainties in the timing of settlement +of tax positions, we are unable to estimate the timing of the effective settlement of these +obligations. +Other Commitments and Off-balance Sheet Arrangements: +License Agreements +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 $696 in fiscal 2010. These royalty payments primarily +relate to the US Diagnostics operating segment. +Meridian entered into a license agreement in October 2006 with a third party that provides rights +to a molecular technology for infectious disease testing in the United States, Europe and other +geographic markets. The agreement, as amended during fiscal 2009, calls for payments of up to +approximately $800 based on the achievement of certain product development milestones and on-going +royalties once products are available for commercial sale. Payments made during product +development are expected to occur over a five-year period, which began in fiscal 2007. Payments +of $104, $0 and $169 were made during fiscal 2009, fiscal 2008 and fiscal 2007, respectively, +related to this license. +- 35 - +Table of Contents +During the fourth quarter of fiscal 2007, we began seeking recovery of approximately $1,400 of past +royalties paid and interest under a license agreement around certain rapid diagnostic testing +technology. This license +agreement covered patent rights that were narrowed in scope via other litigation with the licensor +that did not involve Meridian. We strongly believe that the licensed patent, as reissued, does not +cover any of our products. We also ceased further royalty payments under this license agreement. +The licensor to this agreement disputes our position that the patent, as reissued, does not cover +our products. Although we believe that our position is very strong, we are unable to predict the +outcome of this matter. No provision has been made in the accompanying financial statements for +on-going royalties, if any, nor has any accrual or income been recorded for recovery of past +royalties paid. +Derivative financial instruments +Prior to February 1, 2009, we managed exchange rate risk related to forecasted intercompany sales +denominated in the Euro currency through the use of forward exchange contracts. We designated such +forward contracts as cash flow hedges. As such, the effective portion of the gain or loss on the +derivative instrument was reported as a component of other comprehensive income and reclassified +into earnings in the same period or periods during which the hedged transaction affected earnings. +As of September 30, 2009, we had no such contracts outstanding. +During January 2009, € 500 notional amount of these contracts were settled in accordance with their +original maturities. The realized gain on these contracts was $32. Also during January 2009, we +accelerated the settlement of the remaining € 2,700 notional amount of forward exchange contracts +that were originally scheduled to mature between February 27, 2009 and December 31, 2009. These +transactions resulted in a gain of approximately $140 that was recorded in the second quarter of +fiscal 2009. We unwound these forward exchange contracts after completing a strategic review of +our foreign currency exposures. +Off-balance sheet arrangements +We have no off-balance sheet arrangements. +Market Risk Exposure: +Foreign Currency Risk +We have market risk exposure related to foreign currency transactions. We are exposed to foreign +currency risk related to our European distribution operations where the billing currency is the +Euro for most of our customers in these markets. We also are exposed to foreign currency risk +related to the supply of certain diagnostic test kits by manufacturers located in Germany and +Spain. These foreign currency risks are opposite one another, providing a natural hedge with +respect to consolidated gross profit and operating income. +- 36 - +Table of Contents +Concentration of Customers/Products Risk +Our US Diagnostic operating segment’s sales through two distributors were 58% of the US Diagnostics +operating segment’s total sales or 38% of consolidated sales for fiscal 2009. Three internally +developed products, Premier TM Platinum HpSA PLUS, Premier TM Toxins A&B, and +Immuno Card ® Toxins A&B, accounted for 35% of our US Diagnostics operating segment’s +third-party sales during fiscal 2009. These same three products accounted for 39% of our European +Diagnostics operating segment’s third-party sales and 30% of our consolidated sales for fiscal +2009. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +30% of the Life Science operating segment’s total sales for fiscal 2009 or 5% of our consolidated +sales for fiscal 2009. Our Life Science operating segment has two other significant customers who +purchase antigens, antibodies and reagents, which together comprised 5% of the operating segment’s +total sales for fiscal 2009. +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 require management to make judgments about estimates and assumptions that +affect the reported amounts 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 +Our revenues are derived primarily from product sales. Revenue is generally recognized when +product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating +segment is reduced at the date of sale for estimated rebates 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 our products. We estimate rebate accruals +based on historical statistics, current trends, and other factors. Changes to these rebate +accruals are recorded in the period that they become known. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work followed +by larger-scale manufacturing (both contract research and development services and contract +manufacturing services). Revenue is recognized based on the nature of the arrangements, with each +of the multiple +- 37 - +Table of Contents +deliverables in a given arrangement having distinct +and separate fair values. Fair values are determined via consistent pricing between standalone +arrangements and multiple deliverable arrangements, as well as a competitive bidding process. +Contract research and development services may be performed on a “time and materials” basis or +“fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and +acceptance by the customer. For contract manufacturing services, revenue is generally recognized +upon delivery of product and acceptance by the customer. In some cases, customers may request that +we store on their behalf clinical grade biologicals that we produce under contract manufacturing +agreements. These cases arise when customers do not have clinical grade storage facilities or do +not want to risk contamination during transport. For such cases, revenue may be recognized on a +bill-and-hold basis pursuant to the satisfaction of criteria in SEC Staff Accounting Bulletins Nos. +101 and 104 related to bill-and-hold revenue recognition. +Inventories +Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, +first-out basis. We establish 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 these reserves based on assumptions about future demand and market conditions. +If actual demand and market conditions were to be less favorable than such estimates, additional +inventory write-downs would be required and recorded in the period known. Such adjustments would +negatively affect gross profit margin and overall results of operations. +Intangible Assets +Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles +include customer lists, supply agreements, manufacturing technologies, patents, licenses, and trade +names. All of Meridian’s identifiable intangibles have finite lives. +Goodwill is subject to an annual impairment review (or more frequently if impairment indicators +arise) by applying a fair-value based test. There have been no impairments from these analyses. +Identifiable intangibles with finite lives are subject to impairment testing. 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 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. There were no events or circumstances in fiscal 2009, 2008 or 2007 +indicating that the carrying value of such assets may not be recoverable. +- 38 - +Table of Contents +Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent +upon the future cash flows of the related acquired businesses and assets. Management is required +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, impairment of intangible assets could +take place. If impairment were to occur, this would negatively affect overall results of +operations. +Income Taxes +Our 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 +purposes and income for tax purposes. We prepare estimates of permanent and temporary differences +between income for financial reporting purposes and income for tax purposes. These differences are +adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth +quarters of the current fiscal year for the preceding fiscal year’s estimates. +Our 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 assets considered realizable could be reduced +in future years if estimates of future taxable income during the carryforward period are reduced. +Undistributed earnings in our Italian subsidiary are considered by management to be permanently +re-invested in such subsidiary. Consequently, US deferred tax liabilities on such earnings have +not been recorded. We believe that such US taxes would be largely offset by foreign tax credits +for taxes paid locally in Italy. +From time to time, our tax returns in federal, state, and foreign jurisdictions are examined by the +applicable tax authorities. To the extent that adjustments result from the completion of these +examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the +period known. We believe that the results of any tax authority examinations would not have a +significant adverse impact on financial condition or results of operation. +- 39 - +Table of Contents +Fair Value Measurements +We adopted the fair value measurement as prescribed by FASB on October 1, 2008 to value our +financial assets and liabilities. Fair value is the price that would be received to sell an asset +or paid to transfer a liability in an orderly transaction between market participants at the +measurement date. In order to increase consistency and comparability in fair value measurements +and related disclosures, a fair value hierarchy has been established by FASB that prioritizes +inputs to valuation techniques used to measure fair value into three broad levels, which are +described below: +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are +accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the +highest priority to Level 1 inputs. +Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets +or liabilities, either directly or indirectly. These include quoted prices for identical or +similar assets or liabilities in markets that are not active, that is, markets in which there are +few transactions for the asset or liability, the prices are not current, or price quotations vary +substantially either over time or among market makers, or in which little information is released +publicly and inputs that are derived principally from or corroborated by observable market data by +correlation or other means. +Level 3: Unobservable inputs, developed using the Company’s estimates and assumptions, which +reflect those that the market participants would use. Such inputs are used when little or no +market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. +Determining where an asset or liability falls within the hierarchy depends on the lowest level +input that is significant to the fair value measurement as a whole. In determining fair value, we +utilize valuation techniques that maximize the use of observable inputs and minimize the use of +unobservable inputs to the extent possible and consider counterparty credit risk in the assessment +of fair value. +The failed auction status and lack of liquidity for our student loan auction-rate securities and +the non-transferability of our UBS Auction Rate Security Rights requires the use of a valuation +methodology that relies exclusively on Level 3 inputs including market, tax status, credit quality, +duration, recent market observations and overall capital market liquidity. The valuation of our +student loan auction-rate securities and UBS Auction Rate Security Rights is subject to +uncertainties that are difficult to predict. Factors that may impact the valuations include +changes to credit ratings of the securities as well as to the underlying assets supporting those +securities, rates of default of the underlying assets, underlying collateral value, discount rates, +counterparty risk and ongoing strength and quality of market credit and liquidity. +- 40 - +Table of Contents +Recent Accounting Pronouncements: +See Note 1 (p) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +- 41 - +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +43 +Report of Independent Registered Public Accounting Firm +44 +Consolidated Statements of Operations for the years ended September 30, 2009, 2008 and 2007 +46 +Consolidated Statements of Cash Flows for the years ended September 30, 2009, 2008 and 2007 +47 +Consolidated Balance Sheets as of September 30, 2009 and 2008 +48 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2009, 2008 and 2007 +50 +Notes to Consolidated Financial Statements +51 +Schedule No. II — Valuation and Qualifying Accounts for the years ended September 30, 2009, 2008 and +2007 +80 +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. +- 42 - +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles, and that receipts and expenditures of the +Company are being made only in accordance with authorizations of management and directors of the +Company; and (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and may not prevent or detect misstatements. Also, projections of any +evaluation of effectiveness to future periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree of compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and criteria in Internal Control — +Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2009. +The company’s independent registered public accounting firm has issued an attestation report on the +registrant’s internal control over financial reporting. +/s/ John A. Kraeutler +Chief Executive Officer +November 30, 2009 +/s/ Melissa Lueke +Melissa Lueke +Executive Vice President and +Chief Financial Officer +November 30, 2009 +- 43 - +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Shareholders +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc (an Ohio +corporation) and subsidiaries as of September 30, 2009 and 2008, and the related consolidated +statements of operations, shareholders’ equity, and cash flows for each of the three years in the +period ended September 30, 2009. Our audits of the basic financial statements included the +financial statement schedule listed in the index appearing under Schedule No. II. We also have +audited Meridian Bioscience, Inc.’s internal control over financial reporting as of September 30, +2009, based on criteria established in Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO). Meridian Bioscience, +Inc.’s management is responsible for these financial statements +and financial statement schedule, for maintaining effective internal +control over financial reporting, and for its assessment of the effectiveness of internal control +over financial reporting, included in the accompanying Management’s Report on Internal Control over +Financial Reporting. Our responsibility is to express an opinion on +these financial statements and financial statement schedule and +an opinion on Meridian Bioscience, Inc.’s internal control over financial reporting based on our +audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight +Board (United States). Those standards require that we plan and perform the audits to obtain +reasonable assurance about whether the financial statements are free of material misstatement and +whether effective internal control over financial reporting was maintained in all material +respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining +an understanding of internal control over financial reporting, assessing the risk that a material +weakness exists, and testing and evaluating the design and operating effectiveness of internal +control based on the assessed risk. Our audits also included performing such other procedures as we +considered necessary in the circumstances. We believe that our audits provide a reasonable basis +for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable +assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in accordance with generally accepted accounting principles. A +company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; (2) provide reasonable assurance that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of the company +are being made only in accordance with authorizations of management and directors of the company; +and (3) +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, +use, or disposition of the company’s assets that could have a material effect on the financial +statements. +- 44 - +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are +subject to the risk that controls may become inadequate because of changes in conditions, or that +the degree of compliance with the policies or procedures may deteriorate. +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, +2009 and 2008, and the results of their operations and their cash flows for each of the three years +in the period ended September 30, 2009 in conformity with accounting principles generally accepted +in the United States of America. Also in our opinion, the related financial statement schedule, +when considered in relation to the basic financial statements taken as a whole, presents fairly, in +all material respects, the information set forth therein. +In our opinion, Meridian Bioscience, Inc. and subsidiaries, maintained, in all material +respects, effective internal control over financial reporting as of September 30, 2009, based on +criteria established in Internal Control—Integrated Framework issued by COSO. +We do not express an opinion or any other form of assurance on Management’s Report on Internal +Control over Financial Reporting. +/s/ GRANT THORNTON +Cincinnati, Ohio +November 30, 2009 +- 45 - +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2009 +2008 +2007 +Net Sales +$ +148,274 +$ +139,639 +$ +122,963 +Cost of Sales +55,491 +53,159 +48,023 +Gross Profit +92,783 +86,480 +74,940 +Operating Expenses: +Research and development +8,428 +6,183 +6,085 +Selling and marketing +19,235 +18,770 +17,124 +General and administrative +16,341 +17,177 +16,701 +Total operating expenses +44,004 +42,130 +39,910 +Operating Income +48,779 +44,350 +35,030 +Other Income (Expense): +Interest income +456 +1,533 +1,642 +Interest expense +— +— +(38 +) +Other, net +88 +109 +48 +Total other income +544 +1,642 +1,652 +Earnings Before Income Taxes +49,323 +45,992 +36,682 +Income Tax Provision +16,564 +15,790 +9,961 +Net Earnings +$ +32,759 +$ +30,202 +$ +26,721 +Earnings Per Share Data: +Basic earnings per common share +$ +0.81 +$ +0.75 +$ +0.67 +Diluted earnings per common share +$ +0.80 +$ +0.74 +$ +0.66 +Common shares used for basic earnings +per common share +40,390 +40,093 +39,584 +Effect of dilutive stock options +720 +936 +1,154 +Common shares used for diluted earnings +per common share +41,110 +41,029 +40,738 +Dividends declared per common share +$ +0.65 +$ +0.53 +$ +0.40 +Anti-dilutive Securities: +Common share options +138 +67 +— +The accompanying notes are an integral part of these consolidated financial statements. +- 46 - +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2009 +2008 +2007 +Cash Flows From Operating Activities +Net earnings +$ +32,759 +$ +30,202 +$ +26,721 +Non-cash items: +Depreciation of property, plant and equipment +2,781 +2,857 +2,764 +Amortization of intangible assets +1,579 +1,612 +1,635 +Stock based compensation +1,092 +1,772 +2,632 +Deferred income taxes +(500 +) +976 +800 +Tax reserve adjustment +— +— +(2,425 +) +Loss on disposition of fixed assets +109 +9 +5 +Unrealized gain on auction-rate securities and rights, net +(10 +) +— +— +Change in accounts receivable, inventory, and prepaid expenses +(5,353 +) +(5,147 +) +(3,011 +) +Change in accounts payable, accrued expenses, and income +taxes payable +269 +(2,967 +) +(2,145 +) +Other, net +(234 +) +569 +(374 +) +Net cash provided by operating activities +32,492 +29,883 +26,602 +Cash Flows From Investing Activities +Acquisition earnout payments +(7 +) +(157 +) +(971 +) +Purchases of property, plant and equipment +(3,643 +) +(4,219 +) +(3,211 +) +Proceeds from dispositions of property, plant and equipment +5 +4 +4 +Purchases of investments +— +(7,750 +) +— +Proceeds from sales of investments +475 +— +4,000 +Purchases of intangibles and other assets +(110 +) +(1,108 +) +(265 +) +Net cash used for investing activities +(3,280 +) +(13,230 +) +(443 +) +Cash Flows From Financing Activities +Repayment of debt obligations +— +— +(29 +) +Dividends paid +(26,260 +) +(21,256 +) +(15,836 +) +Proceeds and tax benefits from exercises of stock options +1,624 +4,563 +2,574 +Net cash used for financing activities +(24,636 +) +(16,693 +) +(13,291 +) +Effect of Exchange Rate Changes on Cash and Equivalents +157 +(63 +) +184 +Net Increase in Cash and Equivalents +4,733 +(103 +) +13,052 +Cash and Equivalents at Beginning of Period +49,297 +49,400 +36,348 +Cash and Equivalents at End of Period +$ +54,030 +$ +49,297 +$ +49,400 +The accompanying notes are an integral part of these consolidated financial statements. +- 47 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2009 +2008 +Assets +Current Assets: +Cash and equivalents +$ +54,030 +$ +49,297 +Investment in auction-rate securities and rights +7,285 +— +Accounts receivable, less allowances of $247 in +2009 and $230 in 2008 +26,981 +25,098 +Inventories +23,284 +19,945 +Prepaid expenses and other current assets +3,632 +3,382 +Deferred income taxes +1,935 +1,736 +Total current assets +117,147 +99,458 +Property, Plant and Equipment, at Cost: +Land +894 +892 +Buildings and improvements +19,718 +16,977 +Machinery, equipment and furniture +30,997 +26,458 +Construction in progress +1,586 +3,391 +Subtotal +53,195 +47,718 +Less: accumulated depreciation and amortization +32,721 +28,043 +Net property, plant and equipment +20,474 +19,675 +Other Assets: +Goodwill +9,866 +9,861 +Other intangible assets, net +7,317 +8,786 +Restricted cash +1,000 +1,000 +Investments in auction-rate securities and rights +— +7,480 +Other assets +193 +171 +Total other assets +18,376 +27,298 +Total assets +$ +155,997 +$ +146,431 +The accompanying notes are an integral part of these consolidated financial statements. +- 48 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2009 +2008 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +6,901 +$ +4,777 +Accrued employee compensation costs +5,338 +6,777 +Other accrued expenses +3,803 +3,616 +Income taxes payable +710 +891 +Total current liabilities +16,752 +16,061 +Deferred Income Taxes +1,340 +1,881 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 40,493,313 +and 40,313,656 issued +— +— +Additional paid-in capital +91,668 +89,107 +Retained earnings +45,515 +39,016 +Accumulated other comprehensive income +722 +366 +Total shareholders’ equity +137,905 +128,489 +Total liabilities and shareholders’ equity +$ +155,997 +$ +146,431 +The accompanying notes are an integral part of these consolidated financial statements. +- 49 - +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Dollars and shares in thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Accum Other +Common +Additional +Comp +Comp +Shares +Paid-in +Retained +Income +Income +Issued +Capital +Earnings +(Loss) +(Loss) +Total +Balance at September 30, 2006 +39,236 +$ +74,950 +$ +19,490 +$ +(90 +) +$ +94,350 +Cash dividends paid — $0.40 per share +— +— +(15,836 +) +— +(15,836 +) +Exercise of stock options +336 +2,950 +— +— +2,950 +Stock compensation expense +— +2,632 +— +— +2,632 +Debenture conversions +275 +1,677 +— +— +1,677 +Comprehensive income: +Net earnings +— +— +26,721 +— +$ +26,721 +26,721 +Hedging activity, net +— +— +— +(283 +) +(283 +) +(283 +) +Other comprehensive income taxes +— +— +— +(244 +) +(244 +) +(244 +) +Foreign currency translation adjustment +— +— +— +981 +981 +981 +Comprehensive income +$ +27,175 +Balance at September 30, 2007 +39,847 +82,209 +30,375 +364 +112,948 +Adoption of FASB Interpretation No. 48 +— +— +(305 +) +— +(305 +) +Cash dividends paid — $0.53 per share +— +— +(21,256 +) +— +(21,256 +) +Exercise of stock options +467 +5,126 +— +— +5,126 +Stock compensation expense +— +1,772 +— +— +1,772 +Comprehensive income: +Net earnings +— +— +30,202 +$ +30,202 +30,202 +Hedging activity, net +— +— +— +273 +273 +273 +Unrealized loss on investments +— +— +— +(270 +) +(270 +) +(270 +) +Other comprehensive income taxes +— +— +— +(4 +) +(4 +) +(4 +) +Foreign currency translation adjustment +— +— +— +3 +3 +3 +Comprehensive income +$ +30,204 +Balance at September 30, 2008 +40,314 +89,107 +39,016 +366 +128,489 +Cash dividends paid — $0.65 per share +— +(26,260 +) +— +(26,260 +) +Exercise of stock options +180 +1,476 +— +— +1,476 +Stock compensation expense +— +1,092 +— +— +1,092 +Cost of S-8 registration statement +— +(7 +) +— +— +(7 +) +Comprehensive income: +Net earnings +— +— +32,759 +$ +32,759 +32,759 +Hedging activity, net +— +— +— +(3 +) +(3 +) +(3 +) +Transfer of investments to trading status +— +— +— +270 +270 +270 +Other comprehensive income taxes +— +— +— +(190 +) +(190 +) +(190 +) +Foreign currency translation adjustment +— +— +— +279 +279 +279 +Comprehensive income +$ +33,115 +Balance at September 30, 2009 +40,494 +$ +91,668 +$ +45,515 +$ +722 +$ +137,905 +The accompanying notes are an integral part of these consolidated financial statements. +- 50 - +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(dollars and shares in thousands, except per share data) +(1) Summary of Significant Accounting Policies +(a) +Nature of Business — Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +(b) +Principles of Consolidation — The consolidated financial statements include the accounts of +Meridian Bioscience, Inc. and its subsidiaries. All significant intercompany accounts and +transactions have been eliminated. Unless the context requires otherwise, references to +“Meridian,” “we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its +subsidiaries. +(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 1 (f), 1 (g), 1 (h), 1 (i), 1 (k), 1 (l), 6 and 7 +(b). +(d) +Foreign Currency Translation — Assets and liabilities of foreign operations are translated +using year-end exchange rates with gains or losses resulting from translation included as a +separate component of accumulated other comprehensive income or loss. Revenues and expenses +are translated using exchange rates prevailing during the year. We also recognize 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) +Cash, Cash Equivalents and Investments — The primary objectives of our investment activities +are to preserve capital and provide sufficient liquidity to meet operating requirements and +fund strategic initiatives such as acquisitions. We maintain a written investment policy that +governs the management of our investments in fixed income securities. This policy, among +other things, provides that we may purchase only high credit-quality securities, that have +short-term ratings +- 51 - +Table of Contents +of at least A-1 and P-1 or better, and long-term ratings of at least A-2 and A or better, by Moody’s and Standard & Poor’s, respectively, at +the time of purchase. We consider short-term investments with original maturities of 90 days or +less to be cash equivalents, including overnight repurchase agreements, investments in municipal +variable rate demand notes that have a seven-day put feature and institutional money market +funds. Our investments in repurchase agreements at September 30, 2008 were with a commercial +bank pursuant to an overnight sweep/liquidity arrangement with our operating cash accounts. Our +investments in variable rate demand notes at September 30, 2008 contained a seven-day put +feature. +Our investment portfolio includes the following components: +September 30, 2009 +September 30, 2008 +Cash and +Cash and +Equivalents +Other +Equivalents +Other +Taxable investments — +Repurchase agreements +$ +— +$ +— +$ +6,711 +$ +— +Money market funds +29,032 +— +— +— +Tax-exempt investments — +Money market funds +10,383 +— +12,848 +— +Variable rate demand notes +— +— +23,948 +— +Student loan auction-rate securities +— +7,285 +— +7,480 +Cash on hand — +Non-interest bearing — +Restricted +— +1,000 +— +1,000 +Unrestricted +8,027 +— +1,260 +— +Interest bearing — unrestricted +6,588 +— +4,530 +— +Total +$ +54,030 +$ +8,285 +$ +49,297 +$ +8,480 +Our investments in tax-exempt variable rate demand notes, prior to their complete liquidation in +October 2008, and student loan auction-rate securities, prior to the settlement agreement with +UBS discussed below, were accounted for as available-for-sale. As such, unrealized holding +gains and losses were reported as a component of other comprehensive income or loss within +shareholders’ equity until realized, except where losses were considered to be +other-than-temporary, in which case they would have been recorded to other income and expense, +net. As of September 30, 2008, we did not have any losses that were considered +other-than-temporary, and accumulated other comprehensive income included $270 of unrealized +holding losses related to student loan auction-rate securities. +Our investment portfolio includes student loan auction-rate securities, which are long-term +student loan revenue bonds whose interest rates are reset every 35 days via a Dutch auction +process. All of our auction-rate securities are backed by pools of student loans originated +under the Federal Family Education Loan Program (FFELP). FFELP student loans are guaranteed by +State guarantors who have reinsurance agreements with the US Department of Education. All of +our student loan auction-rate securities were rated +Aaa and AAA by Moody’s and Standard & Poor’s, respectively, at the time of purchase, and have +continued to maintain these credit ratings through the present time. +- 52 - +Table of Contents +The Dutch auction process historically provided the necessary liquidity mechanism to either +purchase or sell these securities. Beginning in mid-February 2008, liquidity issues in the US +credit markets resulted in the failure of auctions across a broad spectrum of tax-exempt +securities, including student loan revenue bonds. Auctions for the student loan revenue bonds +that we hold have continued to fail through the present time. The consequence of a failed +auction is that we do not have access to the principal amount of our investments. Issuers are +still required to make interest payments when due in the event of failed auctions. We have not +experienced any missed interest payments to date. +Our auction-rate securities were purchased through UBS Financial Services, Inc. During November +2008, we accepted an offer from UBS, AG (UBS) of Auction Rate Security Rights. These rights +permit us to require UBS between June 30, 2010 and July 2, 2012 (the exercise period) to +purchase our auction-rate securities at par value. In exchange, UBS is granted the right, at +their sole discretion, to sell or otherwise dispose of our auction-rate security investments +until July 2, 2012 as long as we receive a payment of par value upon the sale or disposition. +In addition, the rights permit us to establish a demand revolving credit line in an amount equal +to the par value of the securities at a net no cost. We are still able to sell the auction-rate +securities on our own, but in such a circumstance, we would lose the par value support from UBS. +Upon executing the settlement agreement with UBS, we recognized the Auction Rate Security Rights +as a stand-alone financial instrument and elected the fair value option. We also transferred +the student loan auction-rate securities from the available-for-sale classification, to the +trading classification. Upon transfer to the trading classification, $270 in unrealized losses +as of September 30, 2008, were transferred from accumulated other comprehensive income to other +income and expense. Adjustments to the fair value of student loan auction-rate securities and +Auction Rate Security Rights are recorded to other income and expense in each accounting period. +As of September 30, 2009, the fair value of the student-loan auction rate securities was $6,708 +compared to a par value of $7,275. As of September 30, 2009, the fair value of the Auction Rate +Security Rights was $577. The student loan auction-rate securities and Auction Rate Security +Rights are included in current assets in the accompanying consolidated balance sheet based on +the earliest exercise date of June 30, 2010. +(f) +Inventories — Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO) for substantially all of our inventories. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf +life may expire before sale to customers, and other identified exposures. Such reserves were +$1,025 and $1,103 at September 30, 2009 and 2008, respectively. We estimate these reserves +based on assumptions about future +demand and market conditions. If actual demand and market conditions were to be less favorable +than such estimates, additional inventory write-downs would be required and recorded in the +period known. Such adjustments would negatively affect gross profit margin and overall results +of operations. +- 53 - +Table of Contents +(g) +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 are removed from the accounts and the resulting gain or loss is +reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation is +computed on the straight-line method in amounts sufficient to write-off the cost over the +estimated useful lives as follows: +Buildings and improvements — 18 to 40 years +Machinery, equipment, and furniture — 3 to 10 years +(h) +Intangible Assets — Goodwill and other intangible assets with indefinite lives are subject to +an annual impairment review (or more frequently if impairment indicators arise) by applying a +fair-value based test. Fair value is determined via a market approach from three +perspectives. These three perspectives are (i) an allocation of our actual enterprise value +(defined as market capitalization plus debt) to each of the reporting units based on revenue +and EBITDA contributions to consolidated results; (ii) an allocation of implied enterprise +values to each of our reporting units based on average and median EBITDA multiples from a +comparable group of companies; and (iii) a review of enterprise value to EBITDA multiples from +recent industry merger and acquisition transactions. We perform our annual impairment review +as of June 30, the end of our third fiscal quarter. We have no intangible assets with +indefinite lives other than goodwill. There have been no impairments from these analyses for +fiscal 2009, 2008 or 2007. +During fiscal 2009, the change in goodwill was an increase of $5. This change consisted of an +increase related to the OEM Concepts earnout obligations for calendar 2008 (Life Science +operating segment). During fiscal 2008, the change in goodwill was a decrease of $103. This +change consisted of an increase related to the OEM Concepts earnout obligations for calendar +2007 and the first nine months of calendar 2008 in the amount of $7 (Life Science operating +segment), offset by a decrease of $110 related to recognition of acquired tax benefits (US +Diagnostics operating segment). +- 54 - +Table of Contents +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2009 and 2008 is as follows. +Wtd Avg +2009 +2009 +2008 +2008 +Amort +Gross +Gross +Period +Carrying +Accum. +Carrying +Accum. +As of September 30, +(Yrs) +Value +Amort. +Value +Amort. +Core products and cell lines +15 +$ +4,698 +$ +2,892 +$ +4,698 +$ +2,602 +Manufacturing technologies +14 +6,057 +4,780 +6,057 +4,440 +Trademarks, licenses and patents +8 +2,772 +1,974 +2,663 +1,843 +Customer lists and supply +agreements +13 +11,040 +7,604 +11,039 +6,786 +$ +24,567 +$ +17,250 +$ +24,457 +$ +15,671 +The actual aggregate amortization expense for these intangible assets for fiscal 2009, +2008, and 2007 was $1,579, $1,612, and $1,632, respectively. The estimated aggregate +amortization expense for these intangible assets for each of the five succeeding fiscal years is +as follows: fiscal 2010 — $1,412, fiscal 2011 — $1,298, fiscal 2012 — $1,153, fiscal 2013- +$1,153 and fiscal 2014 — $746. +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 asset’s future cash flows to its carrying value. If +impairment has occurred, it is measured by a fair-value based test. +Our ability to recover our intangible assets, both identifiable intangibles and goodwill, is +dependent upon the future cash flows of the related acquired businesses and assets. We 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 and fixed assets, we also make judgments and assumptions +regarding useful lives. +We consider 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. +(i) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at +the date of sale for estimated rebates that will be claimed by customers. Management +estimates accruals for rebate agreements based on historical statistics, current trends, and +other factors. Changes to the accruals are recorded in the +period that they become known. Our rebate accruals were $4,776 at September 30, 2009 and $3,259 +at September 30, 2008. +- 55 - +Table of Contents +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work +followed by larger-scale manufacturing (both contract research and development services and +contract manufacturing services). Revenue is recognized based on the nature of the +arrangements, with each of the multiple deliverables in a given arrangement having distinct and +separate fair values. Fair values are determined via consistent pricing between standalone +arrangements and multiple deliverable arrangements, as well as a competitive bidding process. +Contract research and development services may be performed on a “time and materials” basis or +“fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and +acceptance by the customer. For contract manufacturing services, revenue is generally +recognized upon delivery of product and acceptance by the customer. In some cases, customers +may request that we store on their behalf, clinical grade biologicals that we produce under +contract manufacturing agreements. These cases arise when customers do not have clinical grade +storage facilities or do not want to risk contamination during transport. For such cases, +revenue may be recognized on a bill-and-hold basis pursuant to the satisfaction of criteria in +SEC Staff Accounting Bulletins Nos. 101 and 104 related to bill-and-hold revenue recognition. +Trade accounts receivable are recorded in the accompanying consolidated balance sheet at +invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents our estimate of probable credit losses and is based on historical write-off +experience. The allowance for doubtful accounts and related metrics, such as days’ sales +outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed +individually for collectibility. Customer invoices are charged off against the allowance when +we believe it is probable the invoices will not be paid. +(j) +Research and Development Costs — Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, costs for +development of instrumentation equipment, costs for clinical trials, and costs for facilities +and equipment. +(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. We prepare estimates of permanent +and temporary differences between income for financial reporting purposes and income for tax +purposes. These differences are +adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth +quarters of the current fiscal year for the preceding fiscal year’s estimates. +- 56 - +Table of Contents +We account for uncertain tax positions using of a benefit recognition model with a two-step +approach: (i) a more-likely-than-not recognition criterion and (ii) a measurement attribute that +measures the position as the largest amount of tax benefit that is greater than 50% likely of +being ultimately realized upon ultimate settlement. If it is not more likely than not that the +benefit will be sustained on its technical merits, no benefit is recorded. We recognize accrued +interest related to unrecognized tax benefits as a portion of our income tax provision in the +consolidated statements of operations. See Note 6. +(l) +Stock-based Compensation — We recognize compensation expense for all share-based awards made +to employees, based upon the fair value of the share-based award on the date of the grant. We +measure and recognize compensation expense based on grant-date fair value for stock option +awards granted after July 1, 2005, and the non-vested portions of stock option awards granted +prior to July 1, 2005. See Note 7(b). +(m) +Comprehensive Income (Loss) — Comprehensive income (loss) represents the net change in +shareholders’ equity during a period from sources other than transactions with shareholders. +Our comprehensive income or loss is comprised of net earnings, foreign currency translation, +changes in the fair value of forward exchange contracts accounted for as cash flow hedges, and +changes in the fair value of available-for-sale (AFS) fixed income securities. Components of +beginning and ending accumulated other comprehensive income or loss, and related activity, are +shown in the following table: +Foreign +Currency +Unrealized +Translation +Cash Flow +Loss on AFS +Income +Adjustment +Hedges +Securities +Taxes +Total +Balance at September 30, 2008 +$ +831 +$ +3 +$ +(270 +) +$ +(198 +) +$ +366 +Currency translation +279 +— +— +— +279 +Reclassifications to earnings of hedging activity +— +(112 +) +— +— +(112 +) +Net unrealized gains on hedging instruments +— +109 +— +— +109 +Transfer of investments from available-for-sale +to trading classification +— +— +270 +— +270 +Income taxes +— +— +— +(190 +) +(190 +) +Balance at September 30, 2009 +$ +1,110 +$ +— +$ +— +$ +(388 +) +$ +722 +- 57 - +Table of Contents +Income taxes are allocable to components of accumulated other comprehensive income for fiscal 2009 and fiscal 2008 +as shown in the following table: +Foreign +Currency +Unrealized +Translation +Cash Flow +Loss on AFS +Income +Adjustment +Hedges +Securities +Taxes +Balance at September 30, 2008 +$ +(292 +) +$ +(1 +) +$ +95 +$ +(198 +) +Fiscal 2009 activity +(96 +) +1 +(95 +) +(190 +) +Balance at September 30, 2009 +$ +(388 +) +$ +— +$ +— +$ +(388 +) +(n) +Supplemental Cash flow Information — Supplemental cash flow information is as follows for +fiscal 2009, 2008 and 2007: +Year Ended September 30, +2009 +2008 +2007 +Cash paid for — +Income taxes +$ +17,472 +$ +15,365 +$ +12,412 +Interest +— +— +37 +Non-cash items — +Debenture conversions +— +— +1,775 +(o) +Recent Accounting Pronouncements — Effective October 1, 2008, we adopted the FASB’s framework +for measuring fair value, including a hierarchy that prioritizes the inputs to valuation +techniques into three broad levels. This fair value hierarchy gives the highest priority to +quoted prices in active markets for identical assets and liabilities and the lowest priority +to unobservable inputs. See Note 5. +In October 2008, the FASB issued clarifying guidance related to financial assets when the market +is inactive, such as the case with debt securities that were issued via the auction-rate +markets. This guidance was effective upon issuance and was taken into consideration in the +valuation of our investments in student loan auction-rate securities and the UBS Auction Rate +Security Rights. +In connection with the UBS settlement discussed in Note 1(e), we adopted the fair value option +which permits an entity to choose to measure certain financial instruments and other items at +fair value where such financial instruments and other items are not currently required to be +measured at fair value. For financial instruments and other items where the fair value option +is elected, unrealized gains and losses are reported in earnings at each subsequent reporting +date. +In April 2009, the FASB amended the other-than-temporary impairment guidance in US GAAP for debt +securities to make the guidance more operational and to improve the presentation and disclosure +of other-than temporary impairments on debt and equity securities in the financial statements. +As discussed above, we have elected the fair value option for our auction-rate securities. +Thus, this amendment had no effect on our statements of operations or financial position. +- 58 - +Table of Contents +In April 2009, the FASB amended its standards to require disclosures about fair value of +financial instruments for interim reporting periods of publicly traded companies, as well as in +annual financial statements. We have provided the additional disclosures required. +In May 2009, the FASB amended its standards to establish general standards of accounting for and +disclosure of events that occur after the balance sheet date but before financial statements are +issued or are available to be issued. This amendment defines the period after the balance sheet +date during which management of a reporting entity should evaluate events or transactions that +may occur for potential recognition or disclosure in the financial statements, and the +circumstances under which an entity should recognize events or transactions occurring after the +balance sheet date in our financial statements. This amendment is effective for fiscal years +and interim periods ending after June 15, 2009. We adopted this standard as of June 30, 2009, +with the only impact being the provision of additional disclosures in this 10-K. Further, in +connection with preparation of the consolidated financial statements, we evaluated subsequent +events after the balance sheet date of September 30, 2009 through November 25, 2009, the last +business day before the date our consolidated financial statements included in this Annual +Report on Form 10-K, were filed with the SEC. +In June 2009, the FASB amended its standards to establish the Accounting Standards Codification +(the “Codification”) as the source of generally accepted accounting principles (GAAP) recognized +by the FASB to be applied by nongovernmental entities. Following this amendment, the FASB will +not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task +Force Abstracts. Instead, it will issue Accounting Standards Updates. Once in effect, all +guidance contained in the Codification carries an equal level of authority. The GAAP hierarchy +will be modified to include only two levels of GAAP: authoritative and non-authoritative. All +non-grandfathered, non-SEC accounting literature not included in the Codification will become +non-authoritative. This amendment is effective for interim or annual periods ending after +September 15, 2009. We adopted this standard as of June 30, 2009, with the only impact being +the removal of certain references in our financial statements to technical accounting +literature. +(p) +Shipping and Handling costs — Shipping and handling costs invoiced to customers are included +in net sales. Costs to distribute products to customers, including inbound freight costs, +warehousing costs, and other shipping and handling activities are included in cost of goods +sold. +(q) +Non-income Government-Assessed Taxes — We classify all non-income, government-assessed taxes +(sales, use, and value-added) collected from customers and remitted by us to appropriate +revenue authorities, on a net basis (excluded from net sales) in the accompanying consolidated +statements of operations. +- 59 - +Table of Contents +(2) Inventories +Inventories are comprised of the following: +As of September 30, +2009 +2008 +Raw materials +$ +6,079 +$ +5,354 +Work-in-process +5,916 +5,723 +Finished goods +12,314 +9,971 +Gross Inventory +$ +24,309 +$ +21,048 +Reserves +(1,025 +) +(1,103 +) +Net Inventory +$ +23,284 +$ +19,945 +(3) Bank Credit Arrangements +We have a $30,000 credit facility with a commercial bank, which expires in September 2012. This +credit facility is collateralized by our business assets except for those of non-domestic +subsidiaries. There were no borrowings outstanding on this credit facility at September 30, 2009 +or September 30, 2008. Available borrowings under this credit facility were $30,000 at September +30, 2009 and September 30, 2008. In connection with this bank credit arrangement, we are 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. We are in +compliance with all covenants. We are also required to maintain a cash compensating balance with +the bank in the amount of $1,000, pursuant to this bank credit arrangement. +(4) Hedging Transactions +Prior to February 1, 2009, we managed exchange rate risk related to forecasted intercompany sales +denominated in the Euro currency through the use of forward exchange contracts and designated such +forward contracts as cash flow hedges. As such, the effective portion of the gain or loss on the +derivative instrument was reported as a component of other comprehensive income and reclassified +into revenues in the Consolidated Statement of Operations in the same period or periods during +which the hedged transaction affected earnings. As of September 30, 2009, we had no such contracts +outstanding. +During January 2009, €500 notional amount of forward exchange contracts were settled in +accordance with their original maturities. The realized gain on these contracts was $32. Also +during January 2009, we accelerated the settlement of the remaining €2,700 notional amount of +forward exchange contracts that were originally scheduled to mature between February 27, 2009 and +December 31, 2009. These transactions resulted in a gain of approximately $140 that was recorded +in the second quarter of fiscal 2009. We unwound these forward exchange contracts after completing +a strategic review of our foreign currency exposures. This strategic review revealed that we have +natural currency hedges in place for consolidated gross profit and operating income via certain +Meridian-branded diagnostic test kits that we purchase in Euros from suppliers in Spain and +Germany. +- 60 - +Table of Contents +At September 30, 2008, $3 of unrealized gains were included in accumulated other comprehensive +income in the consolidated balance sheet. The estimated fair value of forward contracts +outstanding at September 30, 2008 was based on quoted amounts provided by the counterparties to +these contracts. +The fair value of our hedging portfolio, comprised solely of foreign exchange contracts, was an +asset of $27 at September 30, 2008. The amount of gain (loss) recognized in other comprehensive +income on the effective portion of these foreign exchange contracts was $109, $(326), and $(377) in +fiscal 2009, 2008, and 2007, respectively. The amount of gain (loss) reclassified from accumulated +other comprehensive income into income on the effective portion of these foreign exchange contracts +was $112, $(599), and $(94), for fiscal 2009, 2008, and 2007, respectively. No portion of the +gain/loss was excluded from other comprehensive income due to effectiveness testing. +(5) Fair Value Measurements +We adopted the fair value measurement as prescribed by the FASB on October 1, 2008 to value our +financial assets and liabilities. Fair value is the price that would be received to sell an asset +or paid to transfer a liability in an orderly transaction between market participants at the +measurement date. Fair value hierarchy prioritizes inputs to valuation techniques used to measure +fair value into three broad levels, which are described below: +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are +accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the +highest priority to Level 1 inputs. +Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets +or liabilities, either directly or indirectly. These include quoted prices for +identical or similar assets or liabilities in markets that are not active, that is, markets in +which there are few transactions for the asset or liability, the prices are not current, or price +quotations vary substantially either over time or among market makers, or in which little +information is released publicly and inputs that are derived principally from or corroborated by +observable market data by correlation or other means. +Level 3: Unobservable inputs, developed using the Company’s estimates and assumptions, which +reflect those that the market participants would use. Such inputs are used when little or no +market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. +Determining where an asset or liability falls within the hierarchy depends on the lowest level +input that is significant to the fair value measurement as a whole. In determining fair value, the +Company utilizes valuation techniques that maximize the use of observable inputs and minimize the +use of unobservable inputs to the extent possible and considers counterparty credit risk in the +assessment of fair value. +- 61 - +Table of Contents +Financial assets and liabilities carried at fair value at September 30, 2009 and September 30, 2008 +are classified +in the table below in one of the three categories described above: +Level 1 +Level 2 +Level 3 +Total +Balances as of September 30, 2009 +Cash and equivalents +$ +54,030 +$ +— +$ +— +$ +54,030 +Student loan auction-rate securities +— +— +6,708 +6,708 +UBS Auction Rate Security Rights +— +— +577 +577 +Total +$ +54,030 +$ +— +$ +7,285 +$ +61,315 +Level 1 +Level 2 +Level 3 +Total +Balances as of September 30, 2008 +Cash and equivalents +$ +49,297 +$ +— +$ +— +$ +49,297 +Student loan auction-rate securities +— +— +7,480 +7,480 +Total +$ +49,297 +$ +— +$ +7,480 +$ +56,777 +The failed auction status and lack of liquidity for our student loan auction-rate securities and +the non-transferability of our UBS Auction Rate Security Rights requires the use of a valuation +methodology that relies exclusively on Level 3 inputs including market, tax status, credit quality, +duration, recent market observations and overall capital market liquidity. The valuation of our +student loan auction-rate securities and UBS Auction Rate Security Rights is subject to +uncertainties that are difficult to predict. Factors that may impact the valuations include +changes to credit ratings of the securities as well as to the underlying assets supporting those +securities, rates of default of the underlying assets, underlying collateral value, discount rates, +counterparty risk and ongoing strength and quality of market credit and liquidity. The following +table provides a summary of changes in fair value of our auction-rate securities and UBS Auction +Rate Security Rights for the fiscal years ended September 30, 2009 and September 30, 2008. +Student loan +UBS Auction +auction-rate +Rate Security +securities +Rights +Total Level 3 +Balance at September 30, 2008 +$ +7,480 +$ +— +$ +7,480 +Acquire UBS Auction Rate Security Rights +660 +660 +Proceeds from redemptions of +auction-rate securities +(475 +) +— +(475 +) +Unrealized losses included in current +period earnings +(297 +) +(83 +) +(380 +) +Total +$ +6,708 +$ +577 +$ +7,285 +- 62 - +Table of Contents +(6) Income Taxes +(a) +Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2009, 2008 and 2007 were as follows: +Year Ended September 30, +2009 +2008 +2007 +Domestic +$ +46,504 +$ +42,187 +$ +33,324 +Foreign +2,819 +3,805 +3,358 +Total +$ +49,323 +$ +45,992 +$ +36,682 +Provision (credit) for income taxes — +Federal — +Current provision +$ +15,094 +$ +14,307 +$ +11,179 +Temporary differences +Fixed asset basis differences and depreciation +16 +(108 +) +(105 +) +Intangible asset basis differences and amortization +(363 +) +(249 +) +(249 +) +Currently non-deductible expenses and reserves +(134 +) +(286 +) +238 +Stock based compensation +(373 +) +(610 +) +(678 +) +Other, net +48 +231 +(258 +) +Tax contingency reserve adjustment +— +— +(2,425 +) +Subtotal +14,288 +13,285 +7,702 +State and local +1,385 +1,303 +1,250 +Foreign +891 +1,202 +1,009 +Total +$ +16,564 +$ +15,790 +$ +9,961 +(b) +The following is a 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: +Year Ended September 30, +2009 +2008 +2007 +Computed income taxes at statutory rate +$ +17,263 +35.0 +% +$ +16,097 +35.0 +% +$ +12,839 +35.0 +% +Increase (decrease) in taxes resulting from — +State and local income taxes +904 +1.8 +902 +2.0 +835 +2.3 +Federal and state tax credits +(189 +) +(0.4 +) +(34 +) +(0.1 +) +(213 +) +(0.6 +) +Foreign tax rate differences +(43 +) +(0.1 +) +196 +0.4 +170 +0.5 +Valuation allowance reversal — France +— +— +— +— +(309 +) +(0.8 +) +Qualified domestic production +incentives +(870 +) +(1.8 +) +(715 +) +(1.6 +) +(290 +) +(0.8 +) +Tax exempt interest +(100 +) +(0.2 +) +(417 +) +(0.9 +) +(418 +) +(1.1 +) +Tax contingency reserve adjustment +— +— +— +— +(2,425 +) +(6.6 +) +US book-to-return and uncertain tax +position activity +(412 +) +(0.8 +) +(177 +) +(0.4 +) +(344 +) +(0.9 +) +Other, net +11 +0.1 +(62 +) +(0.1 +) +116 +0.2 +$ +16,564 +33.6 +% +$ +15,790 +34.3 +% +$ +9,961 +27.2 +% +- 63 - +Table of Contents +(c) +The components of net deferred tax assets (liabilities) were as follows: +As of September 30, +2009 +2008 +Deferred tax assets — +Valuation reserves and non-deductible expenses +$ +1,043 +$ +951 +Stock compensation expense not deductible +1,762 +1,527 +Net operating loss carryforwards +948 +865 +Inventory basis differences +886 +779 +Other +6 +6 +Subtotal +4,645 +4,128 +Less valuation allowance +(470 +) +(466 +) +Deferred tax assets +4,175 +3,662 +Deferred tax liabilities — +Fixed asset basis differences and depreciation +(656 +) +(639 +) +Intangible asset basis differences and amortization +(2,263 +) +(2,680 +) +Other +(661 +) +(488 +) +Deferred tax liabilities +(3,580 +) +(3,807 +) +Net deferred tax assets (liabilities) +$ +595 +$ +(145 +) +For income tax purposes, we have tax benefits related to operating loss carryforwards in the +countries of Belgium and France. These net operating loss carryforwards have no expiration date. +We have recorded deferred tax assets for these carryforwards, inclusive of valuation allowances for +the country of Belgium at September 30, 2009. This valuation allowance is for pre-acquisition net +operating loss carryforwards. If tax benefits are recognized in future years for these +pre-acquisition net operating loss carryforwards, such benefits will be allocated to reduce +goodwill and acquired intangible assets. The valuation allowance recorded against deferred tax +assets at September 30, 2009 and September 30, 2008 related solely to net operating loss +carryforwards in Belgium. +The realization of deferred tax assets in foreign jurisdictions is dependent upon the generation of +future taxable income in certain European countries. We have 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, we believe 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. +Undistributed earnings re-invested indefinitely in the Italian operation were approximately $18,600 +at September 30, 2009. US deferred tax liabilities of approximately $6,865 on such earnings have +not been recorded. We believe that such US taxes would be largely offset by foreign tax credits +for taxes paid in Italy. +- 64 - +Table of Contents +Effective October 1, 2007, we adopted a comprehensive model for the recognition, measurement, +presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant +facts by the applicable tax +authorities. The cumulative effect of adoption, $305, was charged to opening retained earnings. +The total amount of unrecognized tax benefits at September 30, 2009 and September 30, 2008 was $572 +and $779, respectively, of which the full amounts would favorably affect the effective tax rate if +recognized. We recognize interest and penalties related to uncertain tax positions as a component +of our income tax provision. During fiscal 2009, we credited approximately $45 in interest and +penalties to our tax provision. We had approximately $102 accrued for the payment of interest and +penalties at September 30, 2009 compared to $147 accrued at September 30, 2008. The amount of our +liability for uncertain tax positions expected to be paid or settled in the next 12 months is +uncertain. +A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: +2009 +2008 +Unrecognized income tax benefits beginning of year +$ +779 +$ +856 +Additions for tax positions related to the current year +115 +123 +Additions for tax positions of prior years +109 +125 +Reductions for tax positions of prior years +(287 +) +(13 +) +Settlements +— +(20 +) +Expirations of statute of limitations +(144 +) +(292 +) +Unrecognized income tax benefits at end of year +$ +572 +$ +779 +We are subject to examination by the tax authorities in the US (both federal and state) and the +countries of Belgium, France, Holland and Italy. In the US, open tax years are for fiscal 2006 and +forward, although, we completed an examination by the IRS for fiscal 2006 in February 2008. In +countries outside the US, open tax years generally range from fiscal 2004 and forward. However, in +Belgium, the utilization of local net operating loss carryforwards extends the statute of +limitations for examination well into the foreseeable future. Tax examinations in France were +completed for fiscal years 2004-2006 during fiscal 2007. +In fiscal 2000, we recorded a tax benefit related to the insolvency of a foreign subsidiary that +has since been liquidated and dissolved. At that time, a reserve was also provided for future +resolution of uncertainties related to this matter. During June 2007, the statute of limitations +expired on the tax returns affected by this matter, and consequently, the adjustment to tax +reserves resulted in a tax benefit of $2,425. +(7) Employee Benefits +(a) +Savings and Investment Plan — We have a profit sharing and retirement savings plan covering +substantially all full-time US employees. Profit sharing contributions to the plan, which are +discretionary, are approved by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an +employee’s contributions, up to maximum match of 3% of eligible compensation. Our +discretionary and matching contributions to the plan amounted to approximately $1,188, $1,214, +and $1,132, during fiscal 2009, 2008 and 2007, respectively. +- 65 - +Table of Contents +(b) +Stock-Based Compensation Plans — We have one active stock-based compensation plan, the 2004 +Equity Compensation plan, which became effective December 7, 2004, as amended (the “2004 +Plan”) and an Employee Stock Purchase Plan (the “ESP Plan”), which became effective October 1, +1997. Effective October 1, 1997, we began selling shares of stock to our 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. +We may grant new shares for options or restricted shares for up to 3,000 shares under the 2004 +Plan, of which we have granted 1,483 through September 30, 2009. Options may be granted at +exercise prices not less than 100% of the closing market value of the underlying common shares +on the date of grant and have maximum terms up to ten years. Vesting schedules are established +at the time of grant and may be set based on future service periods, achievement of performance +targets, or a combination thereof. 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. We have granted options for 5,407 shares under similar +plans that have expired. +On November 14, 2007, we granted 252 options to certain employees subject to attainment of a +specified earnings target for fiscal 2008. As the target was not met and the options forfeited, +they have been excluded from the tables below. On November 12, 2008, we granted approximately +94 restricted shares to certain employees subject to attainment of a specified earnings target +for fiscal 2009. Dividends were paid on these restricted shares throughout fiscal 2009. The +target was not met and these restricted shares have been forfeited. +We recognize compensation expense for all share-based payments made to employees, based upon the +fair value of the share-based payment on the date of the grant. We measure and recognize +compensation expense based on grant-date fair value for stock option awards granted after July +1, 2005 and the non-vested portions of stock option awards granted prior to July 1, 2005. +The amount of stock-based compensation expense reported was $1,092, $1,772, and $2,632 in fiscal +2009, fiscal 2008, and fiscal 2007, respectively. The total income tax benefit recognized in +the income statement for these stock-based compensation arrangements was $367, $610, and $678, +for fiscal 2009, fiscal 2008, and fiscal 2007, respectively. We expect future stock +compensation expense for unvested options as of September 30, 2009 to be $937, which will be +recognized during fiscal years 2010 through 2013. +We recognize compensation expense only for the portion of shares that we expect to vest. As +such, we apply estimated forfeiture rates to our compensation expense calculations. These rates +have been derived using historical forfeiture data, stratified by several employee groups. +During fiscal 2009, fiscal 2008, and +fiscal 2007, we recorded $42, $235 and $210, respectively, in stock compensation expense to +adjust estimated forfeiture rates to actual. +- 66 - +Table of Contents +We have elected to use the Black-Scholes option pricing model to determine grant-date fair +value, with the following assumptions: (i) expected share price volatility based on implied +volatility calculations using options for Meridian and a peer-group of companies; (ii) expected +life of options based on contractual lives, employees’ historical exercise behavior and +employees’ historical post-vesting employment termination behavior; (iii) risk-free interest +rates based on treasury rates that correspond to the expected lives of the options; and (iv) +dividend yield based on the expected yield on underlying Meridian common stock. +Year ended September 30, +2009 +2008 +2007 +Risk-free interest rates +3.75 +% +4.56 +% +4.64 +% +Dividend yield +2.41 +% +1.45 +% +1.96 +% +Life of option +6.30-8.20 yrs. +5.70-7.30 yrs. +5.80-7.50 yrs. +Share price volatility +57 +% +44 +% +44 +% +Forfeitures (by +employee group) +0%-13 +% +0%-17 +% +0%-20 +% +A summary of the status of our stock option plans at September 30, 2009 and changes during the +year is presented in the table and narrative below: +Wtd Avg +Wtd Avg +Aggregate +Exercise +Remaining +Intrinsic +Shares +Price +Life (Yrs) +Value +Outstanding beginning of period +1,548 +$ +9.95 +Grants +62 +22.68 +Exercises +(180 +) +6.97 +Forfeitures +(22 +) +20.27 +Cancellations +(7 +) +18.46 +Outstanding end of period +1,401 +$ +10.69 +4.9188 +$ +20,896 +Exercisable end of period +648 +$ +11.17 +5.2482 +$ +9,283 +- 67 - +Table of Contents +A summary of the status of our nonvested shares as of September 30, 2009, and changes during +the year ended September 30, 2009, is presented below: +Weighted- +Average +Grant Date +Shares +Fair Value +Nonvested beginning of period +1,019 +$ +4.79 +Granted +62 +11.05 +Vested +(306 +) +6.54 +Forfeited +(22 +) +8.74 +Nonvested end of period +753 +$ +4.44 +The weighted average grant-date fair value of options granted was $22.68, $14.58, and $7.10 for +fiscal 2009, 2008, and 2007, respectively. The total intrinsic value of options exercised was +$2,560, $11,405 and $5,526, for fiscal 2009, 2008, and 2007, respectively. The total grant-date +fair value of options that vested during fiscal 2009, 2008, and 2007 was $2,019, $1,674 and +$721, respectively. +Cash received from options exercised was $1,243, $2,668, and $1,318 for fiscal 2009, 2008, and +2007, respectively. Tax benefits realized and recorded to additional paid-in capital from +option exercises totaled $233, $2,458, and $1,632 for fiscal 2009, 2008, and 2007 respectively. +(8) Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, development, +manufacturing, marketing and sales organization with primary emphasis in the field of life science. +Our principal businesses are (i) the development, manufacture and distribution of diagnostic test +kits primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract manufacture of proteins and +other biologicals under clinical cGMP conditions for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa, and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes +the contract development and manufacture of cGMP clinical grade proteins and other biologicals for +use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. +- 68 - +Table of Contents +Sales to individual customers constituting 10% or more of consolidated net sales were as follows: +Year Ended September 30, +2009 +2008 +2007 +Customer A +$ +37,876 +(26 +)% +$ +31,285 +(22 +)% +$ +24,444 +(20 +)% +Customer B +$ +19,063 +(13 +)% +$ +16,160 +(12 +)% +$ +13,340 +(11 +)% +Combined export sales for the US Diagnostics and Life Science operating segments were $15,568, +$16,450 and $15,128 in fiscal years 2009, 2008 and 2007, respectively. Three products accounted +for 30%, 32%, and 31% of consolidated net sales in fiscal 2009, fiscal 2008, and fiscal 2007, +respectively. Approximately 25% of the consolidated accounts receivable balance at September 30, +2009 is largely dependent upon funds from the Italian government. +Significant sales information by country for the European Diagnostics operating segment is as +follows. Sales are attributed to the geographic area based on the location to which the product is +shipped. +Year Ended September 30, +2009 +2008 +2007 +Italy +$ +8,289 +$ +8,942 +$ +7,838 +France +2,939 +3,263 +3,070 +United Kingdom +2,373 +2,655 +1,987 +Belgium +1,875 +1,865 +1,558 +Holland +1,828 +2,138 +1,610 +Other countries +8,566 +9,117 +7,500 +Total European Operating Segment +$ +25,870 +$ +27,980 +$ +23,563 +Identifiable assets for our Italian distribution organization were $16,797, $14,769, and $12,811 at +September 30, 2009, 2008 and 2007, respectively. +- 69 - +Table of Contents +Segment information for the years ended September 30, 2009, 2008 and 2007 is as follows (dollars in +thousands): +US +European +Diagnostics +Diagnostics +Life Science +Elim (1) +Total +Fiscal Year 2009 — +Net sales — +Third-party +$ +98,970 +$ +25,870 +$ +23,434 +$ +— +$ +148,274 +Inter-segment +10,700 +6 +715 +(11,421 +) +— +Operating income +39,490 +4,459 +4,728 +102 +48,779 +Depreciation and amortization +2,680 +92 +1,588 +— +4,360 +Capital expenditures +2,082 +81 +1,480 +— +3,643 +Total assets +131,586 +18,221 +55,592 +(49,402 +) +155,997 +Fiscal Year 2008 — +Net sales — +Third-party +$ +88,419 +$ +27,980 +$ +23,240 +$ +- +$ +139,639 +Inter-segment +11,563 +2 +543 +(12,108 +) +— +Operating income +36,095 +5,397 +3,186 +(328 +) +44,350 +Depreciation and amortization +2,745 +111 +1,614 +— +4,470 +Capital expenditures +2,193 +39 +1,987 +— +4,219 +Total assets +126,808 +15,955 +49,619 +(45,951 +) +146,431 +Fiscal Year 2007 — +Net sales — +Third-party +$ +74,845 +$ +23,563 +$ +24,555 +$ +— +$ +122,963 +Inter-segment +8,872 +— +532 +(9,404 +) +— +Operating income +26,454 +4,930 +3,795 +(149 +) +35,030 +Depreciation and amortization +2,641 +110 +1,648 +— +4,399 +Capital expenditures +1,645 +52 +1,514 +— +3,211 +Total assets +115,297 +13,600 +45,410 +(41,609 +) +132,698 +(1) +Eliminations consist of intersegment transactions. +Year Ended September 30, +2009 +2008 +2007 +Segment operating income +$ +48,779 +$ +44,350 +$ +35,030 +Interest income +456 +1,533 +1,642 +Interest expense +— +— +(38 +) +Other, net +88 +109 +48 +Consolidated earnings before +income taxes +$ +49,323 +$ +45,992 +$ +36,682 +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science +operating segments include goodwill of $1,381 and $8,485, respectively at September 30, 2009, +$1,382 and $8,479, respectively at September 30, 2008, and $1,491 and $8,472, respectively at +September 30, 2007. +- 70 - +Table of Contents +(9) Commitments and Contingencies +(a) +Royalty Commitments — We have 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 $572, $600, and $739, respectively, for the fiscal years ended September 30, +2009, 2008 and 2007. +Meridian entered into a license agreement in October 2006 with a third party that provides +rights to a molecular technology for infectious disease testing in the United States, Europe, +and other geographic markets. The agreement, as amended during fiscal 2009, calls for payments +of up to approximately $800 based on the achievement of certain milestones and on-going +royalties once products are available for commercial sale. Payments made during product +development are expected to occur over a five-year period, which began in fiscal 2007. +Payments of $104, $0 and $169 were made during fiscal 2009, fiscal 2008 and fiscal 2007, +respectively, related to this license. +During the fourth quarter of fiscal 2007, we began seeking recovery of approximately $1,400 of +past royalties paid and interest under a license agreement around certain rapid diagnostic +testing technology. This license agreement covered patent rights that were narrowed in scope +via other litigation with the licensor that did not involve Meridian. We strongly believe that +the licensed patent, as reissued, does not cover any of our products. We also ceased further +royalty payments under this license agreement. The licensor to this agreement disputes our +position that the patent, as reissued, does not cover our products. Although we believe that +our position is very strong, we are unable to predict the outcome of this matter. No provision +has been made in the accompanying financial statements for on-going royalties, if any, nor has +any accrual or income been recorded for recovery of past royalties paid. +(b) +Purchase Commitments — We have purchase commitments primarily for inventory and service items +as part of the normal course of business. Commitments made under these obligations are +$12,917, $624, and $147 for fiscal 2010, 2011, and 2012, respectively. No commitments have +been made beyond fiscal 2012. +(c) +Operating Lease Commitments — Meridian and its subsidiaries are lessees of (i) office and +warehouse buildings in Cincinnati, Florida, Belgium, and France; (ii) automobiles for use by +the direct sales forces in the US and Europe; and (iii) certain office equipment such as +facsimile machines and copier machines across all business units, under operating lease +agreements that expire at various dates. Amounts charged to expense under operating leases +were $775, $674 and $696 for fiscal 2009, 2008 and 2007, respectively. Operating lease +commitments for each of the five succeeding fiscal years are as follows: fiscal 2010 — $610, +fiscal 2011 — $384, fiscal 2012 — $225, fiscal 2013 — $140, and fiscal 2014 — $130. +(d) +Litigation — We are a party to various litigation matters from time to time that we believe +are in the normal course of business. The ultimate resolution of these matters is not +expected to have a material adverse effect +on our financial position, results of operations or cash flows. No provision has been made in +the accompanying consolidated financial statements for these matters. +- 71 - +Table of Contents +(e) +Indemnifications — In conjunction with certain contracts and agreements, we provide routine +indemnifications whose terms range in duration and in some circumstances are not explicitly +defined. The maximum obligation under some such indemnifications is not explicitly stated +and, as a result, cannot be reasonably estimated. We have not made any payments for these +indemnifications and no liability is recorded at September 30, 2009 or September 30, 2008. We +believe that if we were to incur a loss on any of these matters, the loss would not have a +material effect on our financial condition. +(10) Quarterly Financial Data (Unaudited) +The sum of the earnings per common share and cash dividends per share may not equal the +corresponding annual amounts due to interim quarter rounding. +For the Quarter Ended in Fiscal 2009 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +34,293 +$ +33,280 +$ +38,240 +$ +42,461 +Gross profit +23,344 +20,974 +23,323 +25,142 +Net earnings +8,076 +7,251 +8,502 +8,930 +Basic earnings per common share +0.20 +0.18 +0.21 +0.22 +Diluted earnings per common share +0.20 +0.18 +0.21 +0.22 +Cash dividends per common share +0.14 +0.17 +0.17 +0.17 +For the Quarter Ended in Fiscal 2008 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +33,847 +$ +36,249 +$ +33,068 +$ +36,475 +Gross profit +21,752 +21,115 +21,287 +22,326 +Net earnings +7,456 +7,299 +7,763 +7,684 +Basic earnings per common share +0.19 +0.18 +0.19 +0.19 +Diluted earnings per common share +0.18 +0.18 +0.19 +0.19 +Cash dividends per common share +0.11 +0.14 +0.14 +0.14 +(11) Stock Split +On April 19, 2007, we announced a three-for-two stock split, with fractional shares paid in +cash. This split was effective on May 11, 2007, for shareholders of record on May 4, 2007. All +references in this Annual Report on Form 10-K to number of shares and per share amounts reflect +this stock split. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +- 72 - +Table of Contents +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2009, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2009. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2009. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” +ITEM 9B. +OTHER INFORMATION +Not applicable. +- 73 - +Table of Contents +PART III +The information required by Items 10., 11., 13., and 14., of Part III are incorporated by reference +from the Registrant’s Proxy Statement for its 2010 Annual Shareholders’ Meeting to be filed with +the Commission pursuant to Regulation 14A. +ITEM 12. +EQUITY COMPENSATION PLAN INFORMATION +The following table presents summary information as of September 30, 2009 with respect to all of +our equity compensation plans. +(c) +(a) +(b) +Number of +Number of +Weighted- +securities remaining +Securities to be +average exercise +available for future +issued upon +price of +issuance under +exercise of +outstanding +equity compensation +outstanding +options, +plans (excluding +options, warrants +warrants and +securities reflected +Plan Category +and rights +rights +in column (a)) +Equity compensation plans +approved by security +holders(1) +1,382 +$ +10.715 +1,868 +Equity compensation plans +not approved by security +holders +19 +8.893 +— +Total +1,401 +$ +10.691 +1,868 +(1) +1994 Director’s Stock Option Plan +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan, as amended +- 74 - +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(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 (c) under Item 15 are not applicable +to Meridian. +(b) +(3) EXHIBITS. +Exhibit Number +Description of Exhibit +3.1 +Articles of Incorporation, including amendments not related to Company name change +(Incorporated by reference to Registration Statement No. 333-02613 on Form S-3 filed +with the Securities and Exchange Commission on April 18, 1996 and Meridian’s Form 8-K +filed with the Securities and Exchange Commission on May 16, 2007) +3.2 +Code of Regulations (Incorporated by reference to Meridian’s Form 8-K filed with the +Securities and Exchange Commission on July 23, 2008) +10.5 +Sublicense Agreement dated June 17, 1993 among Johnson & Johnson, the Scripps Research +Institute and Meridian Concerning certain Patent Rights (Incorporated by reference to +Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 17, 1993) +10.6 +Assignment dated June 17, 1993 from Ortho Diagnostic Systems Inc. to Meridian +concerning certain Patent Rights (Incorporated by reference to Meridian’s Form 8-K +filed with the Securities and Exchange Commission on June 17, 1993) +10.9 +Merger Agreement among Gull Laboratories, Inc., Meridian Diagnostics, Inc. Fresenius AG +and Meridian Acquisition Co. dated as of September 15, 1998 (Incorporated by reference +to Meridian’s Form 8-K filed with the Securities and Exchange Commission on September +17, 1998) +10.10* +Savings and Investment Plan Prototype Adoption Agreement (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +10.14* +1994 Directors’ Stock Option Plan (Incorporated by reference to Registration Statement +No. 33-78868 on Form S-8 filed with the Securities and Exchange Commission on May 12, +1994) +10.15* +1996 Stock Option Plan (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 1996) +10.16* +Salary Continuation Agreement between Meridian Bioscience, Inc. and John A. Kraeutler, +as amended April 24, 2001 and December 29, 2008 (filed herewith) +10.17 +Merger Agreement Among Gull Laboratories, Inc., Meridian Diagnostics, Inc. Fresenius AG +and Meridian Acquisition Co. dated as of September 15, 1998, as amended on October 22, +1998 (Incorporated by reference to Meridian’s Report on Form 8-K filed with the +Securities and Exchange Commission on September 17, 1998 and Meridian’s Report on Form +8-K filed with the Securities and Exchange Commission on November 13, 1998) +10.18* +1999 Directors’ Stock Option Plan (Incorporated by reference to Meridian’s Proxy +Statement filed with the Securities and Exchange Commission on December 21, 1998) +- 75 - +Table of Contents +Exhibit Number +Description of Exhibit +10.20 +Dividend Reinvestment Plan (Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 1999) +10.21 +Merger Agreement dated September 13, 2000 among Meridian and the Shareholders of Viral +Antigens, Inc. (Incorporated by reference to Meridian’s Form 8-K filed with the +Securities and Exchange Commission on September 29, 2000) +10.23* +Employment Agreement Dated February 15, 2001, as amended December 29, 2008 between +Meridian and John A. Kraeutler (filed herewith) +10.24* +Sample Option Agreement Dated October 1, 2001 (Incorporated by reference to Meridian’s +Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2001) +10.26* +1996 Stock Option Plan as Amended and Restated Effective January 23, 2001 (Incorporated +by reference to Meridian’s Proxy Statement filed with the Securities and Exchange +Commission on December 21, 1998) +10.27* +Sample Option Agreement Dated November 19, 2002 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +10.28* +Agreement Concerning Disability and Death dated September 10, 2003, between Meridian +and William J. Motto (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2003) +10.29* +Professional Services Agreement dated October 1, 2002 between Meridian and Antonio +Interno (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the +Fiscal Year Ended September 30, 2003) +10.31 +Stock Purchase Agreement of OEM Concepts, Inc. by Meridian Bioscience, Inc. dated +January 31, 2005 (Incorporated by reference to Meridian’s Annual Report on Form 10-K +for the Fiscal Year Ended September 30, 2005) +10.32* +Sample Option Agreement dated November 10, 2005 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2005) +10.33* +2004 Equity Compensation Plan, Amended and Restated through January 22, 2008 +(Incorporated by reference to Meridian’s Proxy Statement filed with the Securities and +Exchange Commission on December 19, 2007) +10.34* +Fiscal 2006 Officers’ Compensation Plan, Amended and Restated through January 19, 2006 +(Incorporated by reference to Meridian’s Form 8-K filed with the Securities and +Exchange Commission on January 19, 2006) +10.35* +Sample Option Agreement dated November 14, 2007 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +10.36* +Fiscal 2007 Officers’ Performance Compensation Plan (Incorporated by reference to +Meridian’s Form 8-K filed with the Securities and Exchange Commission on November 21, +2006) +10.37 +Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience +Corporation, Omega Technologies, Inc. Meridian Life Science, Inc. and Fifth Third Bank +dated August 1, 2007 (Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2007) +- 76 - +Table of Contents +Exhibit Number +Description of Exhibit +10.37.1 +Amended and Restated Revolving Note with Fifth Third Bank dated August 1, (Incorporated +by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended +September 30, 2007) +10.38* +Sample Time-Based Restricted Stock Agreement dated November 12, 2009 (Filed herewith) +10.39* +Sample Performance Award Restricted Stock Agreement dated November 12, 2009 (Filed +herewith) +13 +2009 Annual Report to Shareholders (1) +14 +Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form 10-K for +the Fiscal Year Ended September 30, 2003) +18 +Grant Thornton Preferability Letter (Incorporated by reference to Meridian’s Annual +Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +21 +Subsidiaries of the Registrant (Filed herewith) +23 +Consent of Independent Registered Public Accounting Firm (Filed herewith) +31.1 +Certification of Principal Executive Officer required by Rule 13a-14(a) (Filed herewith) +31.2 +Certification of Principal Financial Officer required by Rule 13a-14(a) (Filed herewith) +32 +Section 1350 Certification of Chief Executive Officer and Chief Financial Officer +(Filed herewith) +(1) +Only portions of the 2009 Annual Report to Shareholders specifically are incorporated by +reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2009 Annual Report +to Shareholders has been provided to the Securities and Exchange Commission for informational +purposes only. +* +Management Compensatory Contracts +Meridian will provide shareholders with any exhibit upon the payment of a specified reasonable fee, +which fee shall be limited to Meridian’s reasonable expenses in furnishing such exhibit. +- 77 - +Table of Contents +Pursuant to the requirements of Sections 13 or 15(d) 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/ John A. Kraeutler +Date: November 30, 2009 +John A. Kraeutler +Chief Executive Officer +- 78 - +Table of Contents +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 +November 30, 2009 +William J. Motto +/s/ John A. Kraeutler +Chief Executive Officer, Director +November 30, 2009 +John A. Kraeutler +/s/ Melissa Lueke +Executive Vice President, Chief Financial Officer, +November 30, 2009 +Melissa Lueke +and Secretary +/s/ James M. Anderson +Director +November 30, 2009 +James M. Anderson +/s/ James A. Buzard +Director +November 30, 2009 +James A. Buzard +Director +November 30, 2009 +Gary P. Kreider +/s/ David C. Phillips +Director +November 30, 2009 +David C. Phillips +/s/ Robert J. Ready +Director +November 30, 2009 +Robert J. Ready +- 79 - +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended September 30, 2009, 2008 and 2007 +Balance at +Charged to +Balance at +Beginning +Costs and +End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2009: +Allowance for doubtful accounts +$ +230 +$ +33 +$ +(26 +) +$ +10 +$ +247 +Inventory realizability reserves +1,103 +613 +(691 +) +1,025 +Valuation allowances — deferred +taxes +466 +4 +470 +Year Ended September 30, 2008: +Allowance for doubtful accounts +$ +258 +$ +38 +$ +(70 +) +$ +4 +$ +230 +Inventory realizability reserves +1,162 +551 +(610 +) +— +1,103 +Valuation allowances — deferred +taxes +569 +— +(115 +) +12 +466 +Year Ended September 30, 2007: +Allowance for doubtful accounts +$ +408 +$ +19 +$ +(200 +) +$ +31 +$ +258 +Inventory realizability reserves +1,158 +259 +(258 +) +3 +1,162 +Valuation allowances — deferred +taxes +888 +— +(390 +) +71 +569 +(a) +Balances reflect the effects of currency translation +- 80 - \ No newline at end of file diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/filing_metadata.csv b/raw/filings/0000794172/2009/0000950123-09-066890/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..73bcaf7516aadd928d5e95354e1e1cf64e280a9b --- /dev/null +++ b/raw/filings/0000794172/2009/0000950123-09-066890/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2009-11-30,2009-09-30,2009-11-30T21:25:56.000Z,0000950123-09-066890,c93071e10vk.htm,FORM 10-K,864213,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095012309066890/c93071e10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095012309066890/,2009,2009,1 diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/item1.txt b/raw/filings/0000794172/2009/0000950123-09-066890/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..f08cb459c16ce4e6ef95be402c62c7918dfd1576 --- /dev/null +++ b/raw/filings/0000794172/2009/0000950123-09-066890/item1.txt @@ -0,0 +1,377 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other biologicals +for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. By exploiting revenue opportunities across research, clinical diagnostics, and +therapeutics, we strive to maximize revenues, efficiently invest in research and development, and +increase profitability of our manufacturing operations. The company was incorporated in Ohio in +1976. +Operating Segments +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial information for +Meridian’s operating segments is included in Note 8 to the consolidated financial statements +contained herein. +- 4 - +Table of Contents +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 84% of consolidated net sales for fiscal 2009. Our diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) +have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic +products, and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov . The information on +our website is not part of this Annual Report on Form 10-K. +US Diagnostics Operating Segment +Overview +Our US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $98,970, $88,419 and $74,845 for fiscal +2009, 2008 and 2007, respectively, reflecting a three-year compound annual growth rate of 15%. As +of September 30, 2009, our US Diagnostics operating segment had 275 employees. +Our diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, +stool, and other body fluids or tissue for the presence of antigens and antibodies of specific +infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits +include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of respiratory diseases, such as +pneumonia, valley fever, influenza, and respiratory syncytial virus (RSV); gastrointestinal +diseases, such as stomach ulcers ( H. +pylori ), antibiotic-associated diarrhea (C. difficile ) and pediatric diarrhea (Rotavirus and +Adenovirus); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken Pox and Shingles +(Varicella-Zoster) and Cytomegalovirus (organ transplant infections); and parasitic diseases, such +as Giardiasis, Cryptosporidiosis and Lyme. The primary markets and customers for these products are +reference laboratories and hospitals. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital group purchasing organizations 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. +Sales and Marketing +Our US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and Canada and independent distributors in the US and abroad. The direct sales +force consists of three management personnel who oversee corporate health accounts and work with +managed-care institutions, and six management personnel who oversee 24 technical sales +representatives, three inside sales representatives, and independent distributors in over 25 +countries. +Our only customers who accounted for 10% or more of consolidated sales in fiscal 2009, 2008 and +2007 were two independent distributors in the US for our US Diagnostics operating segment: Cardinal +Healthcare Corporation and Fisher Scientific. Our sales to Cardinal were $37,876, $31,285, and +$24,444 during fiscal 2009, fiscal 2008, and fiscal 2007, respectively. Our sales to Fisher were +$19,063, $16,160, and $13,340 during fiscal 2009, fiscal 2008, and fiscal 2007, respectively. +By design, we do +not have distribution agreements in place with these customers because we manage the selling efforts +for key end-users where these distributors are utilized. +- 6 - +Table of Contents +Consolidation of the US healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to multi-year supply agreements with consolidated healthcare providers and +major reference laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety +of formats that satisfy customer needs and preferences, whether in a hospital, commercial or +reference laboratory or alternate site location. Our product offering consists of approximately +135 medical diagnostic products. +We had three products that accounted for 30%, 32%, and 31% of consolidated net sales in fiscal +2009, fiscal 2008, and fiscal 2007, respectively: Immuno Card ® Toxins A&B, Premier TM +Toxins A&B, and Premier TM Platinum HpSA ® PLUS. +Immuno Card ® Toxins A&B and Premier TM Toxins A&B are part of our C. difficile +product family. Immuno Card ® Toxins A&B is a rapid enzyme immunoassay used for the +detection of C. difficile toxins A and B in stool specimens. Premier TM Toxins A&B is an +ELISA test in a batch microwell format for the detection of C. difficile toxins A and B in stool +specimens. Both of the products were internally developed and are manufactured in our Cincinnati, +Ohio facility. As members of our C. difficile product family relating to hospital-acquired +infections, both Immuno Card ® Toxins A&B and Premier TM Toxins A&B participate +in the organic growth of our Diagnostics business units, US Diagnostics and European Diagnostics. +Premier TM Platinum HpSA ® PLUS is an ELISA test in a microwell format for the +detection of Heliobacter pylori antigens in stool specimens for diagnosis and monitoring and is a +part of our H. pylori family of products. This product was internally developed and is +manufactured in our Cincinnati, Ohio facility. We hold both US and European patents for this +product. +- 7 - +Table of Contents +Research and Development +Our US Diagnostics operating segment’s research and development organization consists of 26 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +parasitology, and molecular biology. Research and development expenses for the US Diagnostics +operating segment for fiscal 2009, 2008 and 2007 were $7,209, $4,878 and $4,571, respectively. +This research and development organization focuses its activities on new applications for our +existing technologies, improvements to existing products and development of new technologies. +Research and development efforts may occur in-house or with collaborative partners. We believe +that new product development is a key source for sustaining revenue growth. Our internally +developed products include Premier ä Platinum HpSA PLUS, Premier ä Toxins A&B, and +Immuno Card Ò Toxins A&B, which together accounted for 35% of our US Diagnostics +operating segment’s third-party sales during fiscal 2009. +During fiscal 2008, we launched our first products under our recently developed and patented TRU +rapid test technology. The design of this technology enhances laboratory safety by containing the +specimen in a closed system during testing as recommended by CDC guidelines. TRU tests also use +less space than other technologies, which is an advantage in space-constrained clinical +laboratories. New products using this technology include TRU FLU ® , TRU RSV ® , +TRU EBV-M ® , and TRU EBV-G ® . +We also believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. We launched our second product in collaboration with Merck, Immuno Card +STAT! ® CAMPY, during the third quarter of fiscal 2009. +Over the last three fiscal years, we have been exploring and developing a molecular-based +diagnostic testing technology to complement our existing antigen/antibody-based testing +technologies. This first look at molecular-based testing started in October 2006, when we executed +a license agreement that provides rights to certain loop-mediated isothermal amplification +technology. This license provides us with rights for infectious disease testing in the United +States, Europe, and other geographic markets. We have branded our technology platform with the +name illumi gene TM . We currently are in active development using this molecular +technology for C. difficile , and are now completing beta site +evaluations and have recent data that meets or exceeds our +expectations. We intend to initiate +clinical trials in the second fiscal quarter of 2010 with a 510(k) application to follow +immediately thereafter. International revenues are likely in the late second quarter of fiscal +2010, with US sales to follow FDA clearance. Several other infectious diseases have been +identified for future development using this technology. +- 8 - +Table of Contents +Manufacturing +Our immunodiagnostic products require the production of highly specific and sensitive antigens and +antibodies. We produce substantially all of our own requirements including monoclonal antibodies +and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens. We believe +that we have sufficient manufacturing capacity for anticipated growth in the near term. +Intellectual Property, Patents, and Licenses +We own or license US and foreign patents, most of which are for products manufactured by our US +Diagnostics operating segment. Sales of these products are as follows: +Number of +% of consolidated sales +products +2009 +2008 +Product Family +H. pylori +2 +12 +% +11 +% +Upper respiratory +2 +4 +% +1 +% +Other +8 +2 +% +2 +% +Total patented products +12 +18 +% +14 +% +Patents for the two H. pylori products expire between 2016 and 2017, while patents for the two +upper respiratory products expire in 2022 and 2027. The remaining eight patented products for +which we own or license patents are spread over three product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate +our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +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. +- 9 - +Table of Contents +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our US Diagnostics operating segment and by third-party +vendors. Approximately 75% of third-party sales for fiscal 2009 for this operating segment were +products purchased from our US Diagnostics operating segment. Third-party sales for this operating +segment were $25,870, $27,980, and $23,563 for fiscal 2009, 2008 and 2007, respectively. As of +September 30, 2009, the European Diagnostics operating segment had 40 employees, including 15 +employees in the direct sales force. Our European Diagnostics operating segment’s sales and +distribution network consists of direct sales forces in Belgium, France, Holland, and Italy, and +independent distributors in other European countries, Africa and the Middle East. The European +Diagnostics operating segment maintains a distribution center in Milan, Italy. The primary markets +and customers for this operating segment are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services under clinical cGMP +conditions. Third-party sales for this operating segment were $23,434, $23,240, and $24,555 for +fiscal 2009, 2008 and 2007, respectively. As of September 30, 2009, our Life Science operating +segment had 107 employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2009, 30% of third-party sales for this segment were to two +customers. For one of these two customers, we have exclusive supply agreements that have annual, +automatic renewal provisions. We have a +long-standing relationship with this customer; and although there can be no assurances, we intend +to renew these supply agreements in the normal course of business. +- 10 - +Table of Contents +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than bioresearch +reagents and bulk antigens and antibodies, as well as buying patterns of major customers. See Note +1 (i) to the Consolidated Financial Statements herein for revenue recognition policies. Our +revenues for contract services were $1,635, $1,477, and $765 in fiscal 2009, 2008 and 2007, +respectively. +During fiscal 2008, we acquired certain technologies and products from Vybion, Inc., including +infectious disease recombinant proteins and cardiac antigens. This acquisition added important +technologies and capabilities to our Life Science business and expanded our Life Science brands. +The acquired technologies added proprietary manufacturing know-how and access to important patent +licenses for the development and production of recombinant proteins, an emerging technology in life +sciences. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, and, most recently, OEM Concepts in +fiscal 2005). Historically, these businesses were run autonomously. In recent years, growth +strategies have been developed around sales and marketing integration, new product development +integration, and the acquisition of complementary product lines, such as the recombinant antigen +products acquired from Vybion, Inc. in fiscal 2008. +Antibodies, antigens and reagents are marketed primarily to diagnostic manufacturing customers as a +source of raw materials for their products, or as an outsourced step in their manufacturing +processes. These products are typically sold in bulk quantities, and may also be custom-designed +for a particular manufacturer’s requirements. Sales efforts are focused on multi-year supply +agreements in order to provide stability in volumes and pricing. We believe this benefits both us +and our customers. +With respect to our contract cGMP services, we believe that the business prospects are also +favorable despite our recent revenue trends for this brand. During fiscal 2009 and going into +fiscal 2010, we either completed services or had services in progress for 7 vaccine projects. +- 11 - +Table of Contents +Research and Development +Our Life Science operating segment’s research and development organization consists of four +research scientists. Research and development expenses for our Life Science operating segment for +fiscal 2009, 2008 and 2007 were $1,219, $1,305, and $1,514, respectively. This research and +development organization is heavily involved in vaccine development and production activities for +our cGMP facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles”, and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +All of the Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger than we are with greater financial, research, +manufacturing and marketing resources. Important competitive factors for 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 our product lines do not reflect technological advances, our ability to compete in those +product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Quidel Corporation and +Inverness Medical Innovations. +- 12 - +Table of Contents +C. difficile is one of our primary disease categories. Over the last 12-18 months, considerable +confusion has developed in this market over the relative benefits of the various test methods +available (toxin testing, antigen testing and molecular testing). Several new competitive +products, including molecular assays, have recently been introduced into this market, causing +competitive pressures for our products. We expect to combat these competitive pressures with our +strong position in toxin testing and the development of our illumi gene TM molecular C. +difficile product. Upon launch of illumi gene TM C. difficile, we will be the only +manufacturer offering toxin, antigen, and molecular products for C. difficile testing . +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply arrangements do not exist. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than purchase from outside +vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service, and +price. Although the product application for this facility was built from our existing expertise in +cell culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings, (ii) improving +product distribution capabilities, (iii) providing access to new markets, and/or (iv) providing +access to key biologicals or new technologies that lead to new products. Although we cannot +provide any assurance that we will consummate any acquisitions in the future, we expect that the +potential for acquisitions will continue to serve as an opportunity for new revenues and earnings +growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $41,438 or +28% of consolidated fiscal 2009 sales, $44,430 or 32% of consolidated fiscal 2008 sales and $38,691 +or 31% of consolidated fiscal 2007 sales. Domestic exports for our US Diagnostics and Life Science +operating segments were $15,568, $16,450, +and $15,128 in fiscal 2009, 2008 and 2007, respectively. We expect to continue to look to +international markets as a source of new revenues and growth in the future. +- 13 - +Table of Contents +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a US EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/item13.txt b/raw/filings/0000794172/2009/0000950123-09-066890/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4eb824f8e5342844ea9f2ae543f7f557832b51c1 --- /dev/null +++ b/raw/filings/0000794172/2009/0000950123-09-066890/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions, and Director Independence +74 \ No newline at end of file diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/item9a.txt b/raw/filings/0000794172/2009/0000950123-09-066890/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..034aa944a204d11fee92eea187e9f74f4fc1739d --- /dev/null +++ b/raw/filings/0000794172/2009/0000950123-09-066890/item9a.txt @@ -0,0 +1,14 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2009, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2009. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2009. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” \ No newline at end of file diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/rp_note.txt b/raw/filings/0000794172/2009/0000950123-09-066890/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2009/0000950123-09-066890/rpt_disclosure.txt b/raw/filings/0000794172/2009/0000950123-09-066890/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8d670afa2d26e0a0b8d5370c27981793590fa8cf --- /dev/null +++ b/raw/filings/0000794172/2009/0000950123-09-066890/rpt_disclosure.txt @@ -0,0 +1,32 @@ +TRANSACTIONS WITH RELATED PERSONS +During fiscal 2010, Todd Motto, the adult son of William J. Motto, served as Vice President, +Business Development (1/2010 — 9/2010) and Vice President, Sales and Marketing (10/2009 — +12/2009). Todd Motto received $266,337 in compensation for fiscal 2010. This compensation +consisted of $208,728 of base salary, $9,642 of auto and professional allowances, $12,373 of +retirement plan contributions, $19,110 related to the fiscal 2010 restricted stock grant, $12,784 +related to stock option awards expense related to awards earned in previous years, and $3,700 for +dividends on restricted stock granted under the 2004 Equity Compensation Plan. Effective September +30, 2010, Todd Motto reduced his involvement with the Company and effective October 1, 2010 is +Coordinator of Business Development. +14 +Nasdaq rules require the Company to conduct an appropriate review of related party transactions +required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential +conflict of interest situations on an ongoing basis and that all such transactions must be approved +by the Audit Committee or another Committee comprised of independent Directors. As a result, the +Audit Committee annually reviews all such related party transactions and approves each related +party transaction if it determines that it is in the best interests of the Company. Additionally, +the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions +involving the Company and “related persons” (Directors and Executive Officers or their immediate +family members, or shareholders owning five percent or greater of the Company’s outstanding stock). +This also covers any related person transaction that meets the minimum threshold for disclosure in +the proxy statement under the relevant SEC rules (generally, transactions involving amounts +exceeding $120,000 in which a related person has a direct or indirect material interest). In +considering the transaction, the Audit Committee may consider all relevant factors, including, as +applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the +alternatives to entering into a related person transaction; (iii) whether the transaction is on +terms comparable to those available to third parties, or in the case of employment relationships, +to employees generally; (iv) the potential for the transaction to lead to an actual or apparent +conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and +(v) the overall fairness of the transaction to the Company. This policy is included in the +Company’s Employee Handbook. The approval of such related person transactions are evidenced by +internal Company resolutions or memoranda. \ No newline at end of file diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/filing.txt b/raw/filings/0000794172/2010/0000950123-10-109251/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..0fcf01e4060f04a014922cea48d6ab775f65aa89 --- /dev/null +++ b/raw/filings/0000794172/2010/0000950123-10-109251/filing.txt @@ -0,0 +1,4650 @@ +10-K +1 +c08969e10vk.htm +FORM 10-K +Form 10-K +Table of Contents +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 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF +1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010. +o +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. +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID No. 31-0888197 +Incorporated under the Laws of Ohio +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange of which registered +Common Shares, No Par Value +The NASDAQ Stock Market LLC +(NASDAQ Global Select Market) +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. +YES NO +þ o +If this report is an annual or transition report, indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange +Act. +YES NO +o þ +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 +þ o +Indicate by check mark whether the registrant has submitted electronically and posted on +its corporate Web site, if any, every Interactive Data File required to be submitted and +posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such +shorter period that the registrant was required to submit and post such files). +YES NO +þ o +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. +YES NO +o þ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated +filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large +accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of +the Exchange Act. +Large accelerated filer þ +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company o +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +YES NO +o þ +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2010 +was $807,874,954 based on a closing sale price of $20.37 per share on March 31, 2010. As +of October 31, 2010, 40,677,386 no par value Common Shares were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended +September 30, 2010 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 2011 Annual +Shareholders’ Meeting are incorporated by reference in Part III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +4 +Item 1A Risk Factors +15 +Item 1B Unresolved Staff Comments +22 +Item 2 Properties +22 +Item 3 Legal Proceedings +23 +Item 4 (Removed and Reserved) +23 +Part II +Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of +Equity +Securities +23 +Item 6 Selected Financial Data +24 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations +24 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +39 +Item 8 Financial Statements and Supplementary Data +40 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +69 +Item 9A Controls and Procedures +69 +Item 9B Other Information +70 +Part III +Item 10 Directors, Executive Officers and Corporate Governance +71 +Item 11 Executive Compensation +71 +Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +71 +Item 13 Certain Relationships and Related Transactions, and Director Independence +71 +Item 14 Principal Accounting Fees and Services +71 +Item 15 Exhibits, Financial Statement Schedules +72 +Exhibit 10.12 +Exhibit 10.18.2 +Exhibit 13 +Exhibit 21 +Exhibit 23 +Exhibit 31.1 +Exhibit 31.2 +Exhibit 32 +EX-101 INSTANCE DOCUMENT +EX-101 SCHEMA DOCUMENT +EX-101 CALCULATION LINKBASE DOCUMENT +EX-101 LABELS LINKBASE DOCUMENT +EX-101 PRESENTATION LINKBASE DOCUMENT +EX-101 DEFINITION LINKBASE DOCUMENT +Table of Contents +FORWARD LOOKING STATEMENTS +This Annual Report on Form 10-K contains 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. Except for historical information, +this report contains forward-looking statements within the meaning of Section 27A of the Securities +Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be +identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, +“will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions +thereof and which also may be identified by their context. Such statements, whether expressed or +implied, are based upon current expectations of the Company and speak only as of the date made. +The Company assumes no obligation to publicly update or revise any forward-looking statements even +if experience or future changes make it clear that any projected results expressed or implied +therein will not be realized. These statements are subject to various risks, uncertainties and +other factors that could cause actual results to differ materially, including, without limitation, +the following: 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. Recessionary pressures on the economy and the markets +in which our customers operate, as well as adverse trends in buying patterns from customers can +change expected results. 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. Changes in the relative +strength or weakness of the U.S. dollar can also change expected results. 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 will be successfully integrated into Meridian’s operations. There may be +risks that acquisitions may disrupt operations and may pose potential difficulties in employee +retention and there may be additional risks with respect to Meridian’s ability to recognize the +benefits of acquisitions, including potential synergies and cost savings or the failure of +acquisitions to achieve their plans and objectives. The Company cannot predict the possible impact +of recently-enacted United States healthcare legislation and any similar initiatives in other +countries on its results of operations. In addition to the factors described in this paragraph, +Part I, Item 1A Risk Factors contains a list and description of uncertainties, risks and other +matters that may affect the Company. +- 3 - +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results +of operations that are subject to risks and uncertainties. See “Forward Looking Statements” above. +Factors that could cause or contribute to such differences include those discussed in Item 1A. +Risk Factors. In addition to the risk factors discussed herein, we are also subject to additional +risks and uncertainties not presently known to us or that we currently deem immaterial. If any of +these risks and uncertainties develop into actual events, our business, financial condition or +results of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Meridian,” +“we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +In the discussion that follows, all amounts are in thousands (both tables and text), except per +share and employee data and square footage and acreage data related to properties . +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract +development and manufacture of proteins and other biologicals under cGMP conditions for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. By +exploiting revenue opportunities across research, clinical diagnostics and therapeutics, we strive +to maximize revenues, efficiently invest in research and development, and increase profitability of +our manufacturing operations. The company was incorporated in Ohio in 1976. +Operating Segments +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes the +contract development and manufacture of cGMP clinical grade proteins and other biologicals for use +by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Financial information for Meridian’s operating segments is included in Note 9 to the consolidated +financial statements contained herein. +- 4 - +Table of Contents +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 81% of consolidated net sales for fiscal 2010. Our diagnostic products provide +accuracy, simplicity and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes; (ii) +have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic +products; and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. The acquisition of the Bioline +group of companies (collectively the “Bioline Group”) in July 2010 significantly increased the +revenue base for our Life Science operating segment. We expect revenues for our Life Science +operating segment to approximate 24% of consolidated net sales for fiscal 2011. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, +DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these filings and +other information regarding Meridian at http://www.sec.gov . The information on our website +is not part of this Annual Report on Form 10-K. +U.S. Diagnostics Operating Segment +Overview +Our U.S. Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $92,020, $98,970 and $88,419 for fiscal +2010, 2009 and 2008, respectively, reflecting a three-year compound annual growth rate of 7%. As +of September 30, 2010, our U.S. Diagnostics operating segment had 284 employees. +Our diagnostic test kits utilize immunodiagnostic and molecular technologies, which test samples of +stool, blood, urine and other body fluids or tissue for the presence of specific infectious +diseases. Specific immunodiagnostic technologies used in our diagnostic test kits include enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. Additionally, during 2010 we received U.S. Food and Drug +Administration (FDA) clearance and introduced into the marketplace our +new molecular amplification assay, illumi gene ® C.difficile . The illumi gene ® +molecular amplification assay detects the presence of the toxin producing region from the C. +difficile DNA, and provides highly accurate results in under an hour. +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of gastrointestinal diseases, such as +antibiotic-associated diarrhea (C. difficile ), pediatric diarrhea (Rotavirus and Adenovirus) and +stomach ulcers ( H. pylori ); foodborne diseases such as Enterohemorrhagic E. Coli infection (EHEC) +and Campylobacter jejuni (Campy); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken +Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant infections); parasitic +diseases, such as Giardiasis, Cryptosporidiosis and Lyme; and respiratory diseases, such as +Pneumonia, Valley Fever, Influenza and Respiratory Syncytial Virus (RSV). The primary markets and +customers for these products are reference laboratories and hospitals. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital group purchasing organizations 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. +Sales and Marketing +Our U.S. Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the U.S. and Canada and independent distributors in the U.S. and abroad. The direct sales +force consists of 4 management personnel who oversee corporate health accounts and work with +managed-care institutions, and 6 management personnel who oversee 25 technical sales +representatives, 3 inside sales representatives, and independent distributors in over 30 countries. +Our only customers who accounted for 10% or more of consolidated net sales in fiscal 2010, 2009 +and 2008 were two independent distributors in the U.S.: Cardinal Healthcare Corporation and Fisher +Scientific. Our sales to Cardinal were $33,821, $37,876 and $31,285 during fiscal 2010, 2009 and +2008, respectively. Our sales to Fisher were $18,204, $19,063 and $16,160 during fiscal +2010, 2009 and 2008, respectively. Currently, we do not have distribution agreements in place with +these customers. However the need for formal distribution +arrangements is assessed on an ongoing basis as our business and +product offerings continue to evolve. +- 6 - +Table of Contents +Consolidation of the U.S. healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to multi-year supply agreements with group purchasing organizations and +major reference laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include DNA amplification, enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. As a result, we are able to develop and manufacture diagnostic tests +in a variety of formats that satisfy customer needs and preferences, whether in a hospital, +commercial or reference laboratory, or alternate site location. Our product offering consists of +approximately 140 medical diagnostic products. +We had three products that accounted for 28%, 30% and 32% of consolidated net sales in fiscal 2010, +2009 and 2008, respectively: Immuno Card ® Toxins A&B, Premier TM Toxins A&B and +Premier TM Platinum HpSA ® PLUS. +Immuno Card ® Toxins A&B and Premier TM Toxins A&B are part of our C. difficile +product family. Immuno Card ® Toxins A&B is a rapid enzyme immunoassay used for the +detection of C. difficile toxins A and B in stool specimens. Premier TM Toxins A&B is an +ELISA test in a batch microwell format for the detection of C. difficile toxins A and B in stool +specimens. Both of the products were internally developed and are manufactured in our Cincinnati, +Ohio facility. +Premier TM Platinum HpSA ® PLUS is an ELISA test in a microwell format for the +detection of Heliobacter pylori antigens in stool specimens for diagnosis and monitoring and is a +part of our H. pylori family of products. This product was internally developed and is +manufactured in our Cincinnati, Ohio facility. We hold both U.S. and European patents for this +product. +- 7 - +Table of Contents +Research and Development +Our U.S. Diagnostics operating segment’s research and development organization consists of 18 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +parasitology and molecular biology. Research and development expenses for the U.S. Diagnostics +operating segment for fiscal 2010, 2009 and 2008 were $6,565, $7,209 and $4,878, respectively. +This research and development organization focuses its activities on new applications for our +existing technologies, improvements to existing products and development of new technologies. +Research and development efforts may occur in-house or with collaborative partners. We believe +that new product development is a key source for sustaining revenue growth. Our internally +developed products include Premier ä Platinum HpSA PLUS, Premier ä Toxins A&B and +Immuno Card Ò Toxins A&B, which together accounted for 33% of our U.S. Diagnostics +operating segment’s third-party sales during fiscal 2010. +After nearly four years of exploration and development of a molecular-based diagnostic testing +technology to complement our existing antigen/antibody-based testing technologies, in the third +quarter of 2010, we introduced our new molecular amplification assay, illumi gene ® +C.difficile to the international markets. Shortly thereafter, early in the fourth quarter of +fiscal 2010, we received clearance from the U.S. Food and Drug Administration (FDA) for the product +and began offering illumi gene ® C.difficile to our domestic customers. The +illumi gene ® molecular amplification assay detects the presence of a key toxin producing +region from the C. difficile DNA, and provides highly accurate results in under an hour. We +believe this new molecular assay uniquely positions us in the market to provide a full line of +testing solutions that will meet the needs of both our domestic and international customers. +Having introduced this platform for C. difficile detection, several other infectious diseases have +been identified for future development using this technology. We currently hold registrations to +sell illumi gene ® in eighteen countries, including the U.S., with registrations pending +in two additional countries. +During fiscal 2008, we launched our first products under our patented TRU rapid test technology. +The design of this technology enhances laboratory safety by containing the specimen in a closed +system during testing as recommended by CDC guidelines. TRU tests also use less space than other +technologies, which is an advantage in space-constrained clinical laboratories. New products using +this technology include TRU FLU ® , TRU RSV ® , TRU EBV-M ® and TRU +EBV-G ® . +We also believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. We launched our second product in collaboration with Merck, Immuno Card +STAT! ® CAMPY, during the third quarter of fiscal 2009. +- 8 - +Table of Contents +Early in the fourth quarter of fiscal 2010 we entered into an exclusive, worldwide product +development and distribution agreement with DiaSorin S.p.A., under which DiaSorin will utilize key +Meridian technology to develop several infectious disease products for use on their +LIAISON ® systems. LIAISON is a fully automated, random access system based on +chemiluminescense detection, of which there over three thousand placed in laboratories throughout +the world. The agreement is royalty-based, with the actual royalty amount to be paid to Meridian +dependent upon type of test and specific geographic market. Under the agreement, DiaSorin has +exclusive distribution rights for the developed products in every geographic market except the U.S. +and the U.K., where we retain the option for distribution. The first two products to be developed +under the agreement will be for the detection of C. difficile and H. pylori . +As a world leader in C. difficile testing, we strive to offer our customers a comprehensive C. +difficile product portfolio. During the fourth quarter of fiscal 2010, we launched our Premier C. +difficile GDH enzyme immunoassay product in non-U.S. markets and we have just recently initiated +clinical trials in the United States. This assay provides our customers with a rapid, accurate and +cost-effective screening method for the identification of suspected C. difficile infections. +Manufacturing +Our immunodiagnostic and molecular products require the production of highly specific and sensitive +antigens, antibodies and primers. While we produce substantially all of our own requirements +including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial and +viral antigens, currently all of the raw materials used in our illumi gene ® molecular +product are purchased from outside vendors. We believe that we have sufficient manufacturing and +sourcing capacity for anticipated growth in the near term. +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our U.S. +Diagnostics operating segment. Sales of these products are as follows: +Number of +% of consolidated sales +Product Family +products +2010 +2009 +H. pylori +2 +13 +% +12 +% +Upper respiratory +2 +4 +% +4 +% +Other +8 +2 +% +2 +% +Total patented products +12 +19 +% +18 +% +Patents for the two H. pylori products expire between 2016 and 2017, while patents for the two +upper respiratory products expire in 2022 and 2027. The remaining eight patented products for +which we own or license patents are spread over three product families. +- 9 - +Table of Contents +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate +our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +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; however, we +can make no assurances in this regard. +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common +gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our +diagnostic product lines reduces the risk that infections subject to seasonality and sporadic +outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that +revenues will not be negatively impacted period over period by such factors. +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our U.S. Diagnostics operating segment and by +third-party vendors. Approximately 74% of third-party sales for fiscal 2010 for this operating +segment were products purchased from our U.S. Diagnostics operating segment. Third-party sales for +this operating segment were $24,041, $25,870 and $27,980 for fiscal 2010, 2009 and 2008, +respectively. As of September 30, 2010, the European Diagnostics operating segment had 39 +employees, including 14 employees in the direct sales force. Our European Diagnostics operating +segment’s sales and distribution network consists of direct sales forces in Belgium, France, +Holland +and Italy, and independent distributors in other European countries, Africa and the Middle East. +The European Diagnostics operating segment maintains a distribution center near Milan, Italy. The +primary markets and customers for this operating segment are hospitals and reference laboratories. +- 10 - +Table of Contents +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into U.S. dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic companies, as well as contract +development and manufacturing services under clinical cGMP conditions. Third-party sales for this +operating segment were $26,939, $23,434 and $23,240 for fiscal 2010, 2009 and 2008, respectively. +As of September 30, 2010, our Life Science operating segment had approximately 175 employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells +and bioresearch reagents used by researchers and other diagnostic companies. During fiscal 2010, +27% of third-party sales for this segment were to two customers. For one of these two customers, +we have exclusive supply agreements that have annual, automatic renewal provisions. We have a +long-standing relationship with this customer; and although there can be no assurances, we intend +to renew these supply agreements in the normal course of business. +In July 2010, we acquired the Bioline Group and in so doing added important technologies and +capabilities to our Life Science business and complemented our expanding life science product lines +sold into the research, pharmaceutical and commercial diagnostic markets. In addition to +technological capabilities, Bioline also adds proprietary know-how in the production of high-volume +nucleotides and PCR enzymes, as well as a growing portfolio of intellectual property in the form of +patents and licenses. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than our +immunodiagnostic and molecular biology products, as well as buying patterns of major customers. +See Note 1 +(i) to the Consolidated Financial Statements herein for revenue recognition policies. Our revenues +for contract services were $1,958, $1,635 and $1,477 in fiscal 2010, 2009 and 2008, respectively. +- 11 - +Table of Contents +During fiscal 2008, we acquired certain technologies and products from Vybion, Inc., including +infectious disease recombinant proteins and cardiac antigens. This acquisition added important +technologies and capabilities to our Life Science business and expanded our Life Science brands. +The acquired technologies added proprietary manufacturing know-how and access to important patent +licenses for the development and production of recombinant proteins, an emerging technology in life +sciences. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, OEM Concepts in fiscal 2005, and most +recently, the Bioline Group in July 2010). Historically, these businesses were run autonomously. +In recent years, growth strategies have been developed around sales and marketing integration, new +product development integration, and the acquisition of complementary product lines, such as the +recombinant antigen products acquired from Vybion, Inc. in fiscal 2008. +Immunodiagnostic products such as antibodies, antigens and reagents are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These products are typically sold in bulk +quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales +efforts are focused on multi-year supply agreements in order to provide stability in volumes and +pricing. We believe this benefits both us and our customers. +Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed +primarily to research customers. These products are typically sold in small quantities. +Research and Development +Our Life Science operating segment’s research and development organization consists of 15 research +scientists. Research and development expenses for our Life Science operating segment for fiscal +2010, 2009 and 2008 were $2,005, $1,219 and $1,305, respectively. This research and development +organization is heavily involved in vaccine development and production activities for our cGMP +facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility +of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, +not Meridian Life Science. +- 12 - +Table of Contents +The Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved, where +appropriate and as required. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger than we are with greater financial, research, +manufacturing and marketing resources. Important competitive factors for 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 our product lines do not reflect technological advances, our ability to compete in +those product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Cepheid, Quidel Corporation and +Alere Inc. +C. difficile is one of our primary disease categories. Over the last 24-30 months, considerable +confusion has developed in this market over the relative benefits of the various testing methods +available (toxin testing, antigen testing and molecular testing). Several new competitive +products, including molecular assays, have recently been introduced into this market, causing +competitive pressures for our products. With the development and launch of our +illumi gene ® molecular C. difficile product, we believe we are well-armed to combat these +competitive pressures. Following the introduction of illumi gene ® C. difficile, we are +the only manufacturer offering toxin, antigen and molecular products for C. difficile testing . +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply +arrangements do not exist. From time to time, customers may choose to manufacture their biomedical +reagents in-house rather than purchase from outside vendors such as Meridian. +- 13 - +Table of Contents +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service and price. +Although the product application for this facility was built from our existing expertise in cell +culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings; (ii) improving +product distribution capabilities; (iii) providing access to new markets; and/or (iv) providing +access to key biologicals or new technologies that lead to new products. Despite our recent +acquisition of the Bioline Group, we cannot provide any assurance that we will consummate any +additional acquisitions in the future nor can we provide any assurance that any acquisitions will +accomplish these objectives. However, we expect that the potential for acquisitions will continue +to provide opportunities for new revenues and earnings growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $43,391 or +30% of consolidated fiscal 2010 sales, $41,438 or 28% of consolidated fiscal 2009 sales and $44,430 +or 32% of consolidated fiscal 2008 sales. Domestic exports for our U.S. Diagnostics and Life +Science operating segments were $17,851, $15,568 and $16,450 in fiscal 2010, 2009 and 2008, +respectively. We expect to continue to look to international markets as a source of new revenues +and growth in the future. See Notes 7 and 9 to the Consolidated Financial Statements for +information concerning sales, long-lived assets and deferred tax assets by country. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. +- 14 - +Table of Contents +ITEM 1A. +RISK FACTORS +In addition to the other information set forth in this report, you should carefully consider the +following factors, which could materially affect our business, financial condition, cash flows or +future results. Any one of these factors could cause our actual results to vary materially from +recent results or from anticipated future results. The risks described below are not the only +risks facing our Company. Additional risks and uncertainties not currently known to us or that we +currently deem to be immaterial also may materially adversely affect our business, financial +condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable +terms. +The medical diagnostic and life science industries are characterized by ongoing technological +developments and changing customer requirements. As such, our results of operations and continued +growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and +successfully introduce into the marketplace, enhancements of existing products and services or new +products and services that incorporate technological advances, meet customer requirements and +respond to products developed by our competition. We cannot provide any assurance that we will be +successful in developing or acquiring such rights to products and services on a timely basis, or +that such products and services will adequately address the changing needs of the marketplace, +either of which could adversely affect our results of operations. +In addition, we must regularly allocate considerable resources to research and development of new +products, services and technologies. The research and development process generally takes a +significant amount of time from design stage to product launch. This process is conducted in +various stages. During each stage, there is a risk that we will not achieve our goals on a timely +basis, or at all, and we may have to abandon a product in which we have invested substantial +resources. +During fiscal 2010, 2009 and 2008, we incurred $8,570, $8,428 and $6,183, respectively, in research +and development expenses. We expect to continue to invest in our research and development +activities. +We may be unable to successfully integrate operations or to achieve expected cost savings from +acquisitions we make. +One of our main growth strategies is the acquisition of companies and/or products. Although +additional acquisitions of companies and products may enhance the opportunity to increase net +earnings over time, such acquisitions could result in greater administrative burdens, increased +exposure to the uncertainties inherent in marketing new products and financial risks of additional +operating costs. The principal benefits expected to result from any acquisitions we make will not +be achieved fully unless we are able to successfully integrate the +operations of the acquired entities with our operations and realize the anticipated synergies, cost +savings and growth opportunities from integrating these businesses into our existing businesses. We +cannot provide any assurance that we will be able to identify and complete additional acquisitions +on terms we consider favorable or that, if completed, will be successfully integrated into our +operations. +- 15 - +Table of Contents +Revenues for our diagnostic operating segments may be impacted by our reliance upon two key +distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our U.S. Diagnostic operating segment’s sales through two distributors were 57% and 58%, +respectively, of the U.S. Diagnostics operating segment’s total sales for fiscal 2010 and 2009, or +36% and 38%, respectively, of our consolidated sales for fiscal 2010 and 2009. These parties +distribute our products and other laboratory products to end-user customers. The loss of either of +these distributors could negatively impact our sales and results of operations unless suitable +alternatives were timely found or lost sales to one distributor were absorbed by another +distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our +industry’s competitive environment. As an alternative, we could expand our efforts to distribute +and market our products directly. This alternative, however, would require substantial investment +in additional sales, marketing and logistics resources, including hiring additional sales and +customer service personnel, which would significantly increase our future selling, general and +administrative expenses. +In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, +potentially leading to uneven concentration levels on a quarterly basis. However, we expect that, +over a 12-month period, these distributors’ orders would follow a normal buying pattern. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common +gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our +diagnostic product lines reduces the risk that infections subject to seasonality and sporadic +outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that +revenues will not be negatively impacted period over period by such factors. +Changing Diagnostic Market Conditions +Changes in the healthcare delivery system have resulted in major consolidation among reference +laboratories and in the formation of multi-hospital alliances, reducing the number of institutional +customers for diagnostic test products. Consolidation in the U.S. healthcare industry has also led +to the creation of group purchasing organizations (GPOs) that aggregate buying power for hospital +groups and put pressure on our selling prices. Due to such consolidation, we may not be able to +enter into and/or sustain contractual or other marketing or +distribution arrangements on a satisfactory commercial basis with institutional customers and GPOs, +which could adversely affect our results of operations. +- 16 - +Table of Contents +We could be adversely affected by healthcare reform legislation. +Third-party payers for medical products and services, including state and federal governments, are +increasingly concerned about escalating health care costs and can indirectly affect the pricing or +the relative attractiveness of our products by regulating the maximum amount of reimbursement they +will provide for diagnostic testing services. Following years of increasing pressure, during 2010 +the U.S. government enacted comprehensive healthcare reform. At present, given the infancy of the +enacted reform, we are unable to predict what effect the legislation might ultimately have on +reimbursement rates for our products. If reimbursement amounts for diagnostic testing services are +decreased in the future, such decreases may reduce the amount that will be reimbursed to hospitals +or physicians for such services and consequently could place constraints on the levels of overall +pricing, which could have a material effect on our sales and/or results of operations. +In addition, this legislation established a 2.3% excise tax on the sales of medical devices that +retail for more than one hundred dollars beginning in 2013. At existing sales levels in our U.S. +markets, this would result in an annual excise tax in excess of $2,000 for our company. It is +unknown at the present time whether this cost can be passed on to customers. +Revenues for our Life Science operating segment may be impacted by customer concentrations and +buying patterns. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +27% and 30%, respectively, of the Life Science operating segment’s total sales for fiscal 2010 and +fiscal 2009, or 5% of our consolidated sales for each of fiscal 2010 and fiscal 2009. For one of +these two customers, we have exclusive supply agreements that have annual, automatic renewal +provisions. Although we have a long-standing relationship with this customer, we cannot provide +any assurance that we will be able to renew these supply agreements, which could adversely affect +our sales and results of operations. +Our Life Science operating segment has four other significant customers who purchase antigens, +antibodies and reagents, which together comprised 13% and 10%, respectively, of the operating +segment’s total sales for fiscal 2010 and 2009. Any significant alteration of buying patterns from +these customers could adversely affect our period over period sales and results of operations. +Revenues relating to research, development and manufacturing services for our Life Science +operating segment are generated on a contract by contract basis. The nature of this business is +such that each contract provides a unique product and/or service and corresponding revenue stream. +Although we believe that future prospects for this business will generate targeted growth rates, +there can be no assurance that future contracts will be secured, and if secured, will be +profitable. +- 17 - +Table of Contents +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid +change. Hundreds of companies in the United States supply immunodiagnostic tests and purified +reagents. These companies range from multinational healthcare entities, for which +immunodiagnostics is one line of business, to small start-up companies. Many of our competitors +have significantly greater financial, technical, manufacturing and marketing resources than we do. +We cannot provide any assurance that our products and services will be able to compete successfully +with the products and services of our competitors. +Over the past two years, molecular tests have been introduced for the first time into the C. +difficile market, which is a significant source of revenues for us. Our ability to continue to +successfully compete in the C. difficile market is partly dependent upon the success and market +acceptance of our own molecular-based product, illumi gene ® C. difficile , which we +launched internationally in the third quarter of 2010 and domestically in the fourth quarter. +We are dependent on international sales, and our financial results may be adversely impacted by +foreign currency, regulatory or other developments affecting international markets. +We sell products and services into approximately 60 countries. Approximately 30% of our net sales +for fiscal 2010 and approximately 28% of our net sales for fiscal 2009 were attributable to +international markets. For fiscal 2010, 48% of our international sales were made in Euros and 49% +were made in U.S. dollars, with the remaining 3% being a combination of the British pound and the +Australian dollar, as a result of the acquisition of the Bioline Group. We are subject to the +risks associated with fluctuations in the exchange rates for the Australian dollar, British pound +and Euro to the U.S. dollar. We are also subject to other risks associated with international +operations, including longer customer payment cycles, tariff regulations, requirements for export +licenses, instability of foreign governments, and governmental requirements with respect to the +importation and distribution of medical devices and immunodiagnostic and molecular biology +reagents, all of which may vary by country. +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by +these regulations. +Medical device diagnostics and the manufacture, sale and distribution of bulk antigens, antibodies +and reagents are highly regulated industries. We cannot provide any assurance that we will be able +to obtain necessary governmental clearances or approvals or timely clearances or approvals to +market future products in the United States and other countries. Costs and difficulties in +complying with laws and regulations administered by the U.S. Food and Drug Administration, the U.S. +Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the +Centers for Disease Control or other regulators can result in unanticipated +expenses and delays and interruptions to the sale of new and existing products. Contract +manufacturing of proteins and other biologicals is regulated by the U.S. Food and Drug +Administration. +- 18 - +Table of Contents +Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs +of approvals difficult to predict. The failure to comply with these regulations can result in +delay in obtaining authorization to sell products, seizure or recall of products, suspension or +revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or +third-party manufacturing facilities would adversely affect our business and operating results. +Products and services manufactured at our Cincinnati, Ohio; Boca Raton, Florida; Memphis, +Tennessee; Saco, Maine; London, England; Luckenwalde, Germany; and Sydney, Australia facilities +comprised 74% of our Diagnostics revenues and 73% of our Life Science revenues. Our global supply +of these products and services is dependent on the uninterrupted and efficient operation of these +facilities. In addition, we currently rely on a small number of third-party manufacturers to +produce certain of our diagnostic products and product components. The operations of our +facilities or these third-party manufacturing facilities could be adversely affected by power +failures, natural or other disasters, such as earthquakes, floods, tornadoes or terrorist threats. +Although we carry insurance to protect against certain business interruptions at our facilities, +there can be no assurance that such coverage will be adequate or that such coverage will continue +to remain available on acceptable terms, if at all. Any significant interruption in the Company’s +or third-party manufacturing capabilities could materially and adversely affect our operating +results. +We are dependent on sole-source suppliers for certain critical components and products. A supply +interruption could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +multiple sources of supply. However, certain critical raw materials and supplies required for the +production of some of our principal products are available only from a single supplier. In +addition, certain finished products, for which we act as a distributor, are available only from a +single supplier. If these suppliers become unable or unwilling to supply the required raw +materials or products, we would need to find another source, and perform additional development +work and obtain regulatory approvals for the use of the alternative raw materials for our products. +Completing that development and obtaining such approvals could require significant time and +resources, and may not occur at all. Any disruption in the supply of these raw materials or +finished products could have a material adverse affect on us. +We have no individual products that represent greater than 10% of consolidated sales for which we +have a sole source supplier. We sell certain respiratory tests for influenza and respiratory +syncytial virus that we purchase from Alere Inc. These products represented 6%, 13% and 14%, +respectively, of third-party sales for our U.S. Diagnostics operating segment in fiscal 2010, 2009 +and 2008, respectively. While we do not have a long-term +supply agreement with this vendor for these products, during fiscal 2008, we launched our own +internally-developed products that compete with these products in the market. Two foodborne +products sourced from another vendor accounted for 11%, 7% and 5% of third-party sales for our US +Diagnostics operating segment in fiscal 2010, 2009 and 2008, respectively. +- 19 - +Table of Contents +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented +technologies. In addition, we have licensed, and expect to continue to license, various +complementary technologies and methods from academic institutions and public and private companies. +We cannot provide any assurance that the technologies that we own or license provide protection +from competitive threats or from challenges to our intellectual property. In addition, we cannot +provide any assurances that we will be successful in obtaining licenses or proprietary or patented +technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our +ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the +market for diagnostics continues to grow and the number of participants in the market increases, we +may increasingly be subject to patent infringement claims. It is possible that a third-party may +claim infringement against us. If found to infringe, we may attempt to obtain a license to such +intellectual property; however, we may be unable to do so on favorable terms, or at all. +Additionally, if our products are found to infringe on third-party intellectual property, we may be +required to pay damages for past infringement and lose the ability to sell certain products, +causing our revenues to decrease. We currently carry intellectual property insurance that covers +damages and defense costs from our potential infringement on other third-party patents at levels +that we believe are commercially reasonable, although there is no assurance that it will be +adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a +claim could have a material adverse affect on our profitability and the damage to our reputation in +the industry could have a material adverse affect on our business. +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing and marketing of medical diagnostic products involves an inherent risk +of product liability claims. If we cannot successfully defend ourselves against product liability +claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially +reasonable, although there is no assurance that it will be adequate to cover claims that may arise. +In certain customer contracts, we indemnify third parties for certain product liability claims +related to our products. These indemnification obligations may cause us to pay significant sums of +money for claims that are covered by these indemnifications. In addition, a defect in the design +or +manufacture of our products could have a material adverse affect on our reputation in the industry +and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss +resulting from such a claim could have a material adverse affect on our profitability and the +damage to our reputation in the industry could have a material adverse affect on our business. +- 20 - +Table of Contents +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire and retain key +personnel. +Our future success depends on our continued ability to attract, hire and retain highly qualified +personnel, including our executive officers and scientific, technical, sales and marketing +employees, and their ability to manage growth successfully. If such key employees were to leave +and we were unable to obtain adequate replacements, our operating results could be adversely +affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain +financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we +would be in default under the credit agreement. If an event of default is not cured or waived, it +could result in acceleration of any indebtedness under our credit agreement, which could have a +material adverse effect on our business. At the present time, no borrowings are outstanding under +our bank credit agreement. +We face risks related to global economic conditions. +We currently generate significant operating cash flows, which combined with access to the credit +markets provides us with discretionary funding capacity for research and development and other +strategic activities. Current uncertainty in global economic conditions poses a risk to the +overall economy that could impact demand for our products, as well as our ability to manage normal +commercial relationships with our customers, suppliers and creditors, including financial +institutions. If global economic conditions deteriorate significantly, our business could be +negatively impacted, including such areas as reduced demand for our products from a slow-down in +the general economy, supplier or customer disruptions resulting from tighter credit markets and/or +temporary interruptions in our ability to conduct day-to-day transactions through our financial +intermediaries involving the payment to or collection of funds from our customers, vendors and +suppliers. +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred +stock and to determine the rights, preferences, privileges and restrictions, including voting +rights, of such shares without any future vote or action by the shareholders. The issuance of +preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage +takeover bids for our company that have not been negotiated with the board of directors. Such +provisions could limit the price that investors might be willing to pay in the future for shares of +our common stock. In addition, sales of substantial amounts of such shares in the public market +could adversely affect the market price of our common stock and our ability to raise additional +capital at a price favorable to us. +- 21 - +Table of Contents +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Our corporate offices, U.S. Diagnostics manufacturing facility and U.S. Diagnostics research and +development facility are located in three buildings totaling approximately 94,000 square feet on +6.2 acres of land in the Village of Newtown, a suburb of Cincinnati, Ohio. These properties are +owned by us. We have approximately 51,000 square feet of manufacturing space and 9,000 square feet +of warehouse space in these facilities. +In September 2009, we purchased an additional building in the Village of Newtown, less than one +mile from our current facility, to augment our research and development, manufacturing and +administrative capacity for our U.S. Diagnostics operating segment. This facility consists of +approximately 22,000 square feet on 3.5 acres of land. We are in the process of expanding a +portion of our US operations into this space and anticipate completion of this expansion during the +next three months. +Our European Diagnostics distribution center in Italy conducts its operations in a two-story +building near Milan, consisting of approximately 18,000 square feet. This facility is owned by our +wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in +Nice, France and Nivelles, Belgium for sales and administrative functions. +Our Life Science operations are conducted in several facilities in Saco, Maine; Memphis, Tennessee; +and Boca Raton, Florida, as well as the recently-acquired Bioline Group facilities located in +Boston, Massachusetts; London, England; Luckenwalde, Germany; and Sydney, Australia. Our facility +in Saco, Maine presently contains approximately 23,000 square feet for manufacturing, sales, +distribution and administrative functions, and is owned by us. Our facility in Memphis, Tennessee +consists of two buildings totaling approximately 34,000 square feet, including approximately 27,000 +square feet of manufacturing space, and is owned by us. Our leased facility in Boca Raton, Florida +contains approximately 7,500 square feet of manufacturing space. Following are details of the +Bioline Group facilities, all of which are leased: Boston — approximately 10,000 square feet of +sales and warehouse space; London — approximately 9,000 square feet of sales, warehouse, +distribution, research and development, manufacturing and administrative office space; Luckenwalde +— approximately 9,000 square +feet of sales, warehouse and manufacturing space; Sydney — approximately 3,000 square feet of +sales, warehouse, research and development and manufacturing space. +- 22 - +Table of Contents +ITEM 3. +LEGAL PROCEEDINGS +We are a party to various litigation matters that we believe are in the normal course of business. +The ultimate resolution of these matters is not expected to have a material adverse effect on our +financial position, results of operations or cash flows. No material provision has been made in +the accompanying consolidated financial statements for these matters. +ITEM 4. +(REMOVED AND RESERVED) +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Refer to “Forward Looking Statements” following the Index in front of the Form 10-K and Item 1A +“Risk Factors” on Pages 15 through 21 of this Annual Report . +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2010 +and “Quarterly Financial Data” relating to our dividends in Note 11 to the Consolidated Financial +Statements are incorporated herein by reference. There are no restrictions on cash dividend +payments. +Historically, our cash dividend policy has been to set the indicated annual dividend rate between +75% and 85% of each fiscal year’s expected net earnings. However, during fiscal 2010, a year of +significant investment in our foundation for the future (e.g., illumi gene ® molecular +technology development/launch, Bioline Group acquisition, etc.), our indicated dividend rate of +$0.76 per share was 117% of diluted earnings per share. Over the next several fiscal years, we +expect our dividend payout ratio to come into line with our historical policy of 75% to 85%, as +expected earnings contributions are realized from our illumi gene ® molecular technology +and the acquisition of the Bioline Group. 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. +- 23 - +Table of Contents +We paid dividends of $0.74 per share, $0.65 per share and $0.53 per share in fiscal 2010, 2009 and +2008, respectively. +As of September 30, 2010, there were approximately 1,000 holders of record and approximately 19,700 +beneficial owners of our common shares. +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2010. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors” on pages 15 through 21 of this Annual Report. +In the discussion that follows, all amounts are in thousands (both tables and text), except per +share data . +Results of Operations : +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2010 decreased 40% to $5,322, or $0.13 per diluted +share, from net earnings for the fourth quarter of fiscal 2009 of $8,930, or $0.22 per diluted +share. This decrease primarily reflects decreased sales coupled with transaction costs related to +the acquisition of the Bioline Group ($822, or $0.02 per diluted share). The effects of these +factors were partially offset by the management of discretionary spending and the resulting +decreases in Research & Development and Selling & Marketing expenses. Sales for the fourth quarter +of fiscal 2010 were $35,539, a decrease of $6,922, or 16%, compared to the fourth quarter of fiscal +2009. +Sales for the U.S. Diagnostics operating segment for the fourth quarter of fiscal 2010 decreased +25% compared to the fourth quarter of fiscal 2009, reflecting decreased sales in our C. difficile +product family, along with the impact on 2009 of the novel A (H1N1) influenza outbreak and the +abrupt halt of the outbreak in December 2009. Fourth quarter 2010 sales for our European +Diagnostics operating segment decreased 25% compared to the fourth quarter of fiscal 2009, while, +as a result of the Bioline Group acquisition, sales for our Life Science segment experienced a 30% +increase in sales during this period. Excluding the effect of the Bioline Group, sales of our Life +Science operating segment decreased by 2% during the fourth quarter of fiscal 2010 compared to the +fourth quarter of fiscal 2009. On an organic basis, which excludes the effects of currency +translation, sales for our European Diagnostics operating segment decreased 18% during the fourth +quarter, reflecting the ongoing +effects of significant competitive pressures in the C. difficile product family and the abrupt halt +of the novel A (H1N1) influenza outbreak in late 2009, similar to that experienced in the U.S. +- 24 - +Table of Contents +Fiscal Year +Net earnings for fiscal 2010 decreased 19% to $26,647 or $0.65 per diluted share from net earnings +for fiscal 2009 of $32,759 or $0.80 per diluted share. Net earnings for fiscal 2010 include +$1,240, or $0.03 per diluted share, of Bioline Group transaction costs. Results of operations for +fiscal 2010 compared to fiscal 2009 are discussed below. +Non-GAAP Information +The tables below provide information on net earnings, basic earnings per share and diluted earnings +per share, excluding the effect of transaction costs associated with the acquisition of the Bioline +Group, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting +Principles. We believe that this information is useful to those who read our financial statements +and evaluate our operating results because: +1. +These measures help to appropriately evaluate and compare the results of operations from +period to period by removing the impact of one-time transaction costs related to the +acquisition of the Bioline Group; and +2. +These measures are used by our management for various purposes, including evaluating +performance against incentive bonus achievement targets, comparing performance from period to +period in presentations to our Board of Directors, and as a basis for strategic planning and +forecasting. +2010 +2009 +2008 +Net Earnings - +U.S. GAAP basis +$ +26,647 +$ +32,759 +$ +30,202 +Transaction costs for Bioline Group acquisition +1,240 +— +— +Excluding Bioline transaction costs +$ +27,887 +$ +32,759 +$ +30,202 +Net Earnings per Basic Common Share - +U.S. GAAP basis +$ +0.66 +$ +0.81 +$ +0.75 +Transaction costs for Bioline Group acquisition +0.03 +— +— +Excluding Bioline transaction costs +$ +0.69 +$ +0.81 +$ +0.75 +Net Earnings per Diluted Common Share - +U.S. GAAP basis +$ +0.65 +$ +0.80 +$ +0.74 +Transaction costs for Bioline Group acquisition +0.03 +— +— +Excluding Bioline transaction costs +$ +0.68 +$ +0.80 +$ +0.74 +- 25 - +Table of Contents +Revenue Overview : +Our Diagnostics operating segments provide the largest share of our consolidated revenues, 81%, 84% +and 83% for fiscal 2010, 2009 and 2008, respectively. Sales from our four focus families ( C. +difficile , H. pylori , Foodborne and Upper Respiratory) comprised 69% of our Diagnostics operating +segments’ revenues during fiscal 2010. +Overall revenue change for fiscal 2010 for our Diagnostics operating segments was a negative 7%, +largely due to a relatively mild worldwide flu season in fiscal 2010 compared to 2009, including +the effects of the world-wide outbreak of novel A (H1N1) influenza, which primarily occurred during +fiscal 2009. Further contributing to the year-over-year sales decline was the fact that sales of +our C. difficile family of products continued to be negatively impacted by significant competitive +pressures and ongoing confusion surrounding the various testing methods, factors which we believe +will be countered by our recently-introduced illumi gene ® molecular C. difficile product. +Partially offsetting the effects of the declines in these products were sales increases in our H. +pylori and Foodborne family of products of 10% and 32%, respectively, compared to fiscal 2009. On +an organic basis, our European Diagnostic operating segment’s sales declined 7% in fiscal 2010, due +in large part to significant competitive pressures on sales of our C. difficile product. This +compared to 1% growth in the segment’s organic sales during fiscal 2009, which was driven by volume +increases in upper respiratory related to the novel A (H1N1) influenza outbreak. +C. difficile Products +During the third quarter of fiscal 2010, we launched our illumi gene ® molecular C. +difficile product in non-U.S. markets, and launch of the product into U.S. markets followed in the +fourth quarter of 2010, upon receiving FDA clearance. As a result, we currently have approximately +125 customer accounts and others that are evaluating our illumi gene ® molecular C. +difficile product. We expect sales of the product, which totaled $475 in 2010, to grow +significantly in fiscal 2011. +As a result of competitive pressures in this disease family over the last several years from new +competitive products, including molecular assays, during fiscal 2010 we experienced declines in the +sales of our C. difficile products. Sales of C. difficile products decreased 19% for both of our +Diagnostics operating segments during fiscal 2010, compared to a 1% decline in fiscal 2009. The C. +difficile market also continues to experience considerable confusion around the relative benefits +of the various test methods available (toxin testing, antigen testing and molecular testing). With +the launch of our molecular product, we believe we are in a unique position to offer a full line of +testing solutions to our clinical laboratory customers around the world to counter the competitive +pressures surrounding this market. +- 26 - +Table of Contents +Upper Respiratory Products +During fiscal 2010, upper respiratory sales for our Diagnostics operating segments decreased 31% +compared to fiscal 2009, following a 24% year-over-year increase from fiscal 2008 to fiscal 2009. +This dramatic sales fluctuation for this family of products was driven by the abrupt halt, in +December 2009, of the outbreak of the novel A (H1N1) influenza virus that began to spread across +countries in the northern hemisphere during the second half of fiscal 2009. The novel A (H1N1) +influenza outbreak created an early start to the 2009-2010 influenza season, resulting in increased +upper respiratory sales for influenza products in the third and fourth quarters of fiscal 2009. +This outbreak also created an increased interest in influenza testing in European markets where +rapid testing has not been traditionally performed, resulting in significant revenue growth in +fiscal 2009, which, similar to U.S. markets, has declined in fiscal 2010. At present, +significant seasonal influenza activity has yet to emerge, and we do +not expect a significant revenue contribution from these products in +fiscal 2011. +Foodborne Products +During fiscal 2010, sales of our foodborne products increased approximately 32% for our U.S. +Diagnostics operating segment and approximately 28% for our European Diagnostics operating segment +on an organic basis. As was experienced in fiscal 2009, the revenue increases in this product +family continues to reflect the volume growth in our new foodborne products launched over the last +few years (Immuno Card STAT! ® EHEC in fiscal 2007, and Premier TM CAMPY and +Immuno Card STAT! ® CAMPY in fiscal 2009). The volume growth from these new products has +more than doubled the global revenues for this disease family since fiscal 2007, and this is now +approaching a $14,000 product family. This disease family is expected to generate significant +sales growth in fiscal 2011. +H. pylori Products +During fiscal 2010, sales of our H. pylori products grew 15% for our U.S. Diagnostics operating +segment and 1% for our European Diagnostics operating segment on an organic basis, compared to the +year-over-year sales level increases these operating segments experienced in 2009 of 10% and 2%, +respectively. The increases for our U.S. Diagnostics operating segment continue to reflect the +benefits of our partnerships with managed care companies in promoting the health and economic +benefits of a test and treat strategy, and the fact that such a strategy is beginning to move +physician behavior away from serology-based testing to direct antigen testing. The modest levels +of growth for our European Diagnostics operating segment reflect the ongoing impact of pricing +pressures from competitive products in European markets. +Group Purchasing Organizations +In our U.S. Diagnostics operating segment, consolidation of the U.S. healthcare industry over the +last several years has led to the creation of group purchasing organizations (GPOs) that aggregate +buying power for hospital groups and put pressure on our selling prices. We have multi-year supply +agreements with several GPOs. During fiscal 2010, we experienced approximately $2,700 in +unfavorable price variance, as a result of these +agreements. However, these agreements help secure our products with these customers and have led +to new business. While in the near term this has negatively impacted gross profit, further +increases in volumes are expected from these contracts. +- 27 - +Table of Contents +Foreign Currency +Currency translation had virtually no impact on the fiscal 2010 consolidated sales results, +compared to resulting in $2,419 of currency translation losses in fiscal 2009 and $2,743 of gains +in fiscal 2008. +Life Science Operating Segment +Excluding the impact of our July 2010 acquisition of the Bioline Group, sales for our Life Science +operating segment increased 6% for fiscal 2010 compared to fiscal 2009; 15% including Bioline Group +sales. This increase largely reflects buying patterns of our two largest diagnostic manufacturing +customers, who accounted for 27% of the Life Science operating segment’s sales in fiscal 2010 +compared to 30% in fiscal 2009. Excluding the impact of Bioline Group transaction costs and the +Bioline Group’s results since the date of acquisition, we experienced a 5% improvement in the +operating income contribution of this operating segment in fiscal 2010 compared to fiscal 2009. +Significant Customers +Our U.S. Diagnostic operating segment’s sales through two distributors were 57% of the U.S. +Diagnostics operating segment’s total sales, or 36% of consolidated sales, for fiscal 2010. This +compares to fiscal 2009, in which sales through these distributors comprised 58% of U.S. +Diagnostics operating segment sales and 38% of consolidated sales. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +27% of the Life Science operating segment’s total sales for fiscal 2010 or 5% of our consolidated +sales for fiscal 2010, compared to 30% and 5% of fiscal 2009 Life Science operating segment and +consolidated sales, respectively. +Operating Segment Revenues : +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also +includes the contract development and manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +- 28 - +Table of Contents +Revenues for the Diagnostics operating segments, in the normal course of business, may be affected +by buying patterns of major distributors, seasonality and strength of certain diseases, and foreign +currency exchange rates. Revenues for the Life Science operating segment, in the normal course of +business, may be affected by the timing and nature of arrangements for contract services work, +which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, +as well as buying patterns of major customers. We believe that the overall breadth of our product +lines serves to reduce the variability in consolidated revenues. +Revenues for each of our operating segments are shown below. +2010 vs. +2009 vs. +2009 +2008 +2010 +2009 +2008 +Inc (Dec) +Inc (Dec) +U.S. Diagnostics +$ +92,020 +$ +98,970 +$ +88,419 +(7) +% +12 +% +European Diagnostics +24,041 +25,870 +27,980 +(7) +% +(8) +% +Life Science +26,939 +23,434 +23,240 +15 +% +1 +% +Consolidated +$ +143,000 +$ +148,274 +$ +139,639 +(4) +% +6 +% +International - +U.S. Diagnostics +$ +6,268 +$ +5,657 +$ +6,643 +11 +% +(15) +% +European Diagnostics +24,041 +25,870 +27,980 +(7) +% +(8) +% +Life Science +13,082 +9,911 +9,807 +32 +% +1 +% +Total +$ +43,391 +$ +41,438 +$ +44,430 +5 +% +(7) +% +% of total sales +30 +% +28 +% +32 +% +Gross Profit: +2010 vs. +2009 vs. +2009 +2008 +2010 +2009 +2008 +Inc (Dec) +Inc (Dec) +Gross Profit +$ +88,475 +$ +92,783 +$ +86,480 +(5) +% +7 +% +Gross Profit Margin +62 +% +63 +% +62 +% +(1) +% +1 +% +The relative stability in our gross profit margins from 2008 to 2010 reflects the ongoing +efficiencies from automation in our U.S. Diagnostics manufacturing plant and a continued favorable +mix of product sales between our higher margin manufactured products and the lower margin +third-party influenza and RSV products within the upper respiratory product family. Manufacturing +efficiency improvements at our Memphis, Tennessee facility also contributed to year-over-year +improvements in gross profit in fiscal 2009 compared to fiscal 2008. +GPO contracts also impacted our gross profit margins during fiscal 2010. These contracts provide +customers with favorable pricing based on purchase volume commitments of Meridian products. During +fiscal 2010, we +experienced approximately $2,700 in unfavorable price variance, as a result of these agreements. +However, these agreements help secure our products with these customers and have led to new +business. While in the near term this has negatively impacted gross profit, further increases in +volumes are expected from these contracts. +- 29 - +Table of Contents +Our overall operations consist of the sale of diagnostic test kits for various disease states and +in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, +proficiency panels, and contract research and development and contract manufacturing services. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +Operating Expenses: +General & +Administrative +Research & +Selling & +and Transaction +Total Operating +Development +Marketing +Costs +Expenses +2008 Expenses +$ +6,183 +$ +18,770 +$ +17,177 +$ +42,130 +% of Sales +4 +% +13 +% +12 +% +30 +% +Fiscal 2009 +Increases +(Decreases): +U.S. Diagnostics +2,331 +930 +(732 +) +2,529 +European Diagnostics +— +(321 +) +(20 +) +(341 +) +Life Science +(86 +) +(144 +) +(84 +) +(314 +) +2009 Expenses +$ +8,428 +$ +19,235 +$ +16,341 +$ +44,004 +% of Sales +6 +% +13 +% +11 +% +30 +% +% Increase (Decrease) +36 +% +2 +% +-5 +% +4 +% +Fiscal 2010 +Increases +(Decreases): +U.S. Diagnostics +(644 +) +(786 +) +1,370 +(60 +) +European Diagnostics +— +(205 +) +277 +72 +Life Science +786 +513 +2,022 +3,321 +2010 Expenses +$ +8,570 +$ +18,757 +$ +20,010 +$ +47,337 +% of Sales +6 +% +13 +% +14 +% +33 +% +% Increase (Decrease) +2 +% +-2 +% +22 +% +8 +% +Operating expenses for the U.S. Diagnostics operating segment decreased $60 for fiscal 2010 +compared to fiscal 2009 and increased $2,529 for fiscal 2009 compared to fiscal 2008. The overall +net decrease in fiscal 2010 reflected the combined effects of: (i) decreased research and +development spending as a result of completing the development of our molecular illumi gene ® C. difficile product, which was launched during fiscal 2010, and comparatively higher +clinical trial costs for certain immunoassay products in 2009; (ii) decreased sales and marketing +expenses due to lower C. difficile and Upper Respiratory product sales resulting in lower bonus and +commission costs for our sales organization; and (iii) increased general and administrative +expenses as a result of higher compensation costs, including stock based compensation costs related +to time-vested restricted stock granted in November 2009. The increase in fiscal 2009 is primarily +attributable to illumi gene ® C. difficile development costs, additional salaries and +benefits related to planned headcount additions and increased +marketing and clinical trial expenses related to new products. These increases were partially +offset by decreased stock based compensation and decreased corporate incentive bonus related to +earnings levels for fiscal 2009. +- 30 - +Table of Contents +Operating expenses for the European Diagnostics operating segment increased $72 for fiscal 2010 +compared to fiscal 2009 and decreased $341 for fiscal 2009 compared to fiscal 2008. The fiscal +2009 decrease was primarily attributable to currency fluctuations. +Operating expenses for the Life Science Operating segment increased $3,321 for fiscal 2010 compared +to fiscal 2009 and decreased $314 for fiscal 2009 compared to fiscal 2008. The increase in 2010 +resulted primarily from increased salaries and benefits related to filling open positions, +increased research and development resource allocations, the addition of the Bioline Group’s +operating expenses of $1,397 and the Bioline Group transaction costs, which were $1,240. The +fiscal 2009 decrease was primarily attributable to reduced salaries and benefits related to lower +headcount. +The amount of stock-based compensation expense reported for fiscal 2010, 2009 and 2008 was $1,866, +$1,092 and $1,772, respectively. During November 2007 and November 2008, we granted to certain +employees stock options and restricted stock that were contingent upon Meridian achieving a +specified net earnings level for each fiscal year. Because Meridian’s fiscal net earnings did not +reach the minimum level in 2008 or 2009, these awards were not earned. No stock-based compensation +has been recorded for these awards. Similarly, in November 2009, we granted restricted shares and +restricted units to certain employees, with half of each employee’s grant being time-vested +restricted shares or restricted units vesting in total in four years, and the remaining half being +subject to attainment of a specified earnings target for fiscal 2010. Dividends were paid on these +shares throughout fiscal 2010. While the 2010 earnings target was not met, on September 30, 2010, +the Compensation Committee of the Board of Directors chose to convert the performance-based +restricted shares to time-vested restricted shares vesting in total after four years in recognition +of the achievement in 2010 of several strategic initiatives that position the Company for future +growth. Expense totaling $472 was recorded in fiscal 2010 as a result of this conversion, and is +included in the total amount of stock-based compensation set forth above. +Operating Income +Operating income decreased 16% and increased 10% in fiscal 2010 and 2009, respectively, as a result +of the factors discussed above. +- 31 - +Table of Contents +Other Income and Expense +Interest income was $124, $456 and $1,533, for fiscal 2010, 2009 and 2008, respectively. The +decreases during fiscal 2010 and fiscal 2009 were primarily driven by lower interest yields due to +a higher concentration of investments in money market funds in fiscal 2010 and lower interest rates +in the current interest rate environment. Fiscal 2010 interest earnings were also impacted by the +use of cash to acquire the Bioline Group early in the fourth quarter. +Income Taxes +The effective rate for income taxes was 36%, 34% and 34% for fiscal 2010, 2009 and 2008, +respectively. The increase in the effective tax rate for fiscal 2010 was primarily attributable to +the non-deductible nature of Bioline Group transaction costs and the expiration of the Federal +research and experimentation tax credit effective December 31, 2009. +Impact of Inflation +To the extent feasible, we have consistently followed the practice of adjusting our prices to +reflect the impact of inflation on salaries and fringe benefits for employees and the cost of +purchased materials and services. Inflation and changing prices did not have a material adverse +impact our gross margin, revenue or operating income in fiscal 2010, 2009 or 2008. +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Our cash flow and financing requirements are determined by analyses of operating and capital +spending budgets, consideration of acquisition plans, and consideration of common share dividends. +We have historically maintained a credit facility to augment working capital requirements and to +respond quickly to acquisition opportunities. This credit facility has been supplemented by the +proceeds from a September 2005 common share offering, which during most of fiscal 2010, were +invested in a non-interest bearing bank deposit account, overnight repurchase agreements, +institutional money-market mutual funds and until their sale during the third quarter of fiscal +2010, tax-exempt auction-rate securities. We used $23,849 from our investment portfolio to +complete the acquisition of the Bioline Group. +We have an investment policy that guides the holdings of our investment portfolio. Our objectives +in managing the investment portfolio are to (i) preserve capital, (ii) provide sufficient liquidity +to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) +capture a market rate of return commensurate with market conditions and our policy’s investment +eligibility criteria. As a result of conditions in the financial markets, we have chosen to keep +the maturity of our investment portfolio very short. As we look forward, we will continue to +manage the holdings of our investment portfolio with preservation of capital being the primary +objective. +- 32 - +Table of Contents +During the third quarter of fiscal 2010, we sold all of our investment in student loan auction-rate +securities to UBS AG via our Auction Rate Security Rights, and received par value of $7,275, plus +accrued interest. +Except as otherwise described herein, we do not expect current conditions in the financial markets, +or overall economic conditions to have a significant impact on our liquidity needs, financial +condition, or results of operations. We intend to continue to fund our working capital +requirements and dividends from current cash flows from operating activities. We also have +additional sources of liquidity through our investment portfolio and $30,000 bank credit facility, +if needed. To date, we have not experienced any significant deterioration in the aging of our +customer accounts receivable nor in our vendors’ ability to supply raw materials and services and +extend normal credit terms. Our liquidity needs may change if overall economic conditions worsen +and/or liquidity and credit within the financial markets remains tight for an extended period of +time, and such conditions impact the collectability of our customer accounts receivable, or impact +credit terms with our vendors, or disrupt the supply of raw materials and services. +Fluctuations in overall stock market valuations may raise questions as to the potential impairment +of goodwill and other long-lived assets. Our annual goodwill impairment review takes place as of +June 30 th each year. There have been no impairments from these annual reviews. As of +November 1, 2010, our stock price was $22.69 per share, compared to our book value per share of +$3.38 as of September 30, 2010. This relationship, stock price trading at 6.7x book value, is an +indicator that the fluctuation in overall stock market valuations and its impact on our stock price +has not been a triggering event for impairment of our goodwill and other long-lived assets. +Net cash provided by operating activities decreased 4% to $31,213 in fiscal 2010. This decrease +was primarily attributable to lower sales and earnings levels, timing of payments with suppliers +and the effect of the Bioline Group’s operations. +Net cash used for investing activities was $17,812 for fiscal 2010 compared to $3,280 for fiscal +2009. This increase was primarily attributable to the acquisition of the Bioline Group and +increased purchases of property, plant and equipment in fiscal 2010, partially offset by cash +received from the third quarter sale of our student loan auction-rate securities. +Net cash used for financing activities was $29,190 for fiscal 2010 compared to $24,636 for fiscal +2009. This increase was primarily attributable to a 14% increase in dividend payments and a +decrease in proceeds and tax benefits from the exercise of stock options. Dividend payments in +fiscal 2010 reflect increased dividend rates and common shares outstanding related to stock option +exercises. +Net cash flows from operating activities are anticipated to fund working capital requirements and +dividends during the next twelve months. +- 33 - +Table of Contents +Capital Resources +We have a $30,000 credit facility with a commercial bank which expires September 15, 2012. As of +November 29, 2010, there were no borrowings outstanding under this facility. We did not have any +borrowing under this facility during fiscal 2010 or 2009. +Our capital expenditures are estimated to range between approximately $6,000 to $9,500 for +fiscal 2011, with the actual amount depending upon actual operating results and the phasing of +certain projects. Such expenditures may be funded with cash and equivalents on hand, operating +cash flows, and/or availability under the $30,000 credit facility discussed above. Capital +expenditures relate to manufacturing and other equipment of a normal and recurring nature, as +well as costs associated with production line automation in Cincinnati, facilities expansions in +Cincinnati and Memphis, computer system and software purchases for the Bioline Group, and +instrumentation to support the illumi gene ® product launch. +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2010: +Less than +More than +Total +1 Year +1-3 Years +4-5 Years +5 Years +Operating leases (1) +$ +2,385 +$ +935 +$ +1,396 +$ +54 +$ +— +Purchase obligations (2) +13,375 +13,004 +371 +— +— +Uncertain income tax +positions liability and +interest (3) +725 +725 +— +— +— +Total +$ +16,485 +$ +14,664 +$ +1,767 +$ +54 +$ +— +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in Cincinnati, Boston, +Florida, Australia, Belgium, France, Holland, Germany and the U.K.; (ii) automobiles for use by the +diagnostic direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile +machines and copier machines across all business units, under operating lease agreements that expire at +various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory and service +items. These contractual commitments are not in excess of expected production requirements over the next +twelve months. +(3) +As of September 30, 2010, our liabilities for uncertain tax positions and related interest and +penalties were $496 and $229, respectively. Due to inherent uncertainties in the timing of settlement of +tax positions, we are unable to estimate the timing of the effective settlement of these obligations. +- 34 - +Table of Contents +Other Commitments and Off-balance Sheet Arrangements : +License Agreements +Meridian has entered into various license agreements that require payment of royalties based on a +specified percentage of sales of related products (1% to 14%). Meridian expects that payments +under these agreements will amount to approximately $2,400 in fiscal 2011. These royalty payments +primarily relate to the U.S. Diagnostics operating segment. +Meridian entered into a license agreement in October 2006 with a third party that provides rights +to a molecular technology for infectious disease testing in the United States, Europe and other +geographic markets. The agreement, as amended during fiscal 2009, calls for remaining payments of +up to approximately $3,200 based on the achievement of certain product development milestones and +on-going royalties once products are available for commercial sale. Payments made during product +development are expected to occur over a five-year period, which began in fiscal 2007. Since +entering into this agreement, we have made payments totaling $392. +Derivative financial instruments +Prior to February 1, 2009, we managed exchange rate risk related to forecasted intercompany sales +denominated in the Euro currency through the use of forward exchange contracts. We designated such +forward contracts as cash flow hedges. As such, the effective portion of the gain or loss on the +derivative instrument was reported as a component of other comprehensive income and reclassified +into earnings in the same period or periods during which the hedged transaction affected earnings. +As of September 30, 2010, we had no such contracts outstanding. +During January 2009, € 500 notional amount of these contracts were settled in accordance with their +original maturities. The realized gain on these contracts was $32. Also during January 2009, we +accelerated the settlement of the remaining € 2,700 notional amount of forward exchange contracts +that were originally scheduled to mature between February 27, 2009 and December 31, 2009. These +transactions resulted in a gain of approximately $140 that was recorded in the second quarter of +fiscal 2009. We unwound these forward exchange contracts after completing a strategic review of +our foreign currency exposures. +Off-balance sheet arrangements +We have no off-balance sheet arrangements. +- 35 - +Table of Contents +Market Risk Exposure : +Foreign Currency Risk +We have market risk exposure related to foreign currency transactions. We are exposed to foreign +currency risk related to our European distribution operations where the billing currency is the +Euro for most of our customers +in these markets. We also are exposed to foreign currency risk related to the supply of certain +diagnostic test kits by manufacturers located in Germany and Spain. These foreign currency risks +are opposite one another, providing a natural hedge with respect to consolidated gross profit and +operating income. Additionally, as a result of the recent Bioline Group acquisition, we are +exposed to foreign currency risks related to the Bioline Group’s operations in Australia +(Australian dollar), Germany (Euro), and the U.K. (British pound). Assessing foreign currency +exposures is a component of our overall ongoing risk management process, with such currency risks +managed as we believe appropriate. +Concentration of Customers/Products Risk +Our U.S. Diagnostic operating segment’s sales through two distributors were 57% of the U.S. +Diagnostics operating segment’s total sales or 36% of consolidated sales for fiscal 2010. Three +internally developed products, Premier TM Platinum HpSA PLUS, Premier TM Toxins +A&B, and Immuno Card ® Toxins A&B, accounted for 33% of our U.S. Diagnostics operating +segment’s third-party sales during fiscal 2010. These same three products accounted for 38% of our +European Diagnostics operating segment’s third-party sales and 28% of our consolidated sales for +fiscal 2010. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +27% of the Life Science operating segment’s total sales for fiscal 2010 or 5% of our consolidated +sales for fiscal 2010. Our Life Science operating segment has four other significant customers who +purchase antigens, antibodies and reagents, which together comprised 13% of the operating segment’s +total sales for fiscal 2010. +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 require management to make judgments about estimates and assumptions that +affect the reported amounts 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 +Our revenues are derived primarily from product sales. Revenue is generally recognized when +product is shipped and title has passed to the buyer. Revenue for the U.S. Diagnostics operating +segment is reduced at the date of sale for estimated rebates 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 our products. We estimate rebate accruals +based on data provided by these distributors, estimates of inventories of +our products held by these distributors, historical statistics, current trends and other factors. +Changes to these rebate accruals are recorded in the period that they become known. +- 36 - +Table of Contents +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work followed +by larger-scale manufacturing (both contract research and development services and contract +manufacturing services). Revenue is recognized based on the nature of the arrangements, with each +of the multiple deliverables in a given arrangement having distinct and separate customer pricing. +Pricing is often subject to a competitive bidding process. Contract research and development +services may be performed on a “time and materials” basis or “fixed fee” basis. For “time and +materials” arrangements, revenue is recognized as services are performed and billed. For “fixed +fee” arrangements, revenue is recognized upon completion and acceptance by the customer. For +contract manufacturing services, revenue is generally recognized upon delivery of product and +acceptance by the customer. In some cases, customers may request that we store on their behalf +clinical grade biologicals that we produce under contract manufacturing agreements. These cases +arise when customers do not have clinical grade storage facilities or do not want to risk +contamination during transport. For such cases, revenue may be recognized on a bill-and-hold basis +pursuant to the satisfaction of criteria in SEC Staff Accounting Bulletins Nos. 101 and 104 related +to bill-and-hold revenue recognition. +Inventories +Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, +first-out basis. We establish 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 these reserves based on assumptions about future demand and market conditions. +If actual demand and market conditions were to be less favorable than such estimates, additional +inventory write-downs would be required and recorded in the period known. Such adjustments would +negatively affect gross profit margin and overall results of operations. +Intangible Assets +Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles +include customer lists, supply agreements, manufacturing technologies, patents, licenses and trade +names. All of Meridian’s identifiable intangibles have finite lives. +Goodwill is subject to an annual impairment review (or more frequently if impairment indicators +arise) by applying a fair-value based test. There have been no impairments from these analyses. +Identifiable intangibles with finite lives are subject to impairment testing. 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 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. There were no events or +circumstances in fiscal 2010, 2009 or 2008 indicating that the carrying value of such assets may +not be recoverable. +- 37 - +Table of Contents +Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent +upon the future cash flows of the related acquired businesses and assets. Management is required +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, impairment of intangible assets could +take place. If impairment were to occur, this would negatively affect overall results of +operations. +Income Taxes +Our 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 +purposes and income for tax purposes. We prepare estimates of permanent and temporary differences +between income for financial reporting purposes and income for tax purposes. These differences are +adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth +quarters of the current fiscal year for the preceding fiscal year’s estimates. +Our 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 assets considered realizable could be reduced +in future years if estimates of future taxable income during the carryforward period are reduced. +Undistributed earnings in our Italian subsidiary are considered by management to be permanently +re-invested in such subsidiary. Consequently, U.S. deferred tax liabilities on such earnings have +not been recorded. We believe that such U.S. taxes would be largely offset by foreign tax credits +for taxes paid locally in Italy. +- 38 - +Table of Contents +From time to time, our tax returns in federal, state and foreign jurisdictions are examined by the +applicable tax authorities. To the extent that adjustments result from the completion of these +examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the +period known. We believe that the results of any tax authority examinations would not have a +significant adverse impact on financial condition or results of operation. +Recent Accounting Pronouncements : +In October 2009, the Financial Accounting Standards Board issued ASU 2009-13, “Multiple-Deliverable +Revenue Arrangements.” This amended guidance enables companies to account for products or services +(deliverables) separately rather than as a combined unit in certain circumstances. Accounting +Standards Codification Subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements , +establishes the accounting and reporting guidance for arrangements under which the vendor will +perform multiple revenue-generating activities. The Subtopic addresses how to separate deliverables +and how to measure and allocate arrangement consideration to one or more units of accounting. The +amended guidance will be effective prospectively for revenue arrangements entered into or +materially modified in fiscal years beginning on or after June 15, 2010 or our fiscal year 2011. We +do not expect any impact on our consolidated results of operations, cash flows or financial +position when this amended guidance is adopted. +Additionally, see Note 1 (n) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +- 39 - +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +41 +Report of Independent Registered Public Accounting Firm +42 +Consolidated Statements of Operations for the years ended September 30, 2010, 2009 and 2008 +44 +Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009 and 2008 +45 +Consolidated Balance Sheets as of September 30, 2010 and 2009 +46 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2010, 2009 and 2008 +48 +Notes to Consolidated Financial Statements +49 +Schedule No. II — Valuation and Qualifying Accounts for the years ended September 30, 2010, 2009 +and 2008 +77 +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. +- 40 - +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles, and that receipts and expenditures of the +Company are being made only in accordance with authorizations of management and directors of the +Company; and (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and may not prevent or detect misstatements. Also, projections of any +evaluation of effectiveness to future periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree of compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and criteria in Internal Control +— Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2010. +The Company’s assessment of and conclusion on the effectiveness of its internal control over +financial reporting did not include the internal controls of the Bioline Group, which was acquired +on July 20, 2010 and included in the 2010 consolidated financial statements. This acquired +company’s total assets and revenues constituted 19% and 1%, respectively, of the Company’s related +consolidated financial statement amounts as of and for the year ended September 30, 2010. +The Company’s independent registered public accounting firm has issued an attestation report on the +registrant’s internal control over financial reporting. +/s/ John A. Kraeutler +/s/ Melissa A. Lueke +John A. Kraeutler +Melissa A. Lueke +Chief Executive Officer +Executive Vice President and +November 29, 2010 +Chief Financial Officer +November 29, 2010 +- 41 - +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Shareholders +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio +corporation) and subsidiaries as of September 30, 2010 and 2009, and the related consolidated +statements of operations, shareholders’ equity, and cash flows for each of the three years in the +period ended September 30, 2010. Our audits of the basic financial statements included the +financial statement schedule listed in the index appearing under Schedule No. II. We also have +audited Meridian Bioscience, Inc.’s internal control over financial reporting as of September 30, +2010, based on criteria established in Internal Control—Integrated Framework issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO). Meridian Bioscience, +Inc.’s management is responsible for these financial statements and financial statement schedule, +for maintaining effective internal control over financial reporting, and for its assessment of the +effectiveness of internal control over financial reporting, included in the accompanying +Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express +an opinion on these financial statements and financial statement schedule and an opinion on +Meridian Bioscience, Inc.’s internal control over financial reporting based on our audits. Our +audit of, and opinion on, Meridian Bioscience, Inc.’s internal control over financial reporting +does not include internal control over financial reporting of the Bioline Group, a group of wholly +owned subsidiaries, whose financial statements reflect total assets and revenues constituting 19% +and 1%, respectively, of the related consolidated financial statement amounts as of and for the +year ended September 30, 2010. As indicated in Managements Report on Internal Control Over +Financial Reporting, the Bioline Group was acquired on July 20, 2010 and therefore, management’s +assertion on the effectiveness of Meridian Bioscience, Inc.’s internal control over financial +reporting excluded internal control over financial reporting of the Bioline Group. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight +Board (United States). Those standards require that we plan and perform the audits to obtain +reasonable assurance about whether the financial statements are free of material misstatement and +whether effective internal control over financial reporting was maintained in all material +respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining +an understanding of internal control over financial reporting, assessing the risk that a material +weakness exists, and testing and evaluating the design and operating effectiveness of internal +control based on the assessed risk. Our audits also included performing such other procedures as we +considered necessary in the circumstances. We believe that our audits provide a reasonable basis +for our opinions. +- 42 - +Table of Contents +A company’s internal control over financial reporting is a process designed to provide reasonable +assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in accordance with generally accepted accounting principles. A +company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; (2) provide reasonable assurance that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of the company +are being made only in accordance with authorizations of management and directors of the company; +and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized +acquisition, use, or disposition of the company’s assets that could have a material effect on the +financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are +subject to the risk that controls may become inadequate because of changes in conditions, or that +the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the consolidated financial statements referred to above present fairly, in all +material respects, the financial position of Meridian Bioscience, Inc. as of September 30, 2010 and +2009, and the results of its operations and its cash flows for each of the three years in the +period ended September 30, 2010 in conformity with accounting principles generally accepted in the +United States of America. Also in our opinion, the related financial statement schedule, when +considered in relation to the basic financial statements taken as a whole, presents fairly, in all +material respects, the information set forth therein. +In our opinion, Meridian Bioscience, Inc. and subsidiaries, maintained, in all material aspects +internal control over financial reporting as of September 30, 2010, based on criteria established +in Internal Control—Integrated Framework issued by COSO. +/s/ GRANT THORNTON LLP +Cincinnati, Ohio +November 29, 2010 +- 43 - +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share data) +Meridian +Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2010 +2009 +2008 +Net Sales +$ +143,000 +$ +148,274 +$ +139,639 +Cost of Sales +54,525 +55,491 +53,159 +Gross Profit +88,475 +92,783 +86,480 +Operating Expenses: +Research and development +8,570 +8,428 +6,183 +Selling and marketing +18,757 +19,235 +18,770 +General and administrative +18,770 +16,341 +17,177 +Bioline Group transaction costs +1,240 +— +— +Total operating expenses +47,337 +44,004 +42,130 +Operating Income +41,138 +48,779 +44,350 +Other Income: +Interest income +124 +456 +1,533 +Other, net +138 +88 +109 +Total other income +262 +544 +1,642 +Earnings Before Income Taxes +41,400 +49,323 +45,992 +Income Tax Provision +14,753 +16,564 +15,790 +Net Earnings +$ +26,647 +$ +32,759 +$ +30,202 +Earnings Per Share Data: +Basic earnings per common share +$ +0.66 +$ +0.81 +$ +0.75 +Diluted earnings per common share +$ +0.65 +$ +0.80 +$ +0.74 +Common shares used for basic earnings +per common share +40,515 +40,390 +40,093 +Effect of dilutive stock options +634 +720 +936 +Common shares used for diluted earnings +per common share +41,149 +41,110 +41,029 +Dividends declared per common share +$ +0.74 +$ +0.65 +$ +0.53 +Anti-dilutive Securities: +Common share options +217 +138 +67 +The accompanying notes are an integral part of these consolidated financial statements. +- 44 - +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2010 +2009 +2008 +Cash Flows From Operating Activities +Net earnings +$ +26,647 +$ +32,759 +$ +30,202 +Non-cash items: +Depreciation of property, plant and equipment +3,104 +2,781 +2,857 +Amortization of intangible assets +1,581 +1,579 +1,612 +Stock based compensation +1,866 +1,092 +1,772 +Deferred income taxes +12 +(500 +) +976 +Loss on disposition of fixed assets +26 +109 +9 +Change in current assets, net of acquisition +3,678 +(5,353 +) +(5,147 +) +Change in current liabilities, net of acquisition +(5,775 +) +269 +(2,967 +) +Other, net +74 +(244 +) +569 +Net cash provided by operating activities +31,213 +32,492 +29,883 +Cash Flows From Investing Activities +Acquisition earnout payments +— +(7 +) +(157 +) +Purchases of property, plant and equipment +(4,563 +) +(3,643 +) +(4,219 +) +Proceeds from dispositions of property, plant and +equipment +— +5 +4 +Purchases of investments +— +— +(7,750 +) +Proceeds from sales and calls of short-term investments +7,275 +475 +— +Acquisition of Bioline Group, net of cash received +(20,404 +) +— +— +Purchases of intangibles and other assets +(120 +) +(110 +) +(1,108 +) +Net cash used for investing activities +(17,812 +) +(3,280 +) +(13,230 +) +Cash Flows From Financing Activities +Dividends paid +(29,985 +) +(26,260 +) +(21,256 +) +Proceeds and tax benefits from exercises of stock options +795 +1,624 +4,563 +Net cash used for financing activities +(29,190 +) +(24,636 +) +(16,693 +) +Effect of Exchange Rate Changes on Cash and Equivalents +(362 +) +157 +(63 +) +Net Increase (Decrease) in Cash and Equivalents +(16,151 +) +4,733 +(103 +) +Cash and Equivalents at Beginning of Period +54,030 +49,297 +49,400 +Cash and Equivalents at End of Period +$ +37,879 +$ +54,030 +$ +49,297 +Supplemental Cash Flow Information +Cash paid for income taxes +$ +16,036 +$ +17,472 +$ +15,365 +The accompanying notes are an integral part of these consolidated financial statements. +- 45 - +Table of Contents +CONSOLIDATED BALANCE SHEETS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2010 +2009 +Assets +Current Assets: +Cash and equivalents +$ +37,879 +$ +54,030 +Investment in auction-rate securities and rights +— +7,285 +Accounts receivable, less allowances of $241 in 2010 and $247 in 2009 +22,064 +26,981 +Inventories +27,965 +23,284 +Prepaid expenses and other current assets +4,277 +3,632 +Deferred income taxes +1,835 +1,935 +Total current assets +94,020 +117,147 +Property, Plant and Equipment, at Cost: +Land +991 +894 +Buildings and improvements +20,670 +19,718 +Machinery, equipment and furniture +31,945 +30,997 +Construction in progress +2,800 +1,586 +Subtotal +56,406 +53,195 +Less: accumulated depreciation and amortization +33,689 +32,721 +Net property, plant and equipment +22,717 +20,474 +Other Assets: +Goodwill +23,482 +9,866 +Other intangible assets, net +13,327 +7,317 +Restricted cash +1,000 +1,000 +Other assets +239 +193 +Total other assets +38,048 +18,376 +Total assets +$ +154,785 +$ +155,997 +The accompanying notes are an integral part of these consolidated financial statements. +- 46 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2010 +2009 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +4,466 +$ +6,901 +Accrued employee compensation costs +3,451 +5,338 +Other accrued expenses +5,421 +3,803 +Income taxes payable +809 +710 +Total current liabilities +14,147 +16,752 +Deferred Income Taxes +3,277 +1,340 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 40,654,286 +and 40,493,313 issued +— +— +Additional paid-in capital +94,529 +91,668 +Retained earnings +42,177 +45,515 +Accumulated other comprehensive income +655 +722 +Total shareholders’ equity +137,361 +137,905 +Total liabilities and shareholders’ equity +$ +154,785 +$ +155,997 +The accompanying notes are an integral part of these consolidated financial statements. +- 47 - +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +(dollars and shares in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Accum Other +Common +Additional +Comp +Comp +Shares +Paid-in +Retained +Income +Income +Issued +Capital +Earnings +(Loss) +(Loss) +Total +Balance at September 30, 2007 +39,847 +$ +82,209 +$ +30,375 +$ +364 +$ +112,948 +Adoption of FASB Interpretation No. 48 +— +— +(305 +) +— +(305 +) +Cash dividends paid — $0.53 per share +— +— +(21,256 +) +— +(21,256 +) +Exercise of stock options +467 +5,126 +— +— +5,126 +Stock compensation expense +— +1,772 +— +— +1,772 +Comprehensive income: +Net earnings +— +— +30,202 +$ +30,202 +30,202 +Hedging activity, net +— +— +— +273 +273 +273 +Unrealized loss on investments +— +— +— +(270 +) +(270 +) +(270 +) +Other comprehensive income taxes +— +— +— +(4 +) +(4 +) +(4 +) +Foreign currency translation adjustment +— +— +— +3 +3 +3 +Comprehensive income +$ +30,204 +Balance at September 30, 2008 +40,314 +89,107 +39,016 +366 +128,489 +Cash dividends paid — $0.65 per share +— +(26,260 +) +— +(26,260 +) +Exercise of stock options +179 +1,476 +— +— +1,476 +Stock compensation expense +— +1,092 +— +— +1,092 +Cost of S-8 registration statement +— +(7 +) +— +— +(7 +) +Comprehensive income: +Net earnings +— +— +32,759 +$ +32,759 +32,759 +Hedging activity, net +— +— +— +(3 +) +(3 +) +(3 +) +Transfer of investments to trading status +— +— +— +270 +270 +270 +Other comprehensive income taxes +— +— +— +(190 +) +(190 +) +(190 +) +Foreign currency translation adjustment +— +— +— +279 +279 +279 +Comprehensive income +$ +33,115 +Balance at September 30, 2009 +40,493 +91,668 +45,515 +722 +137,905 +Cash dividends paid — $0.74 per share +— +(29,985 +) +— +(29,985 +) +Exercise of stock options +67 +995 +— +— +995 +Issuance of restricted shares, net of +forfeitures +94 +— +— +— +— +Stock compensation expense +— +1,866 +— +— +1,866 +Comprehensive income: +Net earnings +— +— +26,647 +$ +26,647 +26,647 +Other comprehensive income taxes +— +— +— +36 +36 +36 +Foreign currency translation adjustment +— +— +— +(103 +) +(103 +) +(103 +) +Comprehensive income +$ +26,580 +Balance at September 30, 2010 +40,654 +$ +94,529 +$ +42,177 +$ +655 +$ +137,361 +The accompanying notes are an integral part of these consolidated financial statements. +- 48 - +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(dollars and shares in thousands, except per share data) +(1) Summary of Significant Accounting Policies +(a) +Nature of Business — Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, +nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other +biologicals for use by biopharmaceutical and biotechnology companies engaged in research for +new drugs and vaccines. +(b) +Principles of Consolidation — The consolidated financial statements include the accounts of +Meridian Bioscience, Inc. and its subsidiaries. All intercompany accounts and transactions +have been eliminated. Unless the context requires otherwise, references to “Meridian,” “we, “ +“us, “ “our “ or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +(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 1 (f), 1 (g), 1 (h), 1 (i), 1 (k), 1 (l), 7 and 8 +(b). +(d) +Foreign Currency Translation — Assets and liabilities of foreign operations are translated +using year-end exchange rates with gains or losses resulting from translation included as a +separate component of accumulated other comprehensive income or loss. Revenues and expenses +are translated using exchange rates prevailing during the year. We also recognize foreign +currency transaction gains and losses on certain assets and liabilities that are denominated +in the Australian dollar, British pound and Euro currencies. These gains and losses are +included in other income and expense in the accompanying consolidated statements of +operations. +- 49 - +Table of Contents +(e) +Cash, Cash Equivalents and Investments — The primary objectives of our investment activities +are to preserve capital and provide sufficient liquidity to meet operating requirements and +fund strategic initiatives such as acquisitions. We maintain a written investment policy that +governs the management of our investments in fixed income securities. This policy, among +other things, provides that we may purchase +only high credit-quality securities, that have short-term ratings of at least A-1 and P-1 or +better, and long-term ratings of at least A-2 and A or better, by Moody’s and Standard & Poor’s, +respectively, at the time of purchase. We consider short-term investments with original +maturities of 90 days or less to be cash equivalents, including overnight repurchase agreements +and institutional money market funds. At times our investments of cash and equivalents with +various high credit quality financial institutions may be in excess of the Federal Deposit +Insurance (FDIC) insurance limit. +Our investment portfolio includes the following components: +September 30, 2010 +September 30, 2009 +Cash and +Cash and +Equivalents +Other +Equivalents +Other +Taxable investments - +Repurchase agreements +$ +14,862 +$ +— +$ +— +$ +— +Money market funds +10,249 +— +29,032 +— +Tax-exempt investments - +Money market funds +— +— +10,383 +— +Student loan +auction-rate securities +— +— +— +7,285 +Cash on hand - +Restricted +— +1,000 +— +1,000 +Unrestricted +12,768 +— +14,615 +— +Total +$ +37,879 +$ +1,000 +$ +54,030 +$ +8,285 +Our student loan auction-rate securities (“SLARS”) were purchased through UBS Financial +Services, Inc. During November 2008, we accepted an offer from UBS, AG (UBS) of Auction Rate +Security Rights. These rights permitted us to require UBS between June 30, 2010 and July 2, +2012 (the exercise period) to purchase our auction-rate securities at par value. In exchange, +UBS was granted the right, at their sole discretion, to sell or otherwise dispose of our +auction-rate security investments until July 2, 2012 as long as we received a payment of par +value upon the sale or disposition. In addition, the rights permitted us to establish a demand +revolving credit line in an amount equal to the par value of the securities at a net no cost. +We were still able to sell the auction-rate securities on our own, but in such a circumstance, +we would have lost the par value support from UBS. +Upon executing the settlement agreement with UBS, we recognized the Auction Rate Security Rights +as a stand-alone financial instrument and elected the fair value option. We also transferred +the SLARS from the available-for-sale classification to the trading classification. Upon +transfer to the trading classification, $270 in unrealized losses as of September 30, 2008, were +transferred from accumulated other comprehensive income to other income and expense. +Adjustments to the fair value of the SLARS and Auction Rate Security Rights were recorded to +other income and expense in each accounting period. During May and June 2010, all of our SLARS +outstanding were either purchased by UBS, or put back to UBS via the Auction Rate Security +Rights. We received par value plus accrued interest on all of our SLARS. As of September 30, +2009, the fair value of the student loan auction-rate securities was $6,708 compared to a par +value of $7,275. As of September 30, 2009, the Auction Rate Security Rights had a fair value of +$577 and, along with the SLARS, were included in current assets in the accompanying consolidated +balance sheet based on the earliest exercise date of June 30, 2010. +- 50 - +Table of Contents +(f) +Inventories — Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO) for substantially all of our inventories. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf +life may expire before sale to customers, and other identified exposures. Such reserves were +$1,130 and $1,025 at September 30, 2010 and 2009, respectively. We estimate these reserves +based on assumptions about future demand and market conditions. If actual demand and market +conditions were to be less favorable than such estimates, additional inventory write-downs would +be required and recorded in the period known. Such adjustments would negatively affect gross +profit margin and overall results of operations. +(g) +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 are removed from the accounts and the resulting gain or loss is +reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation is +computed on the straight-line method in amounts sufficient to write-off the cost over the +estimated useful lives as follows: +Buildings and improvements — 18 to 40 years +Machinery, equipment and furniture — 3 to 10 years +Computer equipment and software — 3 to 5 years +(h) +Intangible Assets — Goodwill and other intangible assets with indefinite lives are subject to +an annual impairment review (or more frequently if impairment indicators arise) by applying a +fair-value based test. Fair value is determined via a market approach from three +perspectives. These three perspectives are (i) an allocation of our actual enterprise value +(defined as market capitalization plus debt less cash and cash equivalents) to each of the +reporting units based on revenue and EBITDA contributions to consolidated results; (ii) an +allocation of implied enterprise values to each of our reporting units based on average and +median EBITDA multiples from a comparable group of companies; and (iii) a review of enterprise +value to EBITDA multiples from recent industry merger and acquisition transactions. We +perform our annual impairment review as of June 30, the end of our third fiscal quarter. We +have no intangible assets with indefinite lives other than goodwill. There have been no +impairments from these analyses for fiscal 2010, 2009 or 2008. +- 51 - +Table of Contents +During fiscal 2010, the change in goodwill was an increase of $13,616. This change resulted +solely from the July 2010 acquisition of the Bioline Group (Life Science operating segment). +See Note 2. During fiscal 2009, the change in goodwill was an increase of $5. This change +consisted of an increase related to the OEM Concepts earnout obligation for calendar 2008 (Life +Science operating segment). +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2010 and 2009 is as follows. +Wtd Avg +2010 +2009 +Amort +Gross +Gross +Period +Carrying +Accum. +Carrying +Accum. +As of September 30, +(Yrs) +Value +Amort. +Value +Amort. +Manufacturing technologies, core +products and cell lines +13 +$ +11,644 +$ +7,693 +$ +10,755 +$ +7,672 +Trademarks, licenses and patents +10 +3,547 +997 +2,772 +1,974 +Customer lists and supply +agreements +11 +12,537 +5,816 +11,040 +7,604 +Non-compete agreements +1 +126 +21 +— +— +$ +27,854 +$ +14,527 +$ +24,567 +$ +17,250 +The actual aggregate amortization expense for these intangible assets for fiscal 2010, 2009 and +2008 was $1,581, $1,579 and $1,612, respectively. The estimated aggregate amortization expense +for these intangible assets for each of the five succeeding fiscal years is as follows: fiscal +2011 — $2,304, fiscal 2012 — $2,059, fiscal 2013 — $2,058, fiscal 2014 — $1,630 and fiscal 2015 +— $1,374. +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 asset’s future cash flows to its carrying value. If +impairment has occurred, it is measured by a fair-value based test. +Our ability to recover our intangible assets, both identifiable intangibles and goodwill, is +dependent upon the future cash flows of the related acquired businesses and assets. We 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 and fixed assets, we also make judgments and assumptions +regarding useful lives. +We consider 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. +- 52 - +Table of Contents +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. +(i) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the U.S. Diagnostics operating segment is reduced +at the date of sale for estimated rebates that will be claimed by customers. Management +estimates accruals for rebate agreements based on data provided by these customers, estimates +of inventories of our products held by these customers, historical statistics, current trends, +and other factors. Changes to the accruals are recorded in the period that they become known. +Our rebate accruals were $5,273 at September 30, 2010 and $4,776 at September 30, 2009. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work +followed by larger-scale manufacturing (both contract research and development services and +contract manufacturing services). Revenue is recognized based on the nature of the +arrangements, with each of the multiple deliverables in a given arrangement having distinct and +separate customer pricing. Pricing is often subject to a competitive bidding process. Contract +research and development services may be performed on a “time and materials” basis or “fixed +fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and +acceptance by the customer. For contract manufacturing services, revenue is generally +recognized upon delivery of product and acceptance by the customer. In some cases, customers +may request that we store on their behalf, clinical grade biologicals that we produce under +contract manufacturing agreements. These cases arise when customers do not have clinical grade +storage facilities or do not want to risk contamination during transport. For such cases, +revenue may be recognized on a bill-and-hold basis pursuant to the satisfaction of criteria in +SEC Staff Accounting Bulletins Nos. 101 and 104 related to bill-and-hold revenue recognition. +Trade accounts receivable are recorded in the accompanying consolidated balance sheets at +invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents our estimate of probable credit losses and is based on historical write-off +experience. The allowance for doubtful accounts and related metrics, such as days’ sales +outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed +individually for collectibility. Customer invoices are charged off against the allowance when +we believe it is probable the invoices will not be paid. +- 53 - +Table of Contents +(j) +Research and Development Costs — Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, costs for +development of instrumentation equipment, costs for clinical trials, and costs for facilities +and equipment. +(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. We prepare estimates of permanent +and temporary differences between income for financial reporting purposes and income for tax +purposes. These differences are adjusted to actual upon filing of our tax returns, typically +occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal +year’s estimates. +We account for uncertain tax positions using a benefit recognition model with a two-step +approach: (i) a more-likely-than-not recognition criterion; and (ii) a measurement attribute +that measures the position as the largest amount of tax benefit that is greater than 50% likely +of being ultimately realized upon ultimate settlement. If it is not more likely than not that +the benefit will be sustained on its technical merits, no benefit is recorded. We recognize +accrued interest related to unrecognized tax benefits as a portion of our income tax provision +in the consolidated statements of operations. See Note 7. +(l) +Stock-based Compensation — We recognize compensation expense for all share-based awards made +to employees, based upon the fair value of the share-based award on the date of the grant. We +measure and recognize compensation expense based on grant-date fair value for stock option and +restricted stock awards granted after July 1, 2005, and the non-vested portions of stock +option awards granted prior to July 1, 2005. See Note 8(b). +(m) +Comprehensive Income (Loss) — Comprehensive income (loss) represents the net change in +shareholders’ equity during a period from sources other than transactions with shareholders. +Our comprehensive income or loss is comprised of net earnings, foreign currency translation, +and the related income tax effects. Components of beginning and ending accumulated other +comprehensive income or loss, and related activity, are shown in the following table: +Foreign +Currency +Translation +Income +Adjustment +Taxes +Total +Balance at September 30, 2009 +$ +1,110 +$ +(388 +) +$ +722 +Currency translation +(103 +) +— +(103 +) +Income taxes +— +36 +36 +Balance at September 30, 2010 +$ +1,007 +$ +(352 +) +$ +655 +- 54 - +Table of Contents +(n) +Recent Accounting Pronouncements — In February 2010, the Financial Accounting Standards Board +issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving +Disclosures about Fair Value Measurements.” This ASU amends the disclosure requirements +related to Fair Value Measurements and Disclosures — Overall Subtopic (Subtopic 820-10) of the +FASB Accounting Standards Codification , originally issued as FASB Statement No. 157, Fair +Value Measurements. The intent of the amended guidance is improved disclosure and increased +transparency related to Fair Value Measurement in financial reporting. This amended guidance +is effective for interim and annual periods beginning after December 15, 2009, except for the +disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is +effective for fiscal years beginning after December 15, 2010 and for interim periods within +those years. We partially adopted the new guidance during the three months ended March 31, +2010 and there was no impact on our consolidated results of operations, cash flows or +financial position. +(o) +Shipping and Handling Costs — Shipping and handling costs invoiced to customers are included +in net sales. Costs to distribute products to customers, including freight costs, warehousing +costs, and other shipping and handling activities are included in cost of goods sold. +(p) +Non-income Government-Assessed Taxes — We classify all non-income, government-assessed taxes +(sales, use, and value-added) collected from customers and remitted by us to appropriate +revenue authorities, on a net basis (excluded from net sales) in the accompanying consolidated +statements of operations. +(2) Acquisition of Bioline Group +On July 20, 2010, we acquired all of the outstanding common stock of the Bioline group of companies +(collectively the “Bioline Group”). We paid $23,849 to acquire the Bioline Group from cash and +equivalents on hand. Headquartered in London, the Bioline Group is a leading manufacturer and +distributor of molecular biology reagents with additional operations in Germany, Australia and the +United States. The highly specialized molecular biology reagents it supplies to the life science +research, biotech, pharmaceutical and commercial diagnostics markets are the critical components +used in PCR testing for DNA, RNA and other genomic testing. +- 55 - +Table of Contents +As a result of the consideration paid exceeding the fair value of the net assets being acquired, +goodwill in the amount of $13,166 was recorded in connection with this acquisition, none of which +will be deductible for tax purposes. This goodwill results largely from the addition of key global +operations and direct sales capabilities, management talent and a research-oriented customer base, +to complement our existing Life Science operations. In addition to the Bioline Group’s results of +operations since the acquisition date, which are included in our fiscal 2010 Consolidated Statement +of Operations and reported as part of the Life Science operating segment, the fiscal 2010 +consolidated results also include: +i) +$230 of Cost of Sales related to the roll-out of fair value inventory +adjustments for sales of products that were in the Bioline Group’s inventory on the +date of acquisition and, therefore, were valued at fair value, rather than manufactured +cost, in the opening balance sheet; +ii) +$166 of General and Administrative Expenses related to the amortization of +specific identifiable intangible assets recorded on the opening balance sheet, +including customer relationships, license agreements, non-compete agreements, +manufacturing processes and trade names; and +iii) +$1,240 of transaction costs reflected as Operating Expenses. +The results of the Bioline Group included in the fiscal 2010 consolidated results of the Company +are Net Sales of $2,084 and Net Loss of $1,262, reflecting the items noted above. +The recognized amounts of identifiable assets acquired and liabilities assumed in the acquisition +of the Bioline Group are as follows: +Fair value of assets acquired - +Cash and equivalents +$ +3,445 +Accounts receivable +1,897 +Inventories +2,807 +Other current assets +371 +Property, plant and equipment, net +816 +Goodwill +13,166 +Other intangible assets (estimated useful life): +Customer relationships (10 years) +3,898 +Manufacturing processes (6 years) +1,467 +License agreements (approximate +8 year weighted average) +718 +Non-compete agreements (1 year) +122 +Trade names (10 years) +995 +29,702 +Fair value of liabilities assumed - +Accounts payable and accrued expenses +2,817 +Deferred income tax liabilities +3,036 +Total consideration paid +$ +23,849 +The allocation of the purchase price shown above is preliminary, pending final completion of +valuation of acquired intangibles and tax assets and liabilities. +- 56 - +Table of Contents +The consolidated pro forma results of the combined entities of Meridian and the Bioline Group, had +the acquisition date been October 1, 2007, are as follows for the periods indicated: +(UNAUDITED) +Net +Net +Sales +Earnings +Consolidated pro forma fiscal 2010 +$ +153,635 +$ +26,918 +Consolidated pro forma fiscal 2009 +$ +160,525 +$ +34,135 +Consolidated pro forma fiscal 2008 +$ +151,424 +$ +31,214 +The fiscal 2010 consolidated pro forma results listed above include pre-tax acquisition-related +expenses totaling $1,636 for the fair value inventory adjustment, the amortization of identifiable +intangibles and transaction costs. Fiscal 2009 and 2008 reflect no such pre-tax expenses. These +pre-tax expenses are included in the as-reported consolidated fiscal 2010 results. +(3) Inventories +Inventories are comprised of the following: +As of September 30, +2010 +2009 +Raw materials +$ +6,221 +$ +6,079 +Work-in-process +6,784 +5,916 +Finished goods +16,090 +12,314 +Gross Inventory +$ +29,095 +$ +24,309 +Reserves +(1,130 +) +(1,025 +) +Net Inventory +$ +27,965 +$ +23,284 +(4) Bank Credit Arrangements +We have a $30,000 credit facility with a commercial bank, which expires in September 2012. This +credit facility is collateralized by our business assets, except for those of non-U.S. +subsidiaries, which totaled approximately $107,000 at September 30, 2010. There were no borrowings +outstanding on this credit facility at September 30, 2010 or September 30, 2009. Available +borrowings under this credit facility were $30,000 at September 30, 2010 and September 30, 2009. +In connection with this bank credit facility, we are required to comply with financial covenants +that limit the amount of debt obligations and require a minimum amount of tangible net worth. We +are in compliance with all covenants. We are also required to maintain a cash compensating balance +with the bank in the amount of $1,000, pursuant to this bank credit facility and are in compliance +with this requirement. +(5) Hedging Transactions +Prior to February 1, 2009, we managed exchange rate risk related to forecasted intercompany sales +denominated in the Euro currency through the use of forward exchange contracts and designated such +forward contracts as cash flow hedges. As such, the effective portion of the gain or loss on the +derivative instrument was reported as +a component of other comprehensive income and reclassified into revenues in the Consolidated +Statement of Operations in the same period or periods during which the hedged transaction affected +earnings. As of September 30, 2010 and September 30, 2009, we had no such contracts outstanding. +- 57 - +Table of Contents +During January 2009, € 500 notional amount of forward exchange contracts were settled in accordance +with their original maturities. The realized gain on these contracts was $32. Also during January +2009, we accelerated the settlement of the remaining € 2,700 notional amount of forward exchange +contracts that were originally scheduled to mature between February 27, 2009 and December 31, 2009. +These transactions resulted in a gain of approximately $140 that was recorded in the second +quarter of fiscal 2009. We unwound these forward exchange contracts after completing a strategic +review of our foreign currency exposures. This strategic review revealed that we have natural +currency hedges in place for consolidated gross profit and operating income via certain +Meridian-branded diagnostic test kits that we purchase in Euros from suppliers in Spain and +Germany. +The amount of gain (loss) recognized in other comprehensive income on the effective portion of our +foreign exchange contracts was $0, $109 and $(326) in fiscal 2010, 2009 and 2008, respectively. +The amount of gain (loss) reclassified from accumulated other comprehensive income into income on +the effective portion of these foreign exchange contracts was $0, $112 and $(599), for fiscal 2010, +2009 and 2008, respectively. No portion of the gain/loss was excluded from other comprehensive +income due to effectiveness testing. +(6) Fair Value Measurements +We use a fair value measurement to value our financial assets and liabilities. Fair value is the +price that would be received to sell an asset or paid to transfer a liability in an orderly +transaction between market participants at the measurement date. Fair value hierarchy prioritizes +inputs to valuation techniques used to measure fair value into three broad levels, which are +described below: +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are +accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the +highest priority to Level 1 inputs. +Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets +or liabilities, either directly or indirectly. These include quoted prices for identical or +similar assets or liabilities in markets that are not active, that is, markets in which there are +few transactions for the asset or liability, the prices are not current, or price quotations vary +substantially either over time or among market makers, or in which little information is released +publicly and inputs that are derived principally from or corroborated by observable market data by +correlation or other means. +Level 3: Unobservable inputs, developed using our estimates and assumptions, which reflect those +that the market participants would use. Such inputs are used when little or no market data is +available. The fair value hierarchy gives the lowest priority to Level 3 inputs. +- 58 - +Table of Contents +Determining where an asset or liability falls within the hierarchy depends on the lowest level +input that is significant to the fair value measurement as a whole. In determining fair value, we +utilize valuation techniques that maximize the use of observable inputs and minimize the use of +unobservable inputs to the extent possible and considers counterparty credit risk in the assessment +of fair value. +Financial assets and liabilities carried at fair value at September 30, 2010 and September 30, 2009 +are classified in the table below in one of the three categories described above: +Balances as of September 30, 2010 +Level 1 +Level 2 +Level 3 +Total +Money market funds +$ +10,249 +$ +— +$ +— +$ +10,249 +Total +$ +10,249 +$ +— +$ +— +$ +10,249 +Balances as of September 30, 2009 +Level 1 +Level 2 +Level 3 +Total +Money market funds +$ +39,415 +$ +— +$ +— +$ +39,415 +Student loan auction-rate securities +— +— +6,708 +6,708 +UBS Auction Rate Security Rights +— +— +577 +577 +Total +$ +39,415 +$ +— +$ +7,285 +$ +46,700 +Prior to their liquidation at par value plus accrued interest in May and June 2010, the failed +auction status and lack of liquidity for our student loan auction-rate securities and the +non-transferability of our UBS Auction Rate Security Rights required the use of a valuation +methodology that relied primarily on Level 3 inputs including market, tax status, credit quality, +duration, recent market observations and overall capital market liquidity. The valuation of our +student loan auction-rate securities and UBS Auction Rate Security Rights was subject to +uncertainties that were difficult to predict. Factors that could impact the valuations included +changes to credit ratings of the securities as well as to the underlying assets supporting those +securities, rates of default of the underlying assets, underlying collateral value, discount rates, +counterparty risk and ongoing strength and quality of market credit and liquidity. The changes in +fair value of our auction-rate securities and UBS Auction Rate Security Rights for the fiscal years +ended September 30, 2010 and September 30, 2009 were ($10) and ($195), respectively. +- 59 - +Table of Contents +(7) Income Taxes +(a) +Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2010, 2009 and 2008 were as follows: +Year Ended September 30, +2010 +2009 +2008 +Domestic +$ +38,329 +$ +46,504 +$ +42,187 +Foreign +3,071 +2,819 +3,805 +Total +$ +41,400 +$ +49,323 +$ +45,992 +Provision (credit) for income taxes - +Federal - +Current provision +$ +13,626 +$ +15,094 +$ +14,307 +Temporary differences +Fixed asset basis differences and depreciation +58 +16 +(108 +) +Intangible asset basis differences and amortization +(335 +) +(363 +) +(249 +) +Currently non-deductible expenses and reserves +(29 +) +(134 +) +(286 +) +Stock based compensation +(618 +) +(373 +) +(610 +) +Other, net +(75 +) +48 +231 +Subtotal +12,627 +14,288 +13,285 +State and local +1,186 +1,385 +1,303 +Foreign +940 +891 +1,202 +Total +$ +14,753 +$ +16,564 +$ +15,790 +(b) +The following is a reconciliation between the statutory U.S. income tax rate and the +effective rate derived by dividing the provision for income taxes by earnings before income +taxes: +Year Ended September 30, +2010 +2009 +2008 +Computed income taxes at statutory rate +$ +14,490 +35.0 +% +$ +17,263 +35.0 +% +$ +16,097 +35.0 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +777 +1.9 +904 +1.8 +902 +2.0 +Federal and state tax credits +— +— +(189 +) +(0.4 +) +(34 +) +(0.1 +) +Foreign tax rate differences +(87 +) +(0.2 +) +(43 +) +(0.1 +) +196 +0.4 +Qualified domestic production +incentives +(786 +) +(1.9 +) +(870 +) +(1.8 +) +(715 +) +(1.6 +) +Tax exempt interest +(12 +) +— +(100 +) +(0.2 +) +(417 +) +(0.9 +) +Bioline Group transaction costs +434 +1.0 +— +— +— +— +Other, net +(63 +) +(0.2 +) +(401 +) +(0.7 +) +(239 +) +(0.5 +) +$ +14,753 +35.6 +% +$ +16,564 +33.6 +% +$ +15,790 +34.3 +% +- 60 - +Table of Contents +(c) +The components of net deferred tax assets (liabilities) were as follows: +As of September 30, +2010 +2009 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +1,128 +$ +1,043 +Stock compensation expense not deductible +2,313 +1,762 +Net operating loss carryforwards +740 +948 +Inventory basis differences +589 +886 +Other +118 +6 +Subtotal +4,888 +4,645 +Less valuation allowance +(439 +) +(470 +) +Deferred tax assets +4,449 +4,175 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(721 +) +(656 +) +Intangible asset basis differences and amortization +(4,591 +) +(2,263 +) +Other +(579 +) +(661 +) +Deferred tax liabilities +(5,891 +) +(3,580 +) +Net deferred tax assets (liabilities) +$ +(1,442 +) +$ +595 +For income tax purposes, we have tax benefits related to operating loss carryforwards in the +countries of Belgium and France. These net operating loss carryforwards have no expiration date. +We have recorded deferred tax assets for these carryforwards totaling $740 and $948 at September +30, 2010 and September 30, 2009, respectively, inclusive of valuation allowances for the country of +Belgium. This valuation allowance is for pre-acquisition net operating loss carryforwards. If tax +benefits are recognized in future years for these pre-acquisition net operating loss carryforwards, +such benefits will be allocated to reduce goodwill and acquired intangible assets. The valuation +allowance recorded against deferred tax assets at September 30, 2010 and September 30, 2009 related +solely to net operating loss carryforwards in Belgium. +The realization of deferred tax assets in foreign jurisdictions is dependent upon the generation of +future taxable income in certain European countries. We have 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, we believe 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. +Undistributed earnings reinvested indefinitely in the Italian operation were approximately $18,900 +at September 30, 2010. U.S. deferred tax liabilities of approximately $6,995 on such earnings have +not been recorded. We believe that such U.S. taxes would be largely offset by foreign tax credits +for taxes paid in Italy. +- 61 - +Table of Contents +As described in Note 1, we utilize a comprehensive model for the recognition, measurement, +presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant +facts by the applicable tax +authorities. The total amount of unrecognized tax benefits at September 30, 2010 and September 30, +2009 related to such positions was $725 and $572, respectively, of which the full amounts would +favorably affect the effective tax rate if recognized. We recognize interest and penalties related +to uncertain tax positions as a component of our income tax provision. During fiscal 2010 and +2009, we increased/(decreased) our tax provision by approximately $128 and ($45), respectively, for +such interest and penalties. We had approximately $229 accrued for the payment of interest and +penalties at September 30, 2010 compared to $102 accrued at September 30, 2009. The amount of our +liability for uncertain tax positions expected to be paid or settled in the next 12 months is +uncertain. +A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: +2010 +2009 +Unrecognized income tax benefits beginning of year +$ +572 +$ +779 +Additions for tax positions related to the current year +67 +115 +Additions for tax positions of prior years +206 +109 +Reductions for tax positions of prior years +— +(287 +) +Expirations of statute of limitations +(120 +) +(144 +) +Unrecognized income tax benefits at end of year +$ +725 +$ +572 +We are subject to examination by the tax authorities in the U.S. (both federal and state) and the +countries of Australia, Belgium, England, France, Germany, Holland and Italy. In the U.S., open +tax years are for fiscal 2007 and forward. Our federal returns for fiscal 2008 and 2009 are +currently under examination by the IRS. In countries outside the U.S., open tax years generally +range from fiscal 2005 and forward. However, in Belgium, the utilization of local net operating +loss carryforwards extends the statute of limitations for examination well into the foreseeable +future. Tax examinations in France were completed for fiscal years 2004-2006 during fiscal 2007. +(8) Employee Benefits +(a) +Savings and Investment Plan — We have a profit sharing and retirement savings plan covering +substantially all full-time U.S. employees. Profit sharing contributions to the plan, which +are discretionary, are approved by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an +employee’s contributions, up to maximum match of 3% of eligible compensation. Our +discretionary and matching contributions to the plan amounted to approximately $1,282, $1,188 +and $1,214, during fiscal 2010, 2009 and 2008, respectively. +(b) +Stock-Based Compensation Plans — We have one active stock-based compensation plan, the 2004 +Equity Compensation plan, which became effective December 7, 2004, as amended (the “2004 +Plan”) and an Employee Stock Purchase Plan (the “ESP Plan”), which became effective October 1, +1997. Effective October 1, 1997, we began selling shares of stock to our 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. +- 62 - +Table of Contents +We may grant new shares for options or restricted shares for up to 3,000 shares under the 2004 +Plan, of which we have granted 1,710 through September 30, 2010. Options may be granted at +exercise prices not less than 100% of the closing market value of the underlying common shares +on the date of grant and have maximum terms up to ten years. Vesting schedules are established +at the time of grant and may be set based on future service periods, achievement of performance +targets, or a combination thereof. 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. We have granted options for 5,407 shares under similar +plans that have expired. +On November 14, 2007, we granted 252 options to certain employees subject to attainment of a +specified earnings target for fiscal 2008. As the target was not met and the options forfeited, +they have been excluded from the tables below. On November 12, 2008, we granted approximately +94 restricted shares to certain employees subject to attainment of a specified earnings target +for fiscal 2009. Dividends were paid on these restricted shares throughout fiscal 2009. The +target was not met and these restricted shares have been forfeited. Similarly, on November 12, +2009, we granted approximately 105 restricted shares and restricted units to certain employees, +with half of each employee’s grant being time-vested restricted shares or restricted units +vesting in total on November 12, 2013, and the remaining half being subject to attainment of a +specified earnings target for fiscal 2010. Dividends were paid on these shares throughout +fiscal 2010. While the 2010 earnings target was not met, on September 30, 2010, the +Compensation Committee of the Board of Directors chose to convert the performance-based +restricted shares to time-vested restricted shares vesting in total on November 12, 2013 in +recognition of the achievement in 2010 of several strategic initiatives that position the +Company for future growth. This conversion impacted approximately fifty employees and resulted +in expense totaling $472, which was recorded in fiscal 2010 and is included in the total amount +of stock-based compensation set forth below. During fiscal 2010, approximately 2 of the +restricted shares were forfeited, resulting in approximately 103 restricted shares and units +outstanding as of September 30, 2010, with a weighted average remaining vesting period of 3.125 +years. +We recognize compensation expense for all share-based payments made to employees, based upon the +fair value of the share-based payment on the date of the grant. We measure and recognize +compensation expense based on grant-date fair value for stock option and restricted stock awards +granted after July 1, 2005 and the non-vested portions of stock option awards granted prior to +July 1, 2005. +The amount of stock-based compensation expense reported was $1,866, $1,092 and $1,772 in fiscal +2010, 2009 and 2008, respectively. The fiscal 2010 expense is comprised of $908 related to +stock options and $958 related to restricted shares and units. The total income tax benefit +recognized in the income statement +for these stock-based compensation arrangements was $665, $367 and $610, for fiscal 2010, 2009 +and 2008, respectively. As of September 30, 2010, we expect future stock compensation expense +for unvested options and unvested restricted stock to total $655 and $1,331, respectively, which +will be recognized during fiscal years 2011 through 2014. +- 63 - +Table of Contents +We recognize compensation expense only for the portion of shares that we expect to vest. As +such, we apply estimated forfeiture rates to our compensation expense calculations. These rates +have been derived using historical forfeiture data, stratified by several employee groups. +During fiscal 2010, 2009 and 2008, we recorded $17, $42 and $235, respectively, in stock +compensation expense to adjust estimated forfeiture rates to actual. +We have elected to use the Black-Scholes option pricing model to determine grant-date fair value +for stock options, with the following assumptions: (i) expected share price volatility based on +average of Meridian’s historical volatility over twelve months and implied volatility based on +the value of tradable call options; (ii) expected life of options based on contractual lives, +employees’ historical exercise behavior and employees’ historical post-vesting employment +termination behavior; (iii) risk-free interest rates based on treasury rates that correspond to +the expected lives of the options; and (iv) dividend yield based on the expected yield on +underlying Meridian common stock. +2010 +2009 +2008 +Year ended September 30, +Risk-free interest rates +2.93 +% +3.75 +% +4.56 +% +Dividend yield +3.12 +% +2.41 +% +1.45 +% +Life of option +5.90 yrs. +6.30-8.20 yrs. +5.70-7.30 yrs. +Share price volatility +42 +% +57 +% +44 +% +Forfeitures (by +employee group) +0%-10 +% +0%-13 +% +0%-17 +% +A summary of the status of our stock option plans at September 30, 2010 and changes during the +year is presented in the table and narrative below: +Wtd Avg +Wtd Avg +Aggregate +Exercise +Remaining +Intrinsic +Shares +Price +Life (Yrs) +Value +Outstanding beginning of period +1,401 +$ +10.69 +Grants +99 +20.84 +Exercises +(67 +) +8.79 +Forfeitures +(6 +) +19.72 +Cancellations +(2 +) +13.82 +Outstanding end of period +1,425 +$ +11.44 +4.3241 +$ +16,053 +Exercisable end of period +786 +$ +12.96 +5.0342 +$ +7,489 +- 64 - +Table of Contents +A summary of the status of our nonvested shares as of September 30, 2010, and changes during +the year ended September 30, 2010, is presented below: +Weighted- +Average +Grant Date +Shares +Fair Value +Nonvested beginning of period +753 +$ +4.44 +Granted +99 +6.70 +Vested +(207 +) +7.52 +Forfeited +(6 +) +8.45 +Nonvested end of period +639 +$ +3.75 +The weighted average grant-date fair value of options granted was $6.70, $11.05 and $14.58 for +fiscal 2010, 2009 and 2008, respectively. The total intrinsic value of options exercised was +$813, $2,560 and $11,405, for fiscal 2010, 2009 and 2008, respectively. The total grant-date +fair value of options that vested during fiscal 2010, 2009 and 2008 was $1,558, $2,019 and +$1,674, respectively. +Cash received from options exercised was $592, $1,243 and $2,668 for fiscal 2010, 2009 and 2008, +respectively. Tax benefits realized and recorded to additional paid-in capital from option +exercises totaled $403, $233 and $2,458 for fiscal 2010, 2009 and 2008, respectively. +(9) Major Customers and Segment Data +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes the +contract development and manufacture of cGMP clinical grade proteins and other biologicals for use +by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +- 65 - +Table of Contents +Sales to individual customers constituting 10% or more of consolidated net sales were as follows: +Year Ended September 30, +2010 +2009 +2008 +Customer A +$ +33,821 +(24 +)% +$ +37,876 +(26 +)% +$ +31,285 +(22 +)% +Customer B +$ +18,204 +(13 +)% +$ +19,063 +(13 +)% +$ +16,160 +(12 +)% +Combined international sales for the U.S. Diagnostics and Life Science operating segments were +$19,350, $15,568 and $16,450 in fiscal years 2010, 2009 and 2008, respectively. Three products +accounted for 28%, 30% and 32% of consolidated net sales in fiscal 2010, 2009 and 2008, +respectively. Approximately 27% of the consolidated accounts receivable balance at September 30, +2010 is largely dependent upon funds from the Italian government. +Significant sales information by country for the European Diagnostics operating segment is as +follows. Sales are attributed to the geographic area based on the location to which the product is +shipped. +Year Ended September 30, +2010 +2009 +2008 +Italy +$ +8,183 +$ +8,289 +$ +8,942 +United Kingdom +2,646 +2,373 +2,655 +France +2,590 +2,939 +3,263 +Holland +2,045 +1,828 +2,138 +Belgium +1,291 +1,875 +1,865 +Other countries +7,286 +8,566 +9,117 +Total European Diagnostics +$ +24,041 +$ +25,870 +$ +27,980 +Identifiable assets for our Italian distribution organization were $17,378, $16,797 and $14,769 at +September 30, 2010, 2009 and 2008, respectively. At September 30, 2010, identifiable assets for +the Bioline Group’s operations in the U.K., Germany and Australia totaled $16,990, $4,441 and +$3,094, respectively. +- 66 - +Table of Contents +Segment information for the years ended September 30, 2010, 2009 and 2008 is as follows: +U.S. +European +Fiscal Year 2010 - +Diagnostics +Diagnostics +Life Science +Elim (1) +Total +Net sales - +Third-party +$ +92,020 +$ +24,041 +$ +26,939 +$ +— +$ +143,000 +Inter-segment +10,285 +20 +561 +(10,866 +) +— +Operating income +33,432 +3,367 +3,615 +724 +41,138 +Depreciation and amortization +2,722 +86 +1,877 +— +4,685 +Capital expenditures +3,349 +213 +1,001 +— +4,563 +Total assets +125,824 +35,834 +90,532 +(97,405 +) +154,785 +Fiscal Year 2009 - +Net sales - +Third-party +$ +98,970 +$ +25,870 +$ +23,434 +$ +— +$ +148,274 +Inter-segment +10,700 +6 +715 +(11,421 +) +— +Operating income +39,490 +4,459 +4,728 +102 +48,779 +Depreciation and amortization +2,680 +92 +1,588 +— +4,360 +Capital expenditures +2,082 +81 +1,480 +— +3,643 +Total assets +131,586 +18,221 +55,592 +(49,402 +) +155,997 +Fiscal Year 2008 - +Net sales - +Third-party +$ +88,419 +$ +27,980 +$ +23,240 +$ +— +$ +139,639 +Inter-segment +11,563 +2 +543 +(12,108 +) +— +Operating income +36,095 +5,397 +3,186 +(328 +) +44,350 +Depreciation and amortization +2,745 +111 +1,614 +— +4,470 +Capital expenditures +2,193 +39 +1,987 +— +4,219 +Total assets +126,808 +15,955 +49,619 +(45,951 +) +146,431 +(1) +Eliminations consist of intersegment transactions. +Year Ended September 30, +2010 +2009 +2008 +Segment operating income +$ +41,138 +$ +48,779 +$ +44,350 +Interest income +124 +456 +1,533 +Other, net +138 +88 +109 +Consolidated earnings before +income taxes +$ +41,400 +$ +49,323 +$ +45,992 +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. Total assets for the U.S. Diagnostics and Life Science +operating segments include goodwill of $1,381 and $22,101, respectively at September 30, 2010, +$1,381 and $8,485, respectively at September 30, 2009, and $1,382 and $8,479, respectively at +September 30, 2008. +- 67 - +Table of Contents +(10) Commitments and Contingencies +(a) +Royalty Commitments — We have entered into various license agreements that require payment of +royalties based on a specified percentage of the sales of licensed products (1% to 14%). +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 $734, $572 and $600, respectively, for the fiscal years ended September 30, +2010, 2009 and 2008. +Meridian entered into a license agreement in October 2006 with a third party that provides +rights to a molecular technology for infectious disease testing in the United States, Europe, +and other geographic markets. The agreement, as amended during fiscal 2009, calls for remaining +payments of up to approximately $3,200 based on the achievement of certain milestones and +on-going royalties once products are available for commercial sale. Payments made during +product development are expected to occur over a five-year period, which began in fiscal 2007. +Since entering into this agreement, we have made payments totaling $392. +(b) +Purchase Commitments — We have purchase commitments primarily for inventory and service items +as part of the normal course of business. Commitments made under these obligations are +$13,004, $277 and $94 for fiscal 2011, 2012 and 2013, respectively. No commitments have been +made beyond fiscal 2013. +(c) +Operating Lease Commitments — Meridian and its subsidiaries are lessees of (i) certain office +and warehouse buildings in the U.S., Europe and Australia; (ii) automobiles for use by the +direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as +facsimile and copier machines across all business units, under operating lease agreements that +expire at various dates. Amounts charged to expense under operating leases were $759, $775 +and $674 for fiscal 2010, 2009 and 2008, respectively. Operating lease commitments for each +of the five succeeding fiscal years are as follows: fiscal 2011 — $935, fiscal 2012 — $763, +fiscal 2013 — $479, fiscal 2014 — $154, and fiscal 2015 — $54. +(d) +Litigation — We are a party to various litigation matters from time to time that we believe +are in the normal course of business. The ultimate resolution of these matters is not +expected to have a material adverse effect on our financial position, results of operations or +cash flows. +(e) +Indemnifications — In conjunction with certain contracts and agreements, we provide routine +indemnifications whose terms range in duration and in some circumstances are not explicitly +defined. The maximum obligation under some such indemnifications is not explicitly stated +and, as a result, cannot be reasonably estimated. We have not made any payments for these +indemnifications and no liability is recorded at September 30, 2010 or September 30, 2009. We +believe that if we were to incur a loss on any of these matters, the loss would not have a +material effect on our financial condition. +- 68 - +Table of Contents +(11) Quarterly Financial Data (Unaudited) +The sum of the earnings per common share and cash dividends per share may not equal the +corresponding annual amounts due to interim quarter rounding. +For the Quarter Ended in Fiscal 2010 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +42,457 +$ +31,147 +$ +33,857 +$ +35,539 +Gross profit +25,485 +20,167 +21,736 +21,087 +Net earnings +8,921 +5,980 +6,424 +5,322 +Basic earnings per common share +0.22 +0.15 +0.16 +0.13 +Diluted earnings per common share +0.22 +0.15 +0.16 +0.13 +Cash dividends per common share +0.17 +0.19 +0.19 +0.19 +For the Quarter Ended in Fiscal 2009 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +34,293 +$ +33,280 +$ +38,240 +$ +42,461 +Gross profit +23,344 +20,974 +23,323 +25,142 +Net earnings +8,076 +7,251 +8,502 +8,930 +Basic earnings per common share +0.20 +0.18 +0.21 +0.22 +Diluted earnings per common share +0.20 +0.18 +0.21 +0.22 +Cash dividends per common share +0.14 +0.17 +0.17 +0.17 +(12) Subsequent Events +We evaluated subsequent events after the balance sheet date of September 30, 2010 and there were no +material subsequent events that required recognition or additional disclosure in these statements. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2010, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2010. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has +materially affected, or is reasonably likely to affect, our internal control over financial +reporting, or in other factors that could significantly affect internal control subsequent to +September 30, 2010. +- 69 - +Table of Contents +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” +ITEM 9B. +OTHER INFORMATION +Not applicable. +- 70 - +Table of Contents +PART III +The information required by Items 10., 11., 12. (other than that portion set forth below), 13. and 14., of Part III are incorporated by reference +from the Registrant’s Proxy Statement for its 2011 Annual Shareholders’ Meeting to be filed with +the Commission pursuant to Regulation 14A. +ITEM 12. +EQUITY COMPENSATION PLAN INFORMATION +The following table presents summary information as of September 30, 2010 with respect to all of +our equity compensation plans. +(c) +(a) +(b) +Number of securities +Number of +Weighted- +remaining available +Securities to be +average exercise +for future issuance +issued upon +price of +under equity +exercise of +outstanding +compensation plans +outstanding +options, +(excluding securities +options, warrants +warrants and +reflected in column +Plan Category +and rights +rights +(a)) +Equity compensation +plans approved by +security holders +(1) +1,521 +$ +10.637 +1,757 +Equity compensation plans not approved +by security holders +7 +18.976 +— +Total +1,528 +$ +10.673 +1,757 +(1) +1994 Director’s Stock Option Plan +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan, as amended +- 71 - +Table of Contents +ITEM 15. +EXHIBITS, FINANCIAL STATEMENT SCHEDULES +(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 (c) under Item 15 are not applicable +to Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +3.1 +Articles of Incorporation, including amendments not related +to Company name change (Incorporated by reference to +Registration Statement No. 333-02613 on Form S-3 filed with +the Securities and Exchange Commission on April 18, 1996 +and Meridian’s Form 8-K filed with the Securities and +Exchange Commission on May 16, 2007) +3.2 +Amended Code of Regulations (Incorporated by reference to +Meridian’s Form 8-K filed with the Securities and Exchange +Commission on July 23, 2008) +10.1 +* +Savings and Investment Plan Prototype Adoption Agreement +(Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2003) +10.2 +* +1994 Directors’ Stock Option Plan (Incorporated by +reference to Registration Statement No. 33-78868 on Form +S-8 filed with the Securities and Exchange Commission on +May 12, 1994) +10.3 +* +1996 Stock Option Plan (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year +Ended September 30, 1996) +10.4 +* +Salary Continuation Agreement between Meridian Bioscience, +Inc. and John A. Kraeutler, as amended April 24, 2001 and +December 29, 2008 (Incorporated by reference to Meridian’s +Annual Report on Form 10-K for the Fiscal Year Ended +September 30, 2009) +10.5 +* +1999 Directors’ Stock Option Plan (Incorporated by +reference to Meridian’s Proxy Statement filed with the +Securities and Exchange Commission on December 21, 1998) +10.6 +Dividend Reinvestment Plan (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year +Ended September 30, 1999) +10.7 +* +Employment Agreement Dated February 15, 2001, as amended +December 29, 2008 between Meridian and John A. Kraeutler +(Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2009) +10.8 +* +Sample Option Agreement Dated October 1, 2001 (Incorporated +by reference to Meridian’s Annual Report on Form 10-K for +the Fiscal Year Ended September 30, 2001) +- 72 - +Table of Contents +Exhibit Number +Description of Exhibit +10.9 +* +1996 Stock Option Plan as Amended and Restated Effective January +23, 2001 (Incorporated by reference to Meridian’s Proxy Statement +filed with the Securities and Exchange Commission on December 21, +1998) +10.10 +* +Sample Option Agreement Dated November 19, 2002 (Incorporated by +reference to Meridian’s Annual Report on Form 10-K for the Fiscal +Year Ended September 30, 2003) +10.11 +* +Agreement Concerning Disability and Death dated September 10, +2003, between Meridian and William J. Motto (Incorporated by +reference to Meridian’s Annual Report on Form 10-K for the Fiscal +Year Ended September 30, 2003) +10.12 +* +Professional Services Agreement dated April 1, 2010 between +Meridian and Antonio Interno (Filed herewith) +10.13 +* +Sample Option Agreement dated November 10, 2005 (Incorporated by +reference to Meridian’s Annual Report on Form 10-K for the Fiscal +Year Ended September 30, 2005) +10.14 +* +2004 Equity Compensation Plan, Amended and Restated through +January 22, 2008 (Incorporated by reference to Meridian’s Proxy +Statement filed with the Securities and Exchange Commission on +December 19, 2007) +10.15 +* +Fiscal 2006 Officers’ Compensation Plan, Amended and Restated +through January 19, 2006 (Incorporated by reference to Meridian’s +Form 8-K filed with the Securities and Exchange Commission on +January 19, 2006) +10.16 +* +Sample Option Agreement dated November 14, 2007 (Incorporated by +reference to Meridian’s Annual Report on Form 10-K for the Fiscal +Year Ended September 30, 2007) +10.17 +* +Fiscal 2007 Officers’ Performance Compensation Plan (Incorporated +by reference to Meridian’s Form 8-K filed with the Securities and +Exchange Commission on November 21, 2006) +10.18 +Loan and Security Agreement among Meridian Bioscience, Inc., +Meridian Bioscience Corporation, Omega Technologies, Inc. Meridian +Life Science, Inc. and Fifth Third Bank dated August 1, 2007 +(Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2007) +10.18.1 +Amended and Restated Revolving Note with Fifth Third Bank dated +August 1, 2007 (Incorporated by reference to Meridian’s Annual +Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +10.18.2 +First Amendment to Loan and Security Agreement among Meridian +Bioscience, Inc., Meridian Bioscience Corporation, Omega +Technologies, Inc., Meridian Life Science, Inc. and Fifth Third +Bank dated September 2, 2010 (Filed herewith) +10.19 +* +Sample Time-Based Restricted Stock Agreement dated November 12, +2009 (Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2009) +- 73 - +Table of Contents +Exhibit Number +Description of Exhibit +10.20 +* +Sample Performance Award Restricted Stock Agreement dated November 12, 2009 +(Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year +Ended September 30, 2009) +10.21 +Stock Purchase Agreement dated as of July 20, 2010 among Meridian Bioscience, Inc., +Meridian Bioscience Europe, S.A. and Marco Giuseppe Calzavara and Vittorio Giovanni +Calzavara (Incorporated by reference to Meridian’s Form 8-K filed with the Securities +and Exchange Commission on July 23, 2010) +13 +2010 Annual Report to Shareholders (1) +14 +Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form 10-K for +the Fiscal Year Ended September 30, 2003) +18 +Grant Thornton Preferability Letter (Incorporated by reference to Meridian’s Annual +Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +21 +Subsidiaries of the Registrant (Filed herewith) +23 +Consent of Independent Registered Public Accounting Firm (Filed herewith) +31.1 +Certification of Principal Executive Officer required by Rule 13a-14(a) (Filed herewith) +31.2 +Certification of Principal Financial Officer required by Rule 13a-14(a) (Filed herewith) +32 +Section 1350 Certification of Chief Executive Officer and Chief Financial Officer +(Filed herewith) +(1) +Only specific portions of the 2010 Annual Report to Shareholders are incorporated by reference +in this Form 10-K as filed herewith. A supplemental paper copy of the 2010 Annual Report to +Shareholders has been provided to the Securities and Exchange Commission for informational purposes +only. +* +Management Compensatory Contracts +Meridian will provide shareholders with any exhibit upon the payment of a specified reasonable fee, +which fee shall be limited to Meridian’s reasonable expenses in furnishing such exhibit. +- 74 - +Table of Contents +Pursuant to the requirements of Sections 13 or 15(d) 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/ John A. Kraeutler +Date: November 29, 2010 +John A. Kraeutler +Chief Executive Officer +- 75 - +Table of Contents +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 +William J. Motto +Chairman of the Board of Directors +November 29, 2010 +/s/ John A. Kraeutler +John A. Kraeutler +Chief Executive Officer, Director +November 29, 2010 +/s/ Melissa A. Lueke +Melissa A. Lueke +Executive Vice President, Chief +Financial Officer, and Secretary +November 29, 2010 +/s/ James M. Anderson +James M. Anderson +Director +November 29, 2010 +/s/ James A. Buzard +James A. Buzard +Director +November 29, 2010 +/s/ Gary P. Kreider +Gary P. Kreider +Director +November 29, 2010 +/s/ David C. Phillips +David C. Phillips +Director +November 29, 2010 +/s/ Robert J. Ready +Robert J. Ready +Director +November 29, 2010 +- 76 - +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended September 30, 2010, 2009 and 2008 +Balance at +Charged to +Balance at +Beginning +Costs and +End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2010: +Allowance for doubtful accounts +$ +247 +$ +82 +$ +(56 +) +$ +(32 +) +$ +241 +Inventory realizability reserves +1,025 +717 +(610 +) +(2 +) +1,130 +Valuation allowances — deferred +taxes +470 +— +— +(31 +) +439 +Year Ended September 30, 2009: +Allowance for doubtful accounts +$ +230 +$ +33 +$ +(26 +) +$ +10 +$ +247 +Inventory realizability reserves +1,103 +613 +(691 +) +— +1,025 +Valuation allowances — deferred +taxes +466 +— +— +4 +470 +Year Ended September 30, 2008: +Allowance for doubtful accounts +$ +258 +$ +38 +$ +(70 +) +$ +4 +$ +230 +Inventory realizability reserves +1,162 +551 +(610 +) +— +1,103 +Valuation allowances — deferred +taxes +569 +— +(115 +) +12 +466 +(a) +Balances reflect the effects of currency translation +- 77 - \ No newline at end of file diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/filing_metadata.csv b/raw/filings/0000794172/2010/0000950123-10-109251/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..9d0c1f89cf2f1aa98db88186f62b7ca303ebe21b --- /dev/null +++ b/raw/filings/0000794172/2010/0000950123-10-109251/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2010-11-29,2010-09-30,2010-11-29T19:46:28.000Z,0000950123-10-109251,c08969e10vk.htm,FORM 10-K,4366698,1,0,https://www.sec.gov/Archives/edgar/data/794172/000095012310109251/c08969e10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095012310109251/,2010,2010,1 diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/item1.txt b/raw/filings/0000794172/2010/0000950123-10-109251/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a3aca705f919df8c18d14092c8c1d1b2a3086e22 --- /dev/null +++ b/raw/filings/0000794172/2010/0000950123-10-109251/item1.txt @@ -0,0 +1,420 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract +development and manufacture of proteins and other biologicals under cGMP conditions for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. By +exploiting revenue opportunities across research, clinical diagnostics and therapeutics, we strive +to maximize revenues, efficiently invest in research and development, and increase profitability of +our manufacturing operations. The company was incorporated in Ohio in 1976. +Operating Segments +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes the +contract development and manufacture of cGMP clinical grade proteins and other biologicals for use +by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Financial information for Meridian’s operating segments is included in Note 9 to the consolidated +financial statements contained herein. +- 4 - +Table of Contents +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 81% of consolidated net sales for fiscal 2010. Our diagnostic products provide +accuracy, simplicity and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes; (ii) +have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic +products; and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. The acquisition of the Bioline +group of companies (collectively the “Bioline Group”) in July 2010 significantly increased the +revenue base for our Life Science operating segment. We expect revenues for our Life Science +operating segment to approximate 24% of consolidated net sales for fiscal 2011. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, +DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these filings and +other information regarding Meridian at http://www.sec.gov . The information on our website +is not part of this Annual Report on Form 10-K. +U.S. Diagnostics Operating Segment +Overview +Our U.S. Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $92,020, $98,970 and $88,419 for fiscal +2010, 2009 and 2008, respectively, reflecting a three-year compound annual growth rate of 7%. As +of September 30, 2010, our U.S. Diagnostics operating segment had 284 employees. +Our diagnostic test kits utilize immunodiagnostic and molecular technologies, which test samples of +stool, blood, urine and other body fluids or tissue for the presence of specific infectious +diseases. Specific immunodiagnostic technologies used in our diagnostic test kits include enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. Additionally, during 2010 we received U.S. Food and Drug +Administration (FDA) clearance and introduced into the marketplace our +new molecular amplification assay, illumi gene ® C.difficile . The illumi gene ® +molecular amplification assay detects the presence of the toxin producing region from the C. +difficile DNA, and provides highly accurate results in under an hour. +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of gastrointestinal diseases, such as +antibiotic-associated diarrhea (C. difficile ), pediatric diarrhea (Rotavirus and Adenovirus) and +stomach ulcers ( H. pylori ); foodborne diseases such as Enterohemorrhagic E. Coli infection (EHEC) +and Campylobacter jejuni (Campy); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken +Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant infections); parasitic +diseases, such as Giardiasis, Cryptosporidiosis and Lyme; and respiratory diseases, such as +Pneumonia, Valley Fever, Influenza and Respiratory Syncytial Virus (RSV). The primary markets and +customers for these products are reference laboratories and hospitals. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital group purchasing organizations 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. +Sales and Marketing +Our U.S. Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the U.S. and Canada and independent distributors in the U.S. and abroad. The direct sales +force consists of 4 management personnel who oversee corporate health accounts and work with +managed-care institutions, and 6 management personnel who oversee 25 technical sales +representatives, 3 inside sales representatives, and independent distributors in over 30 countries. +Our only customers who accounted for 10% or more of consolidated net sales in fiscal 2010, 2009 +and 2008 were two independent distributors in the U.S.: Cardinal Healthcare Corporation and Fisher +Scientific. Our sales to Cardinal were $33,821, $37,876 and $31,285 during fiscal 2010, 2009 and +2008, respectively. Our sales to Fisher were $18,204, $19,063 and $16,160 during fiscal +2010, 2009 and 2008, respectively. Currently, we do not have distribution agreements in place with +these customers. However the need for formal distribution +arrangements is assessed on an ongoing basis as our business and +product offerings continue to evolve. +- 6 - +Table of Contents +Consolidation of the U.S. healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to multi-year supply agreements with group purchasing organizations and +major reference laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include DNA amplification, enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. As a result, we are able to develop and manufacture diagnostic tests +in a variety of formats that satisfy customer needs and preferences, whether in a hospital, +commercial or reference laboratory, or alternate site location. Our product offering consists of +approximately 140 medical diagnostic products. +We had three products that accounted for 28%, 30% and 32% of consolidated net sales in fiscal 2010, +2009 and 2008, respectively: Immuno Card ® Toxins A&B, Premier TM Toxins A&B and +Premier TM Platinum HpSA ® PLUS. +Immuno Card ® Toxins A&B and Premier TM Toxins A&B are part of our C. difficile +product family. Immuno Card ® Toxins A&B is a rapid enzyme immunoassay used for the +detection of C. difficile toxins A and B in stool specimens. Premier TM Toxins A&B is an +ELISA test in a batch microwell format for the detection of C. difficile toxins A and B in stool +specimens. Both of the products were internally developed and are manufactured in our Cincinnati, +Ohio facility. +Premier TM Platinum HpSA ® PLUS is an ELISA test in a microwell format for the +detection of Heliobacter pylori antigens in stool specimens for diagnosis and monitoring and is a +part of our H. pylori family of products. This product was internally developed and is +manufactured in our Cincinnati, Ohio facility. We hold both U.S. and European patents for this +product. +- 7 - +Table of Contents +Research and Development +Our U.S. Diagnostics operating segment’s research and development organization consists of 18 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +parasitology and molecular biology. Research and development expenses for the U.S. Diagnostics +operating segment for fiscal 2010, 2009 and 2008 were $6,565, $7,209 and $4,878, respectively. +This research and development organization focuses its activities on new applications for our +existing technologies, improvements to existing products and development of new technologies. +Research and development efforts may occur in-house or with collaborative partners. We believe +that new product development is a key source for sustaining revenue growth. Our internally +developed products include Premier ä Platinum HpSA PLUS, Premier ä Toxins A&B and +Immuno Card Ò Toxins A&B, which together accounted for 33% of our U.S. Diagnostics +operating segment’s third-party sales during fiscal 2010. +After nearly four years of exploration and development of a molecular-based diagnostic testing +technology to complement our existing antigen/antibody-based testing technologies, in the third +quarter of 2010, we introduced our new molecular amplification assay, illumi gene ® +C.difficile to the international markets. Shortly thereafter, early in the fourth quarter of +fiscal 2010, we received clearance from the U.S. Food and Drug Administration (FDA) for the product +and began offering illumi gene ® C.difficile to our domestic customers. The +illumi gene ® molecular amplification assay detects the presence of a key toxin producing +region from the C. difficile DNA, and provides highly accurate results in under an hour. We +believe this new molecular assay uniquely positions us in the market to provide a full line of +testing solutions that will meet the needs of both our domestic and international customers. +Having introduced this platform for C. difficile detection, several other infectious diseases have +been identified for future development using this technology. We currently hold registrations to +sell illumi gene ® in eighteen countries, including the U.S., with registrations pending +in two additional countries. +During fiscal 2008, we launched our first products under our patented TRU rapid test technology. +The design of this technology enhances laboratory safety by containing the specimen in a closed +system during testing as recommended by CDC guidelines. TRU tests also use less space than other +technologies, which is an advantage in space-constrained clinical laboratories. New products using +this technology include TRU FLU ® , TRU RSV ® , TRU EBV-M ® and TRU +EBV-G ® . +We also believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. We launched our second product in collaboration with Merck, Immuno Card +STAT! ® CAMPY, during the third quarter of fiscal 2009. +- 8 - +Table of Contents +Early in the fourth quarter of fiscal 2010 we entered into an exclusive, worldwide product +development and distribution agreement with DiaSorin S.p.A., under which DiaSorin will utilize key +Meridian technology to develop several infectious disease products for use on their +LIAISON ® systems. LIAISON is a fully automated, random access system based on +chemiluminescense detection, of which there over three thousand placed in laboratories throughout +the world. The agreement is royalty-based, with the actual royalty amount to be paid to Meridian +dependent upon type of test and specific geographic market. Under the agreement, DiaSorin has +exclusive distribution rights for the developed products in every geographic market except the U.S. +and the U.K., where we retain the option for distribution. The first two products to be developed +under the agreement will be for the detection of C. difficile and H. pylori . +As a world leader in C. difficile testing, we strive to offer our customers a comprehensive C. +difficile product portfolio. During the fourth quarter of fiscal 2010, we launched our Premier C. +difficile GDH enzyme immunoassay product in non-U.S. markets and we have just recently initiated +clinical trials in the United States. This assay provides our customers with a rapid, accurate and +cost-effective screening method for the identification of suspected C. difficile infections. +Manufacturing +Our immunodiagnostic and molecular products require the production of highly specific and sensitive +antigens, antibodies and primers. While we produce substantially all of our own requirements +including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial and +viral antigens, currently all of the raw materials used in our illumi gene ® molecular +product are purchased from outside vendors. We believe that we have sufficient manufacturing and +sourcing capacity for anticipated growth in the near term. +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our U.S. +Diagnostics operating segment. Sales of these products are as follows: +Number of +% of consolidated sales +Product Family +products +2010 +2009 +H. pylori +2 +13 +% +12 +% +Upper respiratory +2 +4 +% +4 +% +Other +8 +2 +% +2 +% +Total patented products +12 +19 +% +18 +% +Patents for the two H. pylori products expire between 2016 and 2017, while patents for the two +upper respiratory products expire in 2022 and 2027. The remaining eight patented products for +which we own or license patents are spread over three product families. +- 9 - +Table of Contents +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate +our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +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; however, we +can make no assurances in this regard. +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common +gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our +diagnostic product lines reduces the risk that infections subject to seasonality and sporadic +outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that +revenues will not be negatively impacted period over period by such factors. +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our U.S. Diagnostics operating segment and by +third-party vendors. Approximately 74% of third-party sales for fiscal 2010 for this operating +segment were products purchased from our U.S. Diagnostics operating segment. Third-party sales for +this operating segment were $24,041, $25,870 and $27,980 for fiscal 2010, 2009 and 2008, +respectively. As of September 30, 2010, the European Diagnostics operating segment had 39 +employees, including 14 employees in the direct sales force. Our European Diagnostics operating +segment’s sales and distribution network consists of direct sales forces in Belgium, France, +Holland +and Italy, and independent distributors in other European countries, Africa and the Middle East. +The European Diagnostics operating segment maintains a distribution center near Milan, Italy. The +primary markets and customers for this operating segment are hospitals and reference laboratories. +- 10 - +Table of Contents +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into U.S. dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic companies, as well as contract +development and manufacturing services under clinical cGMP conditions. Third-party sales for this +operating segment were $26,939, $23,434 and $23,240 for fiscal 2010, 2009 and 2008, respectively. +As of September 30, 2010, our Life Science operating segment had approximately 175 employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells +and bioresearch reagents used by researchers and other diagnostic companies. During fiscal 2010, +27% of third-party sales for this segment were to two customers. For one of these two customers, +we have exclusive supply agreements that have annual, automatic renewal provisions. We have a +long-standing relationship with this customer; and although there can be no assurances, we intend +to renew these supply agreements in the normal course of business. +In July 2010, we acquired the Bioline Group and in so doing added important technologies and +capabilities to our Life Science business and complemented our expanding life science product lines +sold into the research, pharmaceutical and commercial diagnostic markets. In addition to +technological capabilities, Bioline also adds proprietary know-how in the production of high-volume +nucleotides and PCR enzymes, as well as a growing portfolio of intellectual property in the form of +patents and licenses. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than our +immunodiagnostic and molecular biology products, as well as buying patterns of major customers. +See Note 1 +(i) to the Consolidated Financial Statements herein for revenue recognition policies. Our revenues +for contract services were $1,958, $1,635 and $1,477 in fiscal 2010, 2009 and 2008, respectively. +- 11 - +Table of Contents +During fiscal 2008, we acquired certain technologies and products from Vybion, Inc., including +infectious disease recombinant proteins and cardiac antigens. This acquisition added important +technologies and capabilities to our Life Science business and expanded our Life Science brands. +The acquired technologies added proprietary manufacturing know-how and access to important patent +licenses for the development and production of recombinant proteins, an emerging technology in life +sciences. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, OEM Concepts in fiscal 2005, and most +recently, the Bioline Group in July 2010). Historically, these businesses were run autonomously. +In recent years, growth strategies have been developed around sales and marketing integration, new +product development integration, and the acquisition of complementary product lines, such as the +recombinant antigen products acquired from Vybion, Inc. in fiscal 2008. +Immunodiagnostic products such as antibodies, antigens and reagents are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These products are typically sold in bulk +quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales +efforts are focused on multi-year supply agreements in order to provide stability in volumes and +pricing. We believe this benefits both us and our customers. +Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed +primarily to research customers. These products are typically sold in small quantities. +Research and Development +Our Life Science operating segment’s research and development organization consists of 15 research +scientists. Research and development expenses for our Life Science operating segment for fiscal +2010, 2009 and 2008 were $2,005, $1,219 and $1,305, respectively. This research and development +organization is heavily involved in vaccine development and production activities for our cGMP +facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility +of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, +not Meridian Life Science. +- 12 - +Table of Contents +The Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved, where +appropriate and as required. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger than we are with greater financial, research, +manufacturing and marketing resources. Important competitive factors for 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 our product lines do not reflect technological advances, our ability to compete in +those product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Cepheid, Quidel Corporation and +Alere Inc. +C. difficile is one of our primary disease categories. Over the last 24-30 months, considerable +confusion has developed in this market over the relative benefits of the various testing methods +available (toxin testing, antigen testing and molecular testing). Several new competitive +products, including molecular assays, have recently been introduced into this market, causing +competitive pressures for our products. With the development and launch of our +illumi gene ® molecular C. difficile product, we believe we are well-armed to combat these +competitive pressures. Following the introduction of illumi gene ® C. difficile, we are +the only manufacturer offering toxin, antigen and molecular products for C. difficile testing . +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply +arrangements do not exist. From time to time, customers may choose to manufacture their biomedical +reagents in-house rather than purchase from outside vendors such as Meridian. +- 13 - +Table of Contents +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service and price. +Although the product application for this facility was built from our existing expertise in cell +culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings; (ii) improving +product distribution capabilities; (iii) providing access to new markets; and/or (iv) providing +access to key biologicals or new technologies that lead to new products. Despite our recent +acquisition of the Bioline Group, we cannot provide any assurance that we will consummate any +additional acquisitions in the future nor can we provide any assurance that any acquisitions will +accomplish these objectives. However, we expect that the potential for acquisitions will continue +to provide opportunities for new revenues and earnings growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $43,391 or +30% of consolidated fiscal 2010 sales, $41,438 or 28% of consolidated fiscal 2009 sales and $44,430 +or 32% of consolidated fiscal 2008 sales. Domestic exports for our U.S. Diagnostics and Life +Science operating segments were $17,851, $15,568 and $16,450 in fiscal 2010, 2009 and 2008, +respectively. We expect to continue to look to international markets as a source of new revenues +and growth in the future. See Notes 7 and 9 to the Consolidated Financial Statements for +information concerning sales, long-lived assets and deferred tax assets by country. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. +- 14 - +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/item13.txt b/raw/filings/0000794172/2010/0000950123-10-109251/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..16cd25cdd861ad5b00ef173c4e58b32a8a051cbd --- /dev/null +++ b/raw/filings/0000794172/2010/0000950123-10-109251/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions, and Director Independence +71 \ No newline at end of file diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/item9a.txt b/raw/filings/0000794172/2010/0000950123-10-109251/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..89a3e76799aed29fe7543bee7b16c136f00c4306 --- /dev/null +++ b/raw/filings/0000794172/2010/0000950123-10-109251/item9a.txt @@ -0,0 +1,17 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2010, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2010. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has +materially affected, or is reasonably likely to affect, our internal control over financial +reporting, or in other factors that could significantly affect internal control subsequent to +September 30, 2010. +- 69 - +Table of Contents +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” \ No newline at end of file diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/rp_note.txt b/raw/filings/0000794172/2010/0000950123-10-109251/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2010/0000950123-10-109251/rpt_disclosure.txt b/raw/filings/0000794172/2010/0000950123-10-109251/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..8d670afa2d26e0a0b8d5370c27981793590fa8cf --- /dev/null +++ b/raw/filings/0000794172/2010/0000950123-10-109251/rpt_disclosure.txt @@ -0,0 +1,32 @@ +TRANSACTIONS WITH RELATED PERSONS +During fiscal 2010, Todd Motto, the adult son of William J. Motto, served as Vice President, +Business Development (1/2010 — 9/2010) and Vice President, Sales and Marketing (10/2009 — +12/2009). Todd Motto received $266,337 in compensation for fiscal 2010. This compensation +consisted of $208,728 of base salary, $9,642 of auto and professional allowances, $12,373 of +retirement plan contributions, $19,110 related to the fiscal 2010 restricted stock grant, $12,784 +related to stock option awards expense related to awards earned in previous years, and $3,700 for +dividends on restricted stock granted under the 2004 Equity Compensation Plan. Effective September +30, 2010, Todd Motto reduced his involvement with the Company and effective October 1, 2010 is +Coordinator of Business Development. +14 +Nasdaq rules require the Company to conduct an appropriate review of related party transactions +required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential +conflict of interest situations on an ongoing basis and that all such transactions must be approved +by the Audit Committee or another Committee comprised of independent Directors. As a result, the +Audit Committee annually reviews all such related party transactions and approves each related +party transaction if it determines that it is in the best interests of the Company. Additionally, +the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions +involving the Company and “related persons” (Directors and Executive Officers or their immediate +family members, or shareholders owning five percent or greater of the Company’s outstanding stock). +This also covers any related person transaction that meets the minimum threshold for disclosure in +the proxy statement under the relevant SEC rules (generally, transactions involving amounts +exceeding $120,000 in which a related person has a direct or indirect material interest). In +considering the transaction, the Audit Committee may consider all relevant factors, including, as +applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the +alternatives to entering into a related person transaction; (iii) whether the transaction is on +terms comparable to those available to third parties, or in the case of employment relationships, +to employees generally; (iv) the potential for the transaction to lead to an actual or apparent +conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and +(v) the overall fairness of the transaction to the Company. This policy is included in the +Company’s Employee Handbook. The approval of such related person transactions are evidenced by +internal Company resolutions or memoranda. \ No newline at end of file diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/filing.txt b/raw/filings/0000794172/2011/0000950123-11-100817/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..a74b40d6343e53dede67a7dfe67ffafaa0801a7a --- /dev/null +++ b/raw/filings/0000794172/2011/0000950123-11-100817/filing.txt @@ -0,0 +1,4830 @@ +10-K +1 +c25046e10vk.htm +FORM 10-K +e10vk +Table of Contents +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 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2011. +o +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. +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID No. 31-0888197 +Incorporated under the Laws of Ohio +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange of which registered +Common Shares, No Par Value +The NASDAQ Stock Market LLC +(NASDAQ Global Select Market) +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. YES þ NO o +If this report is an annual or transition report, indicate by check mark if the +registrant is not required to file reports pursuant to Section 13 or 15(d) of the +Securities Exchange Act. +YES o NO þ +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 þ NO o +Indicate by check mark whether the registrant has submitted electronically and posted +on its corporate Web site, if any, every Interactive Data File required to be submitted +and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for +such shorter period that the registrant was required to submit and post such files). YES þ NO o +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. +YES o NO þ +Indicate by check mark whether the registrant is a large accelerated filer, an +accelerated filer, a non-accelerated filer, or a smaller reporting company. See +definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting +company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer þ +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company o +Indicate by check mark whether the registrant is a shell company (as defined in Exchange +Act Rule 12b-2). YES o NO þ +The aggregate market value of Common Shares held by non-affiliates as of March 31, +2011 was $957,367,874 based on a closing sale price of $23.99 per share on March 31, 2011. +As of October 31, 2011, 41,237,445 no par value Common Shares were issued and +outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended +September 30, 2011 furnished to the Commission pursuant to Rule 14a-3(b) are incorporated +by reference in Part II as specified and portions of the Registrant’s Proxy Statement to +be filed with the Commission for its 2012 Annual Shareholders’ Meeting are incorporated by +reference in Part III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +4 +Item 1A Risk Factors +15 +Item 1B Unresolved Staff Comments +22 +Item 2 Properties +23 +Item 3 Legal Proceedings +24 +Item 4 [Removed and Reserved] +24 +Part II +Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of +Equity +Securities +24 +Item 6 Selected Financial Data +25 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations +25 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +43 +Item 8 Financial Statements and Supplementary Data +44 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +75 +Item 9A Controls and Procedures +75 +Item 9B Other Information +75 +Part III +Item 10 Directors, Executive Officers and Corporate Governance +76 +Item 11 Executive Compensation +76 +Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +76 +Item 13 Certain Relationships and Related Transactions, and Director Independence +76 +Item 14 Principal Accounting Fees and Services +76 +Item 15 Exhibits and Financial Statement Schedules +76 +EX-13 +EX-21 +EX-23 +EX-31.1 +EX-31.2 +EX-32 +EX-101 INSTANCE DOCUMENT +EX-101 SCHEMA DOCUMENT +EX-101 CALCULATION LINKBASE DOCUMENT +EX-101 LABELS LINKBASE DOCUMENT +EX-101 PRESENTATION LINKBASE DOCUMENT +EX-101 DEFINITION LINKBASE DOCUMENT +Table of Contents +FORWARD LOOKING STATEMENTS +This Annual Report on Form 10-K contains 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. Except for historical information, +this report contains forward-looking statements within the meaning of Section 27A of the Securities +Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be +identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, +“will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions +thereof and which also may be identified by their context. Such statements, whether expressed or +implied, are based upon current expectations of the Company and speak only as of the date made. +The Company assumes no obligation to publicly update or revise any forward-looking statements even +if experience or future changes make it clear that any projected results expressed or implied +therein will not be realized. These statements are subject to various risks, uncertainties and +other factors that could cause actual results to differ materially, including, without limitation, +the following: 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. Meridian +relies on proprietary, patented and licensed technologies, and the Company’s ability to protect its +intellectual property rights, as well as the potential for intellectual property litigation, would +impact its results. Ongoing consolidations of reference laboratories and formation of +multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary +pressures on the economy and the markets in which our customers operate, as well as adverse trends +in buying patterns from customers can change expected results. Costs and difficulties in complying +with laws and regulations, including those 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. The international scope of Meridian’s operations, including changes in +the relative strength or weakness of the U.S. dollar, can make results difficult to predict. 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 will be successfully integrated into Meridian’s operations. +There may be risks that acquisitions may disrupt operations and may pose potential difficulties in +employee retention and there may be additional risks with respect to Meridian’s ability to +recognize the benefits of acquisitions, including potential synergies and cost savings or the +failure of acquisitions to achieve their plans and objectives. The Company cannot predict the +possible impact of recently-enacted United States healthcare legislation and any similar +initiatives in other countries on its results of operations. In addition to the factors described +in this paragraph, Part I, Item 1A Risk Factors contains a list and description of uncertainties, +risks and other matters that may affect the Company. +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results +of operations that are subject to risks and uncertainties. See “Forward Looking Statements” above. +Factors that could cause or contribute to such differences include those discussed in Item 1A. +Risk Factors. In addition to the risk factors discussed herein, we are also subject to additional +risks and uncertainties not presently known to us or that we currently deem immaterial. If any of +these risks and uncertainties develop into actual events, our business, financial condition or +results of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Meridian,” +“we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +In the discussion that follows, all dollars and shares are in thousands (both tables and text), +except per share data . +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company with principal businesses in (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract +development and manufacture of proteins and other biologicals under cGMP conditions for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. The +company was incorporated in Ohio in 1976. Our principal corporate offices are located in +Cincinnati, Ohio, USA. +Our +website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission (SEC). These +reports may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., +Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing +these filings and other information regarding Meridian at +www.sec.gov . The information on our +website is not part of this Annual Report on Form 10-K. +- 4 - +Table of Contents +Operating Segments +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes +the contract development and manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Financial information for Meridian’s operating segments is included in Note 9 to the consolidated +financial statements. +Our primary source of revenues continues to be diagnostic products, which represents 76% of +consolidated net sales for fiscal 2011. Our diagnostic products provide accuracy, simplicity and +speed, enable early diagnosis and treatment of common, acute medical conditions, and provide for +better patient outcomes at reduced costs. We target diagnostics for disease states that (i) are +acute conditions where rapid diagnosis impacts patient outcomes; (ii) have opportunistic +demographic and disease profiles; (iii) are underserved by current diagnostic products; and (iv) +have difficult sample handling requirements. This approach has allowed us to establish significant +market share in our target disease states. The acquisition of the Bioline group of companies +(collectively the “Bioline Group”) in July 2010 dramatically increased the revenue base for our +Life Science operating segment; revenues for our Life Science operating segment represents 24% of +consolidated net sales for fiscal 2011. +U.S. Diagnostics Operating Segment +Overview +Our U.S. Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $97,000, $92,000 and $99,000 for fiscal +2011, 2010 and 2009, respectively, reflecting a three-year compound annual growth rate of 3%. As +of September 30, 2011, our U.S. Diagnostics operating segment had approximately 290 employees. +Our diagnostic test kits utilize immunodiagnostic and molecular technologies, which test samples of +stool, blood, urine and other body fluids or tissue for the presence of specific infectious +diseases. Specific immunodiagnostic technologies used in our diagnostic test kits include enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. Additionally, during 2010 we introduced into the marketplace our new +molecular amplification assay, illumi gene ® C.difficile . The illumi gene ® +molecular amplification assay detects the presence of the toxin producing region from the C. +difficile DNA, and provides highly accurate results in under an hour. During 2011, we continued +with the development of additional tests for the illumi gene ® molecular platform, +submitting illumi gene ® Group B Streptococcus (GBS) to the FDA for approval and we +expect to add three additional tests to the platform over the next 12 months — tests for Group A +Streptococcus , Mycoplasma pneumoniae and Bordetella pertussis/ parapertussis . +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of gastrointestinal diseases, such as +antibiotic-associated diarrhea (C. difficile ), pediatric diarrhea (Rotavirus and Adenovirus) and +stomach ulcers ( H. pylori ); foodborne diseases such as Enterohemorrhagic E. coli infection (EHEC) +and Campylobacter jejuni (Campy); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken +Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant infections); parasitic +diseases, such as Giardiasis, Cryptosporidiosis and Lyme; and respiratory diseases, such as +Pneumonia, Valley Fever, Influenza and Respiratory Syncytial Virus (RSV). The primary markets and +customers for these products are reference laboratories and hospitals. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital group purchasing organizations 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. +Sales and Marketing +Our U.S. Diagnostics operating segment’s sales and distribution network in the U.S. consists of a +direct sales force complemented by independent distributors. The use of independent distributors +in the U.S. allows our products to reach any bed-size healthcare facility and also provides our +customers the option to purchase our products direct or through distribution along with other +supplies. For our export markets in Asia, Canada and South America, we use independent +distributors. Two independent distributors in the U.S. accounted for 10% or more of consolidated +net sales in fiscal 2011, 2010 and 2009: Cardinal Healthcare Corporation and Fisher Scientific. +Our sales to Cardinal were approximately $30,000, $34,000 and $38,000 during fiscal 2011, 2010 and +2009, respectively. Our sales to Fisher were approximately $18,000, $18,000 and $19,000 during +fiscal 2011, 2010 and 2009, respectively. +- 6 - +Table of Contents +Consolidation of the U.S. healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to multi-year supply agreements with group purchasing organizations and +major reference laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include DNA amplification, enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. As a result, we are able to develop and manufacture diagnostic tests +in a variety of formats that satisfy customer needs and preferences, whether in a hospital, +commercial or reference laboratory, or alternate site location. Our product offering consists of +approximately 140 medical diagnostic products. +Sales within our focus product families — C. difficile, foodborne and H. pylori — accounted for +58%, 51% and 48% of our U.S. Diagnostics operating segment’s third-party sales during fiscal 2011, +2010 and 2009, respectively. These same product families accounted for 44%, 43% and 42% of +consolidated net sales in fiscal 2011, 2010 and 2009, respectively. +Clostridium difficile +C. difficile , a serious hospital acquired bacterial infection, is our largest product family, +generating approximately $30,000 in global sales for fiscal 2011, or 10% growth from fiscal 2010. +This product family has experienced significant competition over the last three years from new +technologies, including molecular testing platforms. Our illumi gene ® molecular C. +difficile product has now been available in markets around the world for over 12 months. Sales of +this product were approximately $9,000 and $500 in fiscal 2011 and 2010, respectively. We have just +over 650 placements of illumi gene ® units worldwide to date, with approximately 90% of +these installed in the U.S. At the present time, it generally takes a customer 90 days from +purchase order placement to become revenue producing — a timeframe we are continually working to +reduce. Our illumi gene ® molecular C. difficile product has restored the C. difficile +product family to positive sales growth and has allowed us to begin to recover lost test volume +from our Toxin products. +- 7 - +Table of Contents +Our major competitors in this product family are Cepheid and Becton Dickinson. We believe that we +have two advantages to our competition. First, our instrumentation package has a smaller footprint +and significantly lower cost than those of Cepheid or Becton Dickinson, with no capital outlay +required. We believe that this advantage allows our product to fit into virtually any size +hospital or reference laboratory. Second, we believe that the breadth of our C. difficile product +offerings represents an advantage. With the launch of our molecular product and recent FDA +clearance and submission activities related to our common antigen C. difficile products — Premier +C. difficile GDH received FDA clearance in May 2011, and Immuo Card C. difficile GDH was submitted +to the FDA in July 2011 — we believe we are in a unique position to offer a full line of testing +solutions to our clinical laboratory customers around the world to counter the competitive +pressures surrounding this market. Additionally, we hold the only FDA-approved claim for C. +difficile testing in the pediatric population. +Foodborne +Our foodborne product family achieved approximately $18,000 in global sales for fiscal 2011, or +growth of 36%. Our foodborne products include tests for Enterohemorrhagic E. coli (EHEC) and +Campylobacter jejuni (Campy). Approximately 95% of our foodborne product sales are in the U.S. In the U.S. +market, we believe that there are potentially 20 million annual stool cultures that make up the +total available market. At present, we believe that we have a 13% market share for EHEC and a 3% +market share for Campy. +We believe that the primary competition for our foodborne products is laboratory culture methods. +We believe that our products have two principal advantages versus culture methods. The first +principal advantage is test accuracy. Independent evaluations have shown our products to have +higher sensitivity than culture methods. The second principal advantage is improved work flow of +the testing process, resulting in significantly shortened time to test result. Our single-use +rapid products provide a test result in approximately 20 minutes, whereas culture results can take +up to 24-48 hours. Time to test result can be a critical factor in the physician’s choice of +therapies, as the mortality rate for EHEC is estimated to be 5% to 10%. +Helicobacter pylori +H. pylori , a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to +duodenal ulcers and stomach cancer. H. pylori represents our second largest product family, +generating approximately $22,000 in global sales for 2011, or 9% growth. We offer both antibody +and direct antigen tests in alternative formats (single-use and high volume batch). Our major +competition in this product family is test-method alternatives, such as serology and urea breath, +and physicians who prescribe symptom-relieving medications without testing. In the U.S., our +strategy has been to partner with managed care companies to promote the health and economic +benefits of a test and treat strategy, and to move physician behavior away from serology-based +testing toward direct antigen testing. In the U.S. market, we believe that there are potentially +30 million annual tests, of which we believe that we currently have a 5% market share. +In European markets, we face a greater number of competitive products for this product family. As +a result, pricing pressures have led to slightly negative sales growth for fiscal 2011 for our +European Diagnostics operating segment. +- 8 - +Table of Contents +Research and Development +Our U.S. Diagnostics operating segment’s research and development organization has expertise in +biochemistry, immunology, mycology, bacteriology, virology, parasitology and molecular biology. +Research and development expenses for the U.S. Diagnostics operating segment for fiscal 2011, 2010 +and 2009 were approximately $7,000, $6,000 and $7,000, respectively. This research and development +organization focuses its activities on new applications for our existing technologies, improvements +to existing products and development of new technologies. Research and development efforts may +occur in-house or with collaborative partners. We believe that new product development is a key +source for sustaining revenue growth. The products within our C. difficile , foodborne, and H. +pylori product families were either developed solely in-house, or via collaboration with outside +partners. +The introduction of our molecular amplification assay, illumi gene ® C.difficile , +introduced in markets around the world over 12 months ago, followed nearly four years of +exploration and development of a molecular-based diagnostic testing technology to complement our +existing antigen/antibody-based testing technologies. As previously noted, the +illumi gene ® molecular amplification assay detects the presence of a key toxin producing +region from the C. difficile DNA, and provides highly accurate results in under an hour. We +believe this molecular assay uniquely positions us in the market to provide a full line of testing +solutions that will meet the needs of both our domestic and international customers and, as a +result, during 2011 we have continued with the development of additional tests for the +illumi gene ® molecular platform, submitting illumi gene ® Group B Streptococcus +(GBS) to the FDA for approval and we expect to add three additional tests to the platform over the +next 12 months — tests for Group A Streptococcus , Mycoplasma pneumoniae and Bordetella +pertussis/parapertussis . We currently hold registrations to sell illumi gene ® in 37 +countries, including the U.S., with registrations pending in 5 additional countries. +During fiscal 2008, we launched our first products under our patented TRU rapid test technology. +The design of this technology enhances laboratory safety by containing the specimen in a closed +system during testing as recommended by CDC guidelines. TRU tests also use less space than other +immunoassay technologies, which is an advantage in space-constrained clinical laboratories. +Products using this technology include TRU FLU ® , TRU RSV ® , TRU +EBV-M ® and TRU EBV-G ® . TRU Legionella is the latest addition to the TRU line +of products. Legionella was launched in ex-U.S. markets during the fourth quarter of fiscal 2011, +and is expected to be available in the U.S. market in fiscal 2012. +Manufacturing +Our immunodiagnostic and molecular products require the production of highly specific and sensitive +antigens, antibodies and primers. While we produce substantially all of our own requirements +including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial and +viral antigens, currently a number of the raw materials used in our illumi gene ® +molecular product are purchased from outside vendors. We believe that we have sufficient +manufacturing and sourcing capacity for anticipated growth in the near term. +- 9 - +Table of Contents +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our U.S. +Diagnostics operating segment. Sales of these products are as follows: +Number of +Product Family +products +% of consolidated sales +2011 +2010 +C. difficile +1 +6 +% +0 +% +H. pylori +2 +13 +% +13 +% +Respiratory +2 +2 +% +4 +% +Other +6 +1 +% +2 +% +Total patented products +11 +22 +% +19 +% +The patent for the C. difficile product expires in 2020; the patents for the two H. pylori products +expire between 2016 and 2017; and the patents for the two respiratory products expire in 2022 and +2027. The remaining six patented products for which we own or license patents are spread over +three product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate +our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +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; however, we +can make no assurances in this regard. +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common +gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our +diagnostic product lines reduces the risk that infections subject to seasonality and sporadic +outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that +revenues will not be impacted period over period by such factors. +- 10 - +Table of Contents +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our U.S. Diagnostics operating segment and by +third-party vendors. Approximately 66% of third-party sales for fiscal 2011 for this operating +segment were products purchased from our U.S. Diagnostics operating segment. Third-party sales for +this operating segment were approximately $24,000, $24,000 and $26,000 for fiscal 2011, 2010 and +2009, respectively. As of September 30, 2011, the European Diagnostics operating segment had +approximately 40 employees. Our European Diagnostics operating segment’s sales and distribution +network consists of direct sales forces in Belgium, France, Holland and Italy, and independent +distributors in other European countries, Africa and the Middle East. The European Diagnostics +operating segment maintains a distribution center near Milan, Italy. The primary markets and +customers for this operating segment are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into U.S. dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic companies, as well as contract +development and manufacturing services under clinical cGMP conditions. Third-party sales for this +operating segment were approximately $38,000, $27,000 and $23,000 for fiscal 2011, 2010 and 2009, +respectively. As of September 30, 2011, our Life Science operating segment had approximately 195 +employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells +and bioresearch reagents used by researchers and other diagnostic companies. During fiscal 2011, +15% of third-party sales for this segment were to two customers. For one of these two customers, +we have exclusive supply agreements that have annual, automatic renewal provisions. We have a +long-standing relationship with this customer; and although there can be no assurances, we intend +to renew these supply agreements in the normal course of business. +- 11 - +Table of Contents +In July 2010, we acquired the Bioline Group and in so doing added important technologies and +capabilities to our Life Science business and complemented our expanding life science product lines +sold into the research, pharmaceutical and commercial diagnostic markets. In addition to +technological capabilities, Bioline also added proprietary know-how in the production of +high-volume nucleotides and PCR enzymes, as well as a growing portfolio of intellectual property in +the form of patents and licenses. The Bioline Group contributed sales +of approximately $15,000 and $2,000 in fiscal 2011 and fiscal 2010, +respectively. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than our +immunodiagnostic and molecular biology products, as well as buying patterns of major customers. +See Note 1 (i) to the Consolidated Financial Statements herein for revenue recognition policies. +Our revenues for contract services were approximately $3,000, $2,000 and $2,000 in fiscal 2011, +2010 and 2009, respectively. +As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth +quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, and began the +transfer of our manufacturing operations from this facility to our Memphis, Tennessee facility. We +expect the consolidation of manufacturing operations in Memphis will provide a lower overall cost +structure and should be completed during the second fiscal quarter of 2012. Total costs to +complete the consolidation of facilities are expected to be approximately $2,200, consisting of +fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar +items. During the fourth quarter of 2011, we recognized $1,057 of these costs, and the balance +will be recognized during fiscal 2012, primarily during the first half of the fiscal year. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, OEM Concepts in fiscal 2005, and the +Bioline Group in July 2010). Historically, these businesses were run autonomously. In recent +years, growth strategies have been developed around sales and marketing integration, new product +development integration, and the acquisition of complementary product lines. +- 12 - +Table of Contents +Immunodiagnostic products such as antibodies, antigens and reagents are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These products are typically sold in bulk +quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales +efforts are focused on multi-year supply agreements in order to provide stability in volumes and +pricing. We believe this benefits both us and our customers. +Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed +primarily to research customers. These products are typically sold in small quantities. +Research and Development +Research and development expenses for our Life Science operating segment for fiscal 2011, 2010 and +2009 were approximately $3,000, $2,000 and $1,000, respectively. This research and development +organization is heavily involved in vaccine development and production activities for our cGMP +facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +The Meridian Life Science facilities are ISO 9001:2008 certified and EC 1069:2009 approved, where +appropriate and as required. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger than we are with greater financial, research, +manufacturing and marketing resources. Important competitive factors for 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 our product lines do not reflect technological advances, our ability to compete in +those product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Cepheid, Quidel Corporation and +Alere, Inc. +- 13 - +Table of Contents +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply arrangements do not exist. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than purchase from outside +vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service and price. +Although the product application for this facility was built from our existing expertise in cell +culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the growth of our businesses. Our acquisition +objectives include, among other things, (i) enhancing product offerings; (ii) improving product +distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to +key biologicals or new technologies that lead to new products. Although we cannot provide any +assurance that we will consummate any additional acquisitions in the future, nor can we provide any +assurance that any acquisitions will accomplish these objectives, we expect that the potential for +acquisitions will continue to provide opportunities for revenues and earnings growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were +approximately $53,000 or 33% of consolidated fiscal 2011 sales, $43,000 or 30% of consolidated +fiscal 2010 sales and $41,000 or 28% of consolidated fiscal 2009 sales. We expect to continue to +look to international markets as a source of new revenues and growth in the future. See Notes 7 +and 9 to the Consolidated Financial Statements for information concerning sales, long-lived assets +and deferred tax assets by country. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. +- 14 - +Table of Contents +ITEM 1A. +RISK FACTORS +In addition to the other information set forth in this report, you should carefully consider the +following factors, which could materially affect our business, financial condition, cash flows or +future results. Any one of these factors could cause our actual results to vary materially from +recent results or from anticipated future results. The risks described below are not the only +risks facing our Company. Additional risks and uncertainties not currently known to us or that we +currently deem to be immaterial also may materially adversely affect our business, financial +condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable +terms. +The medical diagnostic and life science industries are characterized by ongoing technological +developments and changing customer requirements. As such, our results of operations and continued +growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and +successfully introduce into the marketplace, enhancements of existing products and services or new +products and services that incorporate technological advances, meet customer requirements and +respond to products developed by our competition. We cannot provide any assurance that we will be +successful in developing or acquiring such rights to products and services on a timely basis, or +that such products and services will adequately address the changing needs of the marketplace, +either of which could adversely affect our results of operations. +In addition, we must regularly allocate considerable resources to research and development of new +products, services and technologies. The research and development process generally takes a +significant amount of time from design stage to product launch. This process is conducted in +various stages. During each stage, there is a risk that we will not achieve our goals on a timely +basis, or at all, and we may have to abandon a product in which we have invested substantial +resources. +We may be unable to successfully integrate operations or to achieve expected cost savings from +acquisitions we make. +One of our main growth strategies is the acquisition of companies and/or products. Although +additional acquisitions of companies and products may enhance the opportunity to increase net +earnings over time, such acquisitions could result in greater administrative burdens, increased +exposure to the uncertainties inherent in marketing new products and financial risks of additional +operating costs. The principal benefits expected to result from any acquisitions we make will not +be achieved fully unless we are able to successfully integrate the operations of the acquired +entities with our operations and realize the anticipated synergies, cost savings and growth +opportunities from integrating these businesses into our existing businesses. We cannot provide any +assurance that we will be able to identify and complete additional acquisitions on terms we +consider favorable or that, if completed, will be successfully integrated into our operations. +- 15 - +Table of Contents +Revenues for our diagnostic operating segments may be impacted by our reliance upon two key +distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our U.S. Diagnostic operating segment’s sales through two distributors were 49% and 57%, +respectively, of the U.S. Diagnostics operating segment’s total sales for fiscal 2011 and 2010, or +30% and 36%, respectively, of our consolidated sales for fiscal 2011 and 2010. These parties +distribute our products and other laboratory products to end-user customers. The loss of either of +these distributors could negatively impact our sales and results of operations unless suitable +alternatives were timely found or lost sales to one distributor were absorbed by another +distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our +industry’s competitive environment. As an alternative, we could expand our efforts to distribute +and market our products directly. This alternative, however, would require substantial investment +in additional sales, marketing and logistics resources, including hiring additional sales and +customer service personnel, which would significantly increase our future selling, general and +administrative expenses. +In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, +potentially leading to uneven concentration levels on a quarterly basis. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common +gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our +diagnostic product lines reduces the risk that infections subject to seasonality and sporadic +outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that +revenues will not be negatively impacted period over period by such factors. +Changing Diagnostic Market Conditions +Changes in the healthcare delivery system have resulted in major consolidation among reference +laboratories and in the formation of multi-hospital alliances, reducing the number of institutional +customers for diagnostic test products. Consolidation in the U.S. healthcare industry has also led +to the creation of group purchasing organizations (GPOs) that aggregate buying power for hospital +groups and put pressure on our selling prices. Due to such consolidation, we may not be able to +enter into and/or sustain contractual or other marketing or distribution arrangements on a +satisfactory commercial basis with institutional customers and GPOs, which could adversely affect +our results of operations. +- 16 - +Table of Contents +We could be adversely affected by healthcare reform legislation. +Third-party payers for medical products and services, including state and federal governments, are +increasingly concerned about escalating health care costs and can indirectly affect the pricing or +the relative attractiveness of our products by regulating the maximum amount of reimbursement they +will provide for diagnostic testing services. Following years of increasing pressure, during 2010 +the U.S. government enacted comprehensive healthcare reform. At present, given the infancy of the +enacted reform, we are unable to predict what effect the legislation might ultimately have on +reimbursement rates for our products. If reimbursement amounts for diagnostic testing services are +decreased in the future, such decreases may reduce the amount that will be reimbursed to hospitals +or physicians for such services and consequently could place constraints on the levels of overall +pricing, which could have a material effect on our sales and/or results of operations. +In addition, this legislation established a 2.3% excise tax on the sales of medical devices +beginning in 2013. At existing sales levels in our U.S. markets, this would result in an annual +excise tax in excess of $2,000 for our company. It is unknown at the present time whether this +cost can be passed on to customers. +Revenues for our Life Science operating segment may be impacted by customer concentrations and +buying patterns. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +15% and 27%, respectively, of the Life Science operating segment’s total sales for fiscal 2011 and +fiscal 2010, or 4% and 5%, respectively, of our consolidated sales for fiscal 2011 and fiscal 2010. +For one of these two customers, we have exclusive supply agreements that have annual, automatic +renewal provisions. Although we have a long-standing relationship with this customer, we cannot +provide any assurance that we will be able to renew these supply agreements, which could adversely +affect our sales and results of operations. +Our Life Science operating segment has four other significant customers who purchase antigens, +antibodies and reagents, which together comprised 10% and 13%, respectively, of the operating +segment’s total sales for fiscal 2011 and 2010. Any significant alteration of buying patterns from +these customers could adversely affect our period over period sales and results of operations. +Revenues relating to research, development and manufacturing services for our Life Science +operating segment are generated on a contract by contract basis. The nature of this business is +such that each contract provides a unique product and/or service and corresponding revenue stream. +Although we believe that future prospects for this business will generate targeted growth rates, +there can be no assurance that future contracts will be secured, and if secured, will be +profitable. +- 17 - +Table of Contents +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid +change. Hundreds of companies in the United States supply immunodiagnostic tests and purified +reagents. These companies range from multinational healthcare entities, for which +immunodiagnostics is one line of business, to small start-up companies. Many of our competitors +have significantly greater financial, technical, manufacturing and marketing resources than we do. +We cannot provide any assurance that our products and services will be able to compete successfully +with the products and services of our competitors. +In recent years, molecular tests have been introduced for the first time into the C. difficile +market, which is a significant source of revenues for us. Our ability to continue to successfully +compete in the C. difficile market is partly dependent upon the success and market acceptance of +our own molecular-based product, illumi gene ® C. difficile . +We depend on international sales, and our financial results may be adversely impacted by foreign +currency, regulatory or other developments affecting international markets. +We sell products and services into approximately 60 countries. Approximately 33% of our net sales +for fiscal 2011 and approximately 30% of our net sales for fiscal 2010 were attributable to +international markets. For fiscal 2011, 43% of our international sales were made in Euros and 40% +were made in U.S. dollars, with the remaining 17% being a combination of the British pound and the +Australian dollar. We are subject to the risks associated with fluctuations in the exchange rates +for the Australian dollar, British pound and Euro to the U.S. dollar. We are also subject to other +risks associated with international operations, including longer customer payment cycles, tariff +regulations, requirements for export licenses, instability of foreign governments, and governmental +requirements with respect to the importation and distribution of medical devices and +immunodiagnostic and molecular biology reagents, all of which may vary by country. +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by +these regulations. +Medical device diagnostics and the manufacture, sale and distribution of bulk antigens, antibodies +and reagents are highly regulated industries. We cannot provide any assurance that we will be able +to obtain necessary governmental clearances or approvals or timely clearances or approvals to +market future products in the United States and other countries. Costs and difficulties in +complying with laws and regulations administered by the U.S. Food and Drug Administration, the U.S. +Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the +Centers for Disease Control or other regulators can result in unanticipated expenses and delays and +interruptions to the sale of new and existing products. Contract manufacturing of proteins and +other biologicals is regulated by the U.S. Food and Drug Administration. +Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs +of approvals difficult to predict. The failure to comply with these regulations can result in +delay in obtaining authorization to sell products, seizure or recall of products, suspension or +revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +- 18 - +Table of Contents +Significant interruptions in production at our principal manufacturing facilities and/or +third-party manufacturing facilities would adversely affect our business and operating results. +Products and services manufactured at our Cincinnati, Ohio; Boca Raton, Florida; Memphis, +Tennessee; Saco, Maine; London, England; Luckenwalde, Germany; and Sydney, Australia facilities +comprised 73% of our Diagnostics revenues and 82% of our Life Science revenues. Our global supply +of these products and services is dependent on the uninterrupted and efficient operation of these +facilities. In addition, we currently rely on a small number of third-party manufacturers to +produce certain of our diagnostic products and product components. The operations of our +facilities or these third-party manufacturing facilities could be adversely affected by power +failures, natural or other disasters, such as earthquakes, floods, tornadoes or terrorist threats. +Although we carry insurance to protect against certain business interruptions at our facilities, +there can be no assurance that such coverage will be adequate or that such coverage will continue +to remain available on acceptable terms, if at all. Any significant interruption in the Company’s +or third-party manufacturing capabilities could materially and adversely affect our operating +results. +We depend on sole-source suppliers for certain critical components and products. A supply +interruption could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +multiple sources of supply. However, certain critical raw materials and supplies required for the +production of some of our principal products are available only from a single supplier. In +addition, certain finished products, for which we act as a distributor, are available only from a +single supplier. If these suppliers become unable or unwilling to supply the required raw +materials or products, we would need to find another source, and perform additional development +work and obtain regulatory approvals for the use of the alternative raw materials for our products. +Completing that development and obtaining such approvals could require significant time and +resources, and may not occur at all. Any disruption in the supply of these raw materials or +finished products could have a material adverse affect on us. +We currently sole-source from a U.S. manufacturer the illumi pro -10 ® instrument on which +our illumi gene ® molecular testing platform operates. Additionally, two of our foodborne +products sourced from another vendor accounted for 14%, 11% and 7% of third-party sales for our +U.S. Diagnostics operating segment in fiscal 2011, 2010 and 2009, respectively. +- 19 - +Table of Contents +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented +technologies. In addition, we have licensed, and expect to continue to license, various +complementary technologies and methods from academic institutions and public and private companies. +We cannot provide any assurance that the technologies that we own or license provide protection +from competitive threats or from challenges to our intellectual property. In addition, we cannot +provide any assurances that we will be successful in obtaining licenses or proprietary or patented +technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our +ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the +market for diagnostics continues to grow and the number of participants in the market increases, we +may increasingly be subject to patent infringement claims. It is possible that a third-party may +claim infringement against us. If found to infringe, we may attempt to obtain a license to such +intellectual property; however, we may be unable to do so on favorable terms, or at all. +Additionally, if our products are found to infringe on third-party intellectual property, we may be +required to pay damages for past infringement and lose the ability to sell certain products, +causing our revenues to decrease. We currently carry intellectual property insurance that covers +damages and defense costs from our potential infringement on other third-party patents at levels +that we believe are commercially reasonable, although there is no assurance that it will be +adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a +claim could have a material adverse affect on our profitability and the damage to our reputation in +the industry could have a material adverse affect on our business. +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing and marketing of medical diagnostic products involves an inherent risk +of product liability claims. If we cannot successfully defend ourselves against product liability +claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially +reasonable, although there is no assurance that it will be adequate to cover claims that may arise. +In certain customer contracts, we indemnify third parties for certain product liability claims +related to our products. These indemnification obligations may cause us to pay significant sums of +money for claims that are covered by these indemnifications. In addition, a defect in the design +or manufacture of our products could have a material adverse affect on our reputation in the +industry and subject us to claims of liability for injury and otherwise. Any substantial +underinsured loss resulting from such a claim could have a material adverse affect on our +profitability and the damage to our reputation in the industry could have a material adverse affect +on our business. +- 20 - +Table of Contents +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire and retain key +personnel. +Our future success depends on our continued ability to attract, hire and retain highly qualified +personnel, including our executive officers and scientific, technical, sales and marketing +employees, and their ability to manage growth successfully. If such key employees were to leave +and we were unable to obtain adequate replacements, our operating results could be adversely +affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain +financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we +would be in default under the credit agreement. If an event of default is not cured or waived, it +could result in acceleration of any indebtedness under our credit agreement, which could have a +material adverse effect on our business. At the present time, no borrowings are outstanding under +our bank credit agreement. +We face risks related to global economic conditions. +We currently generate significant operating cash flows, which combined with access to the credit +markets provides us with discretionary funding capacity for research and development and other +strategic activities. Current uncertainty in global economic conditions poses a risk to the +overall economy that could impact demand for our products, as well as our ability to manage normal +commercial relationships with our customers, suppliers and creditors, including financial +institutions. If global economic conditions deteriorate significantly, our business could be +negatively impacted, including such areas as reduced demand for our products from a slow-down in +the general economy, supplier or customer disruptions resulting from tighter credit markets and/or +temporary interruptions in our ability to conduct day-to-day transactions through our financial +intermediaries involving the payment to or collection of funds from our customers, vendors and +suppliers. +Approximately $4,900 of our accounts receivable at September 30, 2011 is due from Italian hospital +customers whose funding ultimately comes from the Italian government. The magnitude of the +sovereign debt crisis in Europe, and Italy in particular, is significant. We have experienced a +deterioration in the aging of our Italian accounts receivable and continue to monitor the situation +closely. +- 21 - +Table of Contents +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred +stock and to determine the rights, preferences, privileges and restrictions, including voting +rights, of such shares without any future vote or action by the shareholders. The issuance of +preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage +takeover bids for our company that have not been negotiated with the board of directors. Such +provisions could limit the price that investors might be willing to pay in the future for shares of +our common stock. In addition, sales of substantial amounts of such shares in the public market +could adversely affect the market price of our common stock and our ability to raise additional +capital at a price favorable to us. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +- 22 - +Table of Contents +ITEM 2. +PROPERTIES +Our corporate offices, U.S. Diagnostics manufacturing facility and U.S. Diagnostics research and +development facility are located in four buildings totaling approximately 114,000 square feet on 10 +acres of land in the Village of Newtown, a suburb of Cincinnati, Ohio. These properties are owned +by us. We have approximately 39,000 square feet of manufacturing space and 14,000 square feet of +warehouse space in these facilities. Included within these properties is an approximately 21,000 +square foot building located on 3.5 acres of land within one mile of our primary headquarters +facility. Since purchasing this property in September 2009, we have transformed the property into +a state-of-the-art facility, which as of July 2011 houses our research and development operations +and our sales and marketing departments. The facility is called the Meridian Innovation Center and +was designed to stimulate our product development and marketing efforts. +Our European Diagnostics distribution center in Italy conducts its operations in a two-story +building near Milan, consisting of approximately 18,000 square feet. This facility is owned by our +wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in +Nice, France; Paris, France; and Nivelles, Belgium for sales and administrative functions. +Our Life Science operations are conducted in several facilities in Saco, Maine; Memphis, Tennessee; +and Boca Raton, Florida, as well as the Bioline Group facilities located in Boston, Massachusetts; +London, England; Luckenwalde, Germany; and Sydney, Australia. Our facility in Memphis, Tennessee +consists of two buildings totaling approximately 44,000 square feet, including approximately 27,000 +square feet of manufacturing space, and is owned by us. Our leased facility in Boca Raton, Florida +contains approximately 7,500 square feet of manufacturing space. Our facility in Saco, Maine, the +operations of which we are in the process of consolidating with the Memphis facility, contains +approximately 23,000 square feet for manufacturing, sales, distribution and administrative +functions. In anticipation of the consolidation of the Maine operations with the Tennessee +location being completed during the second quarter of fiscal 2012, we are marketing the property +for sale or lease. Following are details of the Bioline Group facilities, all of which are leased: +Boston — approximately 10,000 square feet of sales and warehouse space; London — approximately +9,000 square feet of sales, warehouse, distribution, research and development, manufacturing and +administrative office space; Luckenwalde — approximately 9,000 square feet of sales, warehouse and +manufacturing space; Sydney — approximately 3,000 square feet of sales, warehouse, research and +development and manufacturing space. +- 23 - +Table of Contents +ITEM 3. +LEGAL PROCEEDINGS +We are a party to various litigation matters that we believe are in the normal course of business. +The ultimate resolution of these matters is not expected to have a material adverse effect on our +financial position, results of operations or cash flows. No material provision has been made in +the accompanying consolidated financial statements for these matters. +ITEM 4. +[REMOVED AND RESERVED] +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Refer to “Forward Looking Statements” following the Index in front of the Form 10-K and Item 1A +“Risk Factors” on Pages 15 through 22 of this Annual Report. +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2011 +and “Quarterly Financial Data (Unaudited)” relating to our dividends in Note 11 to the Consolidated +Financial Statements are incorporated herein by reference. Except as may otherwise be prohibited +by applicable law, there are no restrictions on cash dividend payments. +Historically, our cash dividend policy has been to set the indicated annual dividend rate between +75% and 85% of each fiscal year’s expected net earnings. However, during each of fiscal 2011 and +fiscal 2010, years of significant investment in our foundation for the future (e.g., +illumi gene ® molecular technology development/launch, ongoing development of new products +for the molecular platform, Bioline Group acquisition, etc.), our indicated annual dividend rate of +$0.76 per share was 117% of diluted earnings per share. Based upon published fiscal 2012 earnings +guidance, management expects the annual indicated dividend to be between approximately 85% and 89% +of fiscal 2012 diluted earnings per share, although no assurances can be made in this regard. 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. +We paid dividends of $0.76 per share, $0.74 per share and $0.65 per share in fiscal 2011, 2010 and +2009, respectively. +As of September 30, 2011, there were approximately 1,000 holders of record and approximately 18,100 +beneficial owners of our common shares. +- 24 - +Table of Contents +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2011. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors” on pages 15 through 22 of this Annual Report. +In the discussion that follows, all amounts are in thousands (both tables and text), except per +share data . +Results of Operations : +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2011 increased 26% to $6,710, or $0.16 per diluted +share, from net earnings for the fourth quarter of fiscal 2010 of $5,322, or $0.13 per diluted +share. This increase reflects the combined effects of both increased sales and increased operating +expenses, in large part resulting from the Bioline Group, which was acquired on July 20, 2010. +Additionally, the fiscal 2011 fourth quarter includes $1,057 of costs associated with the +consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on net +earnings of $691, or $0.02 per diluted share). Sales for the fourth quarter of fiscal 2011 were +$41,349, an increase of $5,810, or 16%, compared to the fourth quarter of fiscal 2010, reflecting +the impact of a full quarter of Bioline Group sales and increased sales across all of our +diagnostic focus product families: C. difficile , Foodborne and H. pylori . +Sales for the U.S. Diagnostics operating segment for the fourth quarter of fiscal 2011 increased +14% compared to the fourth quarter of fiscal 2010, reflecting growth across all of our focus +product families — ranging from 12% growth in H. pylori products to 29% growth in our C. difficile +product family. Fourth quarter 2011 sales for our European Diagnostics operating segment increased +7% compared to the fourth quarter of fiscal 2010 due primarily to a positive currency effect. On +an organic basis, which excludes the effects of currency translation, sales for our European +Diagnostics operating segment decreased 4% during the fourth quarter, reflecting the ongoing +effects of significant competitive pressures in the C. difficile and H. pylori product families. +Largely as a result of the Bioline Group, sales for our Life Science segment experienced a 27% +increase in sales during this period. Excluding the effect of the Bioline Group, sales of our Life +Science operating segment increased by 8% during the fourth quarter of fiscal 2011 compared to the +fourth quarter of fiscal 2010. +- 25 - +Table of Contents +Fiscal Year +Net +earnings for fiscal 2011 increased 1% to $26,831, or $0.65 per diluted share, from net earnings +for fiscal 2010 of $26,647, or $0.65 per diluted share. Fiscal 2011 net earnings includes $691 +($1,057 excluding the income tax effect), or $0.02 per diluted share, associated with the +consolidation of the Saco, Maine operations into the Memphis, Tennessee facility, and $872 ($1,240 +excluding the income tax effect), or $0.02 per diluted share, related to costs incurred in +connection with the reorganization of our sales and marketing leadership during the second quarter +of fiscal 2011. Fiscal 2010 net earnings, on the other hand, includes $1,240, or $0.03 per diluted +share, of Bioline Group transaction costs. Results of operations for fiscal 2011 compared to +fiscal 2010 are discussed below. +Non-GAAP Information +The tables below provide information on net earnings, basic earnings per share and diluted earnings +per share, excluding the effect of costs associated with the consolidation of our Saco, Maine +operations into our Memphis, Tennessee facility (fiscal 2011), costs of reorganizing our sales and +marketing leadership (fiscal 2011) and transaction costs associated with the acquisition of the +Bioline Group (fiscal 2010), each of which is a non-GAAP financial measure, as well as +reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We +believe that this information is useful to those who read our financial statements and evaluate our +operating results because: +1. +These measures help to appropriately evaluate and compare the results of operations from +period to period by removing the impact of non-routine costs related to consolidating the +Maine operations (fiscal 2011) and reorganizing our sales and marketing leadership (fiscal +2011), and the one-time transaction costs related to the acquisition of the Bioline Group +(fiscal 2010); and +2. +These measures are used by our management for various purposes, including evaluating +performance against incentive bonus achievement targets, comparing performance from period to +period in presentations to our Board of Directors, and as a basis for strategic planning and +forecasting. +- 26 - +Table of Contents +2011 +2010 +2009 +Net Earnings - +U.S. GAAP basis +$ +26,831 +$ +26,647 +$ +32,759 +Sales & Marketing Leadership Reorganization (1) +872 +— +— +Facility consolidation costs (1) +691 +— +— +Transaction costs for Bioline Group acquisition (2) +— +1,240 +— +Adjusted earnings +$ +28,394 +$ +27,887 +$ +32,759 +Net Earnings per Basic Common Share - +U.S. GAAP basis +$ +0.66 +$ +0.66 +$ +0.81 +Sales & Marketing Leadership Reorganization (1) +0.02 +— +— +Facility consolidation costs (1) +0.02 +— +— +Transaction costs for Bioline Group acquisition (2) +— +0.03 +— +Adjusted Basic EPS +$ +0.70 +$ +0.69 +$ +0.81 +Net Earnings per Diluted Common Share - +U.S. GAAP basis +$ +0.65 +$ +0.65 +$ +0.80 +Sales & Marketing Leadership Reorganization (1) +0.02 +— +— +Facility consolidation costs (1) +0.02 +Transaction costs for Bioline Group acquisition (2) +— +0.03 +— +Adjusted Diluted EPS +$ +0.69 +$ +0.68 +$ +0.80 +(1) +These amounts are net of income tax effects of $368 and $366 for the leadership reorganization and the facility +consolidation costs, respectively, which were calculated using the effective tax rates of the jurisdictions in which +the costs were incurred. +(2) +Since the Bioline Group transaction costs were not deductible, there are no income tax effects. +Revenue Overview : +Our Diagnostics operating segments provide the largest share of our consolidated revenues, 76%, 81% +and 84% for fiscal 2011, 2010 and 2009, respectively. The percentage decline from fiscal 2010 to +2011 results primarily from the addition of the Bioline Group to our Life Science operating +segment. Sales from our focus families ( C. difficile , +Foodborne and H. pylori ) comprised 58% of +our Diagnostics operating segments’ revenues during fiscal 2011. +The overall revenue change for our Diagnostics operating segments during fiscal 2011 was an +increase of 5%, reflecting growth in all of our focus product families. The levels of growth +ranged from 9% in our H. pylori products to 36% in our foodborne products family. C. difficile +revenue, which had declined 18% and 2% in 2010 and 2009, respectively, increased 10% in fiscal +2011. Respiratory product sales declined 26% as a result of the end of the H1N1 influenza pandemic +in December 2009. However, sales of non-influenza respiratory products declined only 1%. On an +organic basis, which excludes the effects of currency translation, sales of our European Diagnostic +operating segment decreased by 2% in fiscal 2011, reflecting the combined effects of decreases in +our C. difficile , respiratory and H. pylori product families, partially offset by growth in our +foodborne product sales. +- 27 - +Table of Contents +C. difficile Products +Our illumi gene ® molecular C. difficile product has now been available in markets around +the world for over 12 months. Sales of this product were approximately $9,000 and $500 in fiscal +2011 and 2010, respectively. We have just over 650 placements of illumi gene ® units +worldwide to date, with approximately 90% of these installed in the U.S. At the present time, it +generally takes a customer 90 days from purchase order placement to become revenue producing — a +timeframe we are continually working to reduce. Our illumi gene ® molecular C. difficile +product has restored the C. difficile product family to positive sales growth, 10% in fiscal 2011, +and has allowed us to begin to recover lost test volume from our Toxin products. +Our major competitors in this product family are Cepheid and Becton Dickinson. We believe that we +have two principal advantages versus our competition. First, our instrumentation package has a +smaller footprint and significantly lower cost than either Cepheid or Becton Dickinson. We believe +that this advantage allows our product to fit into virtually any size hospital or reference +laboratory. We believe that our second principal advantage is the breadth of our C. difficile +product offerings. With the launch of our molecular product and recent FDA clearance and +submission activities related to our common antigen C. difficile products — Premier C. difficile +GDH received FDA clearance in May 2011, and Immuno Card C. difficile GDH was submitted to the FDA in +July 2011 — we believe we are in a unique position to offer a full line of testing solutions to our +clinical laboratory customers around the world to counter the competitive pressures surrounding +this market. Additionally, we hold the only FDA-approved claim for C. difficile testing in the +pediatric population. During July, we submitted to the FDA our second molecular test for the +illumi gene ® molecular platform, illumi gene ® Group B Streptococcus (GBS), and +over the next 12 months, we expect the following additional tests for the platform — Group A +Streptococcus , Mycoplasma pneumoniae and Bordetella pertussis/parapertussis — to clear formal +clinical trials and be submitted to the FDA for marketing clearance. +Foodborne Products +During fiscal 2011, sales of our foodborne products increased approximately 35% for our U.S. +Diagnostics operating segment and approximately 39% for our European Diagnostics operating segment +on an organic basis. As was experienced in fiscal 2010, the revenue increases in this product +family continue to reflect the volume growth in our new foodborne products launched in recent +years. Additionally, the European Diagnostics operating segment’s growth reflects the effects of +the Enterohemorrhagic E. coli (EHEC) infection outbreak in Europe during the third quarter of +fiscal 2011. The market acceptance and volume growth of these products has resulted in global +revenues for this disease family growing nearly five-fold since fiscal 2007, with foodborne fast +approaching a $20,000 product family. +We believe that the primary competition for our foodborne products is laboratory culture methods. +We believe that our products have two principal advantages versus culture methods. The first +principal advantage is test accuracy. Independent evaluations have shown our products to have +higher sensitivity than culture methods. The second principal advantage is improved work flow of +the testing process, resulting in significantly shortened time to test result. Our single-use rapid +products provide a test result in approximately 20 minutes, whereas culture results can take up to +24-48 hours. Time to test result can be a critical factor in the physician’s choice of therapies. +- 28 - +Table of Contents +H. pylori Products +During fiscal 2011, sales of our H. pylori products grew 14% for our U.S. Diagnostics operating +segment and declined 3% for our European Diagnostics operating segment on an organic basis, +compared to the year-over-year sales level increases these operating segments experienced in 2010 +of 15% and 1%, respectively. The increases for our U.S. Diagnostics operating segment continue to +reflect the benefits of our partnerships with managed care companies in promoting the health and +economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving +physician behavior away from serology-based testing toward direct antigen testing. We expect that +our efforts with managed care companies in the U.S. will provide low to mid-teens growth +opportunities for the next several years. The sales results for our European Diagnostics operating +segment reflect the ongoing impact of pricing pressures from competitive products in European +markets. +Respiratory Products +During fiscal 2011, respiratory sales for our Diagnostics operating segments decreased 26% compared +to fiscal 2010, following a 25% year-over-year decrease from fiscal 2009 to fiscal 2010. The +dramatic sales fluctuation for this family is a direct result of the end of the novel A (H1N1) +outbreak in December 2009. Total non-influenza respiratory product sales remained relatively flat +compared to fiscal 2010, with sales of such products decreasing 3% for our U.S. Diagnostics +operating segment and increasing 10% for our European Diagnostics operating segment on an organic +basis. At present, we do not expect a significant revenue contribution from influenza products in +fiscal 2012. +Group Purchasing Organizations +In our U.S. Diagnostics operating segment, consolidation of the U.S. healthcare industry over the +last several years has led to the creation of group purchasing organizations (GPOs) that aggregate +buying power for hospital groups and put pressure on our selling prices. We have multi-year supply +agreements with several GPOs. During fiscal 2011, we experienced approximately $1,000 in +unfavorable price variance, as a result of these agreements. However, these agreements help secure +our products with these customers and have led to new business. While in the near term this has +negatively impacted gross profit, further increases in volumes are expected from these contracts. +Foreign Currency +Favorable currency exchange rates resulted in approximately $600 of additional revenue being +recognized by our European Diagnostics operating segment during fiscal 2011, compared to currency +exchange rates having virtually no impact on the fiscal 2010 consolidated sales results. During +fiscal 2009, currency exchange rates had an approximate $2,400 unfavorable impact on revenue. +- 29 - +Table of Contents +Life Science Operating Segment +Sales for our Life Science operating segment increased 43% in fiscal 2011, due primarily to a +$15,000 revenue contribution from the Bioline Group acquired in July 2010. Excluding the impact of +the Bioline Group, sales for the operating segment declined 5% for the year, as this business +continues to experience both pricing pressure and reduced order volumes in bulk antigens, +antibodies and related reagents. For fiscal 2012, we expect overall revenue growth of our Life +Science operating segment to be in the range of 5% to 6%, led by the Bioline Group, which we expect +to generate double-digit increases in sales of its molecular reagent products. We expect sales of +our bulk antigen, antibody and reagent products to decline slightly in fiscal 2012 due to a slowing +immunoassay demand profile. +As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth +quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, and began the +consolidation of our manufacturing operations from this facility with our Memphis, Tennessee +facility. We expect the consolidation of manufacturing operations in Memphis will provide a lower +overall cost structure and should be completed during the second fiscal quarter of 2012. Total +costs to complete the consolidation of facilities are expected to be approximately $2,200, +consisting of fixed asset impairments, inventory impairments, stay +bonuses and moving costs, among other +similar items. During the fourth quarter of fiscal 2011, we recognized $1,057 of these costs, and +the balance will be recognized during fiscal 2012, primarily during the first half of the fiscal +year. +Significant Customers +Our U.S. Diagnostic operating segment’s sales through two national distributors were 49% of the +U.S. Diagnostics operating segment’s total sales, or 30% of consolidated sales, for fiscal 2011. +This compares to fiscal 2010, in which sales through these distributors comprised 57% of U.S. +Diagnostics operating segment sales and 36% of consolidated sales. The lower percentage of sales +reflects the fact that the majority of our illumi gene ® product sales are direct, as well +as the comparative decline in these distributors’ inventory stocking of influenza and other +products. +Our Life Science operating segment’s sales of purified antigens and reagents to two diagnostic +manufacturing customers were 15% of the Life Science operating segment’s total sales for fiscal +2011 or 4% of our consolidated sales for fiscal 2011, compared to 27% and 5% of fiscal 2010 Life +Science operating segment and consolidated sales, respectively. The lower percentage of sales +results primarily from the addition of the Bioline Group. +- 30 - +Table of Contents +Operating Segment Revenues : +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes +the contract development and manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Revenues for the Diagnostics operating segments, in the normal course of business, may be affected +by buying patterns of major distributors, seasonality and strength of certain diseases, and foreign +currency exchange rates. Revenues for the Life Science operating segment, in the normal course of +business, may be affected by the timing and nature of arrangements for contract services work, +which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, +as well as buying patterns of major customers. We believe that the overall breadth of our product +lines serves to reduce the variability in consolidated revenues. +Revenues for each of our operating segments are shown below. +2011 vs. +2010 vs. +2010 +2009 +2011 +2010 +2009 +Inc (Dec) +Inc (Dec) +U.S. Diagnostics +$ +97,133 +$ +92,020 +$ +98,970 +6 +% +(7 +)% +European Diagnostics +24,187 +24,041 +25,870 +1 +% +(7 +)% +Life Science +38,403 +26,939 +23,434 +43 +% +15 +% +Consolidated +$ +159,723 +$ +143,000 +$ +148,274 +12 +% +(4 +)% +International - +U.S. Diagnostics +$ +6,692 +$ +6,268 +$ +5,657 +7 +% +11 +% +European Diagnostics +24,187 +24,041 +25,870 +1 +% +(7 +)% +Life Science +22,283 +13,082 +9,911 +70 +% +32 +% +Total +$ +53,162 +$ +43,391 +$ +41,438 +23 +% +5 +% +% of total sales +33 +% +30 +% +28 +% +- 31 - +Table of Contents +Gross Profit: +2011 vs. +2010 vs. +2010 +2009 +2011 +2010 +2009 +Inc (Dec) +Inc (Dec) +Gross Profit +$ +99,298 +$ +88,696 +$ +92,442 +12 +% +(4 +)% +Gross Profit Margin +62 +% +62 +% +62 +% +— +— +The stability in our overall gross profit margins from 2009 to 2011 reflects the combined effects +of 1) the margin contribution of Bioline Group products for a full year in fiscal 2011; 2) +continued operating efficiencies in our Cincinnati, Ohio diagnostic test manufacturing facility; +and 3) the year-over-year declines in respiratory product sales. Our respiratory product family +generally has a lower gross profit margin than our focus product families ( C. difficile , +foodborne and H. pylori ). Sales of respiratory products during fiscal 2011, 2010 and 2009 were approximately +10%, 15% and 20%, respectively, of our consolidated sales. Specifically, sales of the Company’s +influenza products during fiscal 2011, 2010 and 2009 represented approximately 2%, 6% and 10%, +respectively, of consolidated sales. +GPO contracts also impacted our gross profit margins during fiscal 2011 and 2010. These contracts +provide customers with favorable pricing based on purchase volumes of Meridian products. During +fiscal 2011, we experienced approximately $1,000 in unfavorable price variance, as a result of +these agreements. However, these agreements help secure our products with these customers and have +led to new business. While in the near term this has negatively impacted gross profit, further +increases in volumes are expected from these contracts. +Our overall operations consist of the sale of diagnostic test kits for various disease states and +in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, +proficiency panels, and contract research and development and contract manufacturing services. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +- 32 - +Table of Contents +Operating Expenses: +Total +Research & +Selling & +General & +Operating +Development +Marketing +Administrative +Other (1) +Expenses +2009 Expenses +$ +8,274 +$ +18,324 +$ +17,065 +$ +— +$ +43,663 +% of Sales +6 +% +12 +% +12 +% +0 +% +29 +% +Fiscal 2010 Increases (Decreases): +U.S. Diagnostics +(655 +) +(377 +) +1,511 +— +479 +European Diagnostics +— +(205 +) +277 +— +72 +Life Science +- Bioline Group +117 +493 +787 +— +1,397 +- Core +660 +15 +32 +— +707 +- Transaction Costs +— +— +— +1,240 +1,240 +2010 Expenses +$ +8,396 +$ +18,250 +$ +19,672 +$ +1,240 +$ +47,558 +% of Sales +6 +% +13 +% +14 +% +1 +% +33 +% +% Increase (Decrease) +1 +% +0 +% +15 +% +— +9 +% +Fiscal 2011 Increases (Decreases): +U.S. Diagnostics +844 +1,236 +183 +365 +2,628 +European Diagnostics +— +143 +156 +875 +1,174 +Life Science +- Bioline Group +636 +3,293 +5,235 +— +9,164 +- Core +(54 +) +(150 +) +(363 +) +548 +(19 +) +- Transaction Costs +— +— +— +(1,240 +) +(1,240 +) +2011 Expenses +$ +9,822 +$ +22,772 +$ +24,883 +$ +1,788 +$ +59,265 +% of Sales +6 +% +14 +% +16 +% +1 +% +37 +% +% Increase (Decrease) +17 +% +25 +% +26 +% +44 +% +25 +% +Overall, the increase in total operating expenses during fiscal 2011 results in large part from (i) +the impact on all three ongoing operating expense categories (i.e., Research & Development, Selling +& Marketing, and General & Administrative) of adding the Bioline Group’s full-year operating +expenses; (ii) incurring approximately $1,240 of costs during the second quarter of fiscal 2011 in +connection with the reorganization of our sales and marketing leadership (including severance +benefits for the former President and Managing Director of our European diagnostics business); and +(iii) incurring approximately $1,057 of costs during the fourth quarter of fiscal 2011 in +connection with the consolidation of our Saco, Maine operations into our Memphis, Tennessee +location. The facility consolidation costs incurred to-date are comprised primarily of write-downs +to property, equipment and inventory, and stay bonus costs for personnel scheduled to be terminated +at varying times throughout fiscal 2012. Additional stay bonus costs totaling approximately $600 +are expected to be incurred during fiscal 2012, with the majority of such costs to be incurred +during the first and second quarters. +- 33 - +Table of Contents +Operating expenses for the U.S. Diagnostics operating segment increased $2,628 for fiscal 2011 +compared to fiscal 2010 and increased $479 for fiscal 2010 compared to fiscal 2009. The overall +net increase in fiscal 2011 reflects the combined effects of the following: +Research & Development +Overall increase in spending on new product development activities related to products +submitted to the FDA during the year and planned for submission during fiscal 2012, as well +as spending on increased illumi gene ® component qualification activities. Costs +include increased personnel-related and quality control costs of approximately $450 and +$150, respectively. +Selling & Marketing +The launch of illumi gene ® resulting in increased sales bonus and commissions +expenses and increased travel and trade show expenses of approximately $750 and $300, +respectively. +General & Administrative +The positive effects of overall cost containment and reduction efforts being offset by an +approximate $750 increase in stock-based compensation during fiscal 2011. +The overall net increase in the U.S. Diagnostics operating segment’s expenses during fiscal 2010 +compared to fiscal 2009 reflected the combined effects of: (i) decreased research and development +spending as a result of completing the development of our molecular illumi gene ® C. +difficile product, including the illumi pro -10 ® instrument, which was launched during +fiscal 2010, and comparatively higher clinical trial costs for certain immunoassay products in +2009; (ii) decreased sales and marketing expenses due to lower C. difficile and respiratory product +sales resulting in lower bonus and commission costs for our sales organization; and (iii) increased +general and administrative expenses as a result of higher +compensation costs, including stock-based +compensation costs related to time-vested restricted stock granted in November 2009. +Operating expenses for the European Diagnostics operating segment increased $1,174 for fiscal 2011 +compared to fiscal 2010 and increased $72 for fiscal 2010 compared to fiscal 2009. The fiscal 2011 +increase was primarily attributable to costs associated with the aforementioned reorganization of +our sales and marketing leadership during the fiscal 2011 second quarter. +Operating expenses for the Life Science operating segment increased $9,145 for fiscal 2011 compared +to fiscal 2010 and increased $2,104 for fiscal 2010 compared to fiscal 2009, excluding one-time +transaction costs of $1,240. The increase in 2011 resulted from the previously-noted addition of +the Bioline Group’s full-year operating expenses and the costs related to consolidating the Maine +and Tennessee facilities. The increase in 2010 resulted primarily from increased salaries and +benefits related to filling open positions, increased research and development resource +allocations, and the addition of the Bioline Group’s operating expenses of $1,397. +- 34 - +Table of Contents +The amount of stock-based compensation expense reported for fiscal 2011, 2010 and 2009 was $2,614, +$1,866 and $1,092, respectively. During November 2008, we granted to certain employees restricted +stock that was contingent upon Meridian achieving a specified net earnings level for fiscal 2009. +Because Meridian’s fiscal net earnings did not reach the minimum level in 2009, these awards were +not earned and no stock-based compensation has been recorded for these awards. In November 2009, +we granted restricted shares and restricted share units to certain employees, with half of each +employee’s grant being time-vested restricted shares or restricted share units vesting in total in +four years, and the remaining half being subject to attainment of a specified earnings target for +fiscal 2010. Dividends were paid on these shares and units throughout fiscal 2010. While the 2010 +earnings target was not met, on September 30, 2010, the Compensation Committee of the Board of +Directors chose to convert the performance-based restricted shares to time-vested restricted shares +vesting in total after four years in recognition of the achievement in 2010 of several strategic +initiatives that position the Company for future growth. Expense totaling $472 was recorded in +fiscal 2010 as a result of this conversion, and is included in the total amount of stock-based +compensation set forth above. Similarly, in November 2010, we granted restricted shares and +restricted share units to certain employees, with half of each employee’s grant being time-vested +restricted shares or restricted share units vesting in full in four years, and the remaining half +being subject to attainment of a specified earnings target for fiscal 2011. Although dividends +were paid on these shares and units throughout fiscal 2011, because Meridian’s net earnings +did not reach the minimum level in fiscal 2011, the performance-based awards were not earned and no +stock-based compensation has been recorded for these performance-based awards. +Operating Income +Operating income decreased 3% and 16% in fiscal 2011 and 2010, respectively, as a result of the +factors discussed above. +Other Income and Expense +Interest income was $115, $124 and $456, for fiscal 2011, 2010 and 2009, respectively. The +decreases during the periods reflect (i) lower interest yields in the current interest rate +environment, (ii) the use of cash early in the fiscal 2010 fourth quarter to acquire the Bioline +Group, and (iii) the use of cash in fiscal 2011 to fund facility expansions in Cincinnati and +Memphis, and to build illumi gene ® inventory. The increase in other income, net, during +fiscal 2011 can primarily be attributed to the addition of the Bioline Group, as it contributed +grant income from a foreign government agency of approximately $200. Receipt of grant income to +this level, if at all, is not expected to continue in fiscal 2012 due to the local country’s rules +regarding ownership by a U.S. parent. +Income Taxes +The effective rate for income taxes was 34%, 36% and 34% for fiscal 2011, 2010 and 2009, +respectively. The decrease in the effective tax rate for fiscal 2011 was primarily attributable to +the release of certain reserves for uncertain tax positions due to the passage of the relevant +statutes of limitations and the nondeductible nature of Bioline acquisition costs. The effective +rate increase in 2010 resulted primarily from the non-deductible nature of Bioline Group +transaction costs and the expiration of the Federal research and experimentation tax credit +effective December 31, 2009. +- 35 - +Table of Contents +Impact of Inflation +To the extent feasible, we have consistently followed the practice of adjusting our prices to +reflect the impact of inflation on salaries and fringe benefits for employees and the cost of +purchased materials and services. Inflation and changing prices did not have a material adverse +impact on our gross margin, revenue or operating income in fiscal 2011, 2010 and 2009. +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Our cash flow and financing requirements are determined by analyses of operating and capital +spending budgets, consideration of acquisition plans, and consideration of common share dividends. +We have historically maintained a credit facility to augment working capital requirements and to +respond quickly to acquisition opportunities. Our investment portfolio presently contains +overnight repurchase agreements. We used $23,849 from our investment portfolio to complete the +acquisition of the Bioline Group during July 2010. +We have an investment policy that guides the holdings of our investment portfolio. Our objectives +in managing the investment portfolio are to (i) preserve capital, (ii) provide sufficient liquidity +to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) +capture a market rate of return commensurate with market conditions and our policy’s investment +eligibility criteria. As we look forward, we will continue to manage the holdings of our +investment portfolio with preservation of capital being the primary objective. +At the present time, we do not expect current conditions in the financial markets, or overall +economic conditions to have a significant impact on our liquidity needs, financial condition, or +results of operations, although no assurances can be made in this regard. We intend to continue to +fund our working capital requirements and dividends from current cash flows from operating +activities and cash on hand. We also have additional sources of liquidity through our $30,000 bank +credit facility, if needed. To date, except for the Italian matter discussed below, we have not +experienced any significant deterioration in the aging of our customer accounts receivable nor in +our vendors’ ability to supply raw materials and services and extend normal credit terms. +Approximately $4,900 of our accounts receivable at September 30, 2011 is due from Italian hospital +customers whose funding ultimately comes from the Italian government. The magnitude of the +sovereign debt crisis in Europe, and Italy in particular, is significant. We have experienced a +deterioration in the aging of our Italian accounts receivable and continue to monitor the situation +closely. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and +credit within the financial markets remains tight for an extended period of time, and such +conditions impact the collectability of our customer accounts receivable, or impact credit terms +with our vendors, or disrupt the supply of raw materials and services. +- 36 - +Table of Contents +Fluctuations in overall stock market valuations may raise questions as to the potential impairment +of goodwill and other long-lived assets. Our annual goodwill impairment review takes place as of +June 30 th each year. There have been no impairments from these annual reviews. As of +October 31, 2011, our stock price was $18.22 per share, compared to our book value per share of +$3.36 as of September 30, 2011. This relationship, stock price trading at a 5.4x multiple of book +value, is an indicator that the fluctuation in overall stock market valuations and its impact on +our stock price has not been a triggering event for impairment of our goodwill and other long-lived +assets. +Net cash provided by operating activities decreased 24% to $22,456 in fiscal 2011. Given the +relatively consistent level of net earnings, this decrease primarily reflects the effects of net +working capital changes related to our investments in illumi gene ® inventory, including +instruments, and the timing of payments from customers and payments to suppliers. +Net cash used for investing activities was $9,151 for fiscal 2011 compared to $16,332 for fiscal +2010. This decrease in cash used primarily results from an approximate $6,000 increase in +expenditures for property, plant and equipment during fiscal 2011, including significant facility +expansions in both Cincinnati and Memphis, being more than offset by the comparative effects of +fiscal 2010 including, but not limited to, (i) the acquisition of the Bioline Group ($20,404 net +cash used) and (ii) the sale of our student loan auction-rate securities ($7,275 net cash +received). +Net cash used for financing activities was $27,520 for fiscal 2011 compared to $29,190 for fiscal +2010. This decrease was primarily attributable to a 3% increase in dividend payments being more +than offset by an increase in proceeds and tax benefits from the exercise of stock options. +Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund +working capital requirements, capital expenditures and dividends during the next twelve months. +During the last seven fiscal quarters, the per share amount of our cash dividend has exceeded the +per share amount of our diluted earnings. During fiscal 2012, management expects that this +relationship will change; meaning the per share amount of our diluted earnings will exceed the per +share amount of our current cash dividend, although no assurances can be made in this regard. +- 37 - +Table of Contents +Capital Resources +We have a $30,000 credit facility with a commercial bank which expires September 15, 2012. As of +November 29, 2011, there were no borrowings outstanding on this facility and we had 100% borrowing +capacity available to us. We have had no borrowings outstanding under this facility during fiscal +2011 or 2010. +Our capital expenditures are estimated to range between approximately $3,000 to $5,000 for +fiscal 2012, with the actual amount depending upon actual operating results and the phasing of +certain projects. Such expenditures may be funded with cash and equivalents on hand, operating +cash flows, and/or availability under the $30,000 credit facility discussed above. +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2011: +Less than 1 +More than +Total +Year +1-3 Years +4-5 Years +5 Years +Operating leases (1) +$ +2,877 +$ +1,119 +$ +1,521 +$ +237 +$ +— +Purchase obligations (2) +8,524 +7,911 +613 +— +— +Uncertain income tax +positions liability and +interest (3) +542 +542 +— +— +— +Total +$ +11,943 +$ +9,572 +$ +2,134 +$ +237 +$ +— +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in +Cincinnati, Boston, Florida, Australia, Belgium, France, Holland, Germany and the U.K.; (ii) +automobiles for use by the diagnostic direct sales forces in the U.S. and Europe; and (iii) +certain office equipment such as facsimile machines and copier machines across all business +units, under operating lease agreements that expire at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory and +service items. These contractual commitments are not in excess of expected production +requirements over the next twelve months. +(3) +As of September 30, 2011, our liabilities for uncertain tax positions and related interest +and penalties were $422 and $120, respectively. Due to inherent uncertainties in the timing of +settlement of tax positions, we are unable to estimate the timing of the effective settlement of +these obligations. +Other Commitments and Off-balance Sheet Arrangements : +License Agreements +Meridian has entered into various license agreements that require payment of royalties based on a +specified percentage of sales of related products (1% to 14%). Meridian expects that payments +under these agreements will amount to approximately $4,500 in fiscal 2012. These royalty payments +primarily relate to the U.S. Diagnostics operating segment. +Meridian entered into a license agreement in October 2006 with a third party that provides rights +to a molecular technology for infectious disease testing in the United States, Europe and other +geographic markets. The agreement, as amended, calls for remaining payments of up to approximately +$3,500, based on the achievement of certain product development milestones and on-going royalties +once products are available for commercial sale. +- 38 - +Table of Contents +Off-balance sheet arrangements +We have no off-balance sheet arrangements. +Market Risk Exposure : +Foreign Currency Risk +We have market risk exposure related to foreign currency transactions. We are exposed to foreign +currency risk related to our European distribution operations where the billing currency is the +Euro for most of our customers in these markets. We also are exposed to foreign currency risk +related to the supply of certain diagnostic test kits by manufacturers located in Germany and +Spain. These foreign currency risks are opposite one another, providing a natural hedge with +respect to consolidated gross profit and operating income. Additionally, as a result of the July +2010 Bioline Group acquisition, we are exposed to foreign currency risks related to the Bioline +Group’s operations in Australia (Australian dollar), Germany (Euro), and the U.K. (British pound). +Assessing foreign currency exposures is a component of our overall ongoing risk management process, +with such currency risks managed as we believe appropriate. +Concentration of Customers/Products Risk +Our U.S. Diagnostic operating segment’s sales through two national distributors were 49% of the +U.S. Diagnostics operating segment’s total sales or 30% of consolidated sales for fiscal 2011. Our +C. difficile, foodborne and H. pylori product families accounted for 58% of our U.S. Diagnostics +operating segment’s third-party sales during fiscal 2011. These same products accounted for 58% of +our European Diagnostics operating segment’s third-party sales and 44% of our consolidated sales +for fiscal 2011. +Our Life Science operating segment’s sales of purified antigens and reagents to two customers were +15% of the Life Science operating segment’s total sales for fiscal 2011 or 4% of our consolidated +sales for fiscal 2011. Our Life Science operating segment has four other significant customers who +purchase antigens, antibodies and reagents, which together comprise 10% of the operating segment’s +total sales for fiscal 2011. +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 require management to make judgments about estimates and assumptions that +affect the reported amounts 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. +- 39 - +Table of Contents +Revenue Recognition +Our revenues are derived primarily from product sales. Revenue is generally recognized from sales +when product is shipped and title has passed to the buyer. Revenue for the U.S. Diagnostics +operating segment is reduced at the date of sale for estimated rebates 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 our products. Management +estimates accruals for rebate agreements based on data provided by these customers, estimates of +inventories of our products held by these customers, historical statistics, current trends and +other factors. Changes to the accruals are recorded in the period that they become known. +Revenue for our Diagnostics operating segments includes bundled product revenue for our +illumi gene ® molecular test system. The bundled product includes an instrument, +instrument accessories and test kits. If not sold outright, amounts invoiced for the +illumi gene ® test kits cover the instrument, accessories and test kits. Revenue is +recognized based on kit sales. If not sold outright, costs for the instruments are recognized in +cost of sales over the period that we have a pricing agreement in effect with the customer, generally +three years. +Life Science revenue for contract services may come from research and development services or +manufacturing services, including process development work, or a combination of both. Revenue is +recognized based on each of the deliverables in a given arrangement having distinct and separate +customer pricing. Pricing is often subject to a competitive bidding process. Contract research +and development services may be performed on a “time and materials” basis or “fixed fee” basis. +For “time and materials” arrangements, revenue is recognized as services are performed and billed. +For “fixed fee” arrangements, revenue is recognized upon completion and acceptance by the customer. +For contract manufacturing services, revenue is generally recognized upon delivery of product and +acceptance by the customer. In some cases, customers may request that we store on their behalf, +clinical grade biologicals that we produce under contract manufacturing agreements. These cases +arise when customers do not have clinical grade storage facilities or do not want to risk +contamination during transport. For such cases, revenue may be recognized on a bill-and-hold +basis. No such bill-and-hold arrangements existed at September 30, 2011 or September 30, 2010. +Inventories +Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, +first-out (FIFO) basis for substantially all of our inventories. We establish 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 these reserves based on +assumptions about future demand and market conditions. If actual demand and market conditions were +to be less favorable than such estimates, additional inventory write-downs would be required and +recorded in the period known. Such adjustments would negatively affect gross profit margin and +overall results of operations. +- 40 - +Table of Contents +Intangible Assets +Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles +include customer lists, supply agreements, manufacturing technologies, patents, licenses and trade +names. All of Meridian’s identifiable intangibles have finite lives. +Goodwill is subject to an annual impairment review (or more frequently if impairment indicators +arise) by applying a fair-value based test. There have been no impairments from these analyses. +Identifiable intangibles with finite lives are subject to impairment testing. 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 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. There were no events or circumstances in fiscal 2011, 2010 or 2009 +indicating that the carrying value of such assets may not be recoverable. +Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent +upon the future cash flows of the related acquired businesses and assets. Management is required +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. +Income Taxes +Our 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 +purposes and income for tax purposes. We prepare estimates of permanent and temporary differences +between income for financial reporting purposes and income for tax purposes. These differences are +adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth +quarters of the current fiscal year for the preceding fiscal year’s estimates. +- 41 - +Table of Contents +Our 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 assets considered realizable could be reduced +in future years if estimates of future taxable income during the carryforward period are reduced. +Undistributed earnings in our non-U.S. subsidiaries are considered by management to be permanently +re-invested in such subsidiaries. Consequently, U.S. deferred tax liabilities on such earnings +have not been recorded. We believe that such U.S. taxes would be largely offset by foreign tax +credits for taxes paid locally. +From time to time, our tax returns in federal, state and foreign jurisdictions are examined by the +applicable tax authorities. To the extent that adjustments result from the completion of these +examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the +period known. We believe that the results of any tax authority examinations would not have a +significant adverse impact on financial condition or results of +operations. +Recent Accounting Pronouncements : +In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve +Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU No. +2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820, resulting +in common requirements for measuring fair value and for disclosing information about fair value +measurements, clarification of how to apply existing fair value measurement and disclosure +requirements, and changes to certain principles and requirements for measuring fair value and +disclosing information about fair value measurements. The new requirements are effective for +fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance +on October 1, 2012 and at this time does not anticipate that it will have a material impact on the +Company’s consolidated results of operations, cash flows or financial position. +In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income , which amends the +disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. +2011-05 requires that all nonowner changes in shareholders’ equity be presented either in 1) a +single continuous statement of comprehensive income or 2) two separate but consecutive statements, +in which the first statement presents total net income and its components, and the second statement +presents total other comprehensive income and its components. These new presentation requirements, +as currently set forth, are effective for the Company beginning October 1, 2012, with early +adoption permitted. The Company will proceed with evaluating the presentation alternatives +provided within FASB ASU No. 2011-05, as well as the permitted dates of adoption, and determine the +most appropriate changes to be made to the current presentation of comprehensive income within its +Statement of Changes in Shareholders’ Equity and when to make such changes. +- 42 - +Table of Contents +In September 2011, FASB issued ASU No. 2011-08, Testing Goodwill for Impairment , which amended +goodwill impairment guidance to provide an option for entities to first assess qualitative factors +to determine whether the existence of events or circumstances leads to a determination that it is +more likely than not that the fair value of a reporting unit is less than its carrying amount. +After assessing the totality of events and circumstances, if an entity determines that it is not +more likely than not that the fair value of a reporting unit is less than its carrying amount, +performance of the two-step impairment test is no longer required. This guidance is effective for +annual and interim goodwill impairment tests performed for fiscal years beginning after December +15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any +impact on the Company’s consolidated results of operations, cash flow or financial position. +Additionally, see Note 1 (n) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +- 43 - +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +45 +Report of Independent Registered Public Accounting Firm +46 +Consolidated Statements of Operations for the years ended September 30, 2011, 2010 and 2009 +48 +Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009 +49 +Consolidated Balance Sheets as of September 30, 2011 and 2010 +50 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2011, 2010 +and 2009 +52 +Notes to Consolidated Financial Statements +53 +Schedule No. II — Valuation and Qualifying Accounts for the years ended September 30, 2011, 2010 +and 2009 +81 +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. +- 44 - +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance +that transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles, and that receipts and expenditures of the +Company are being made only in accordance with authorizations of management and directors of the +Company; and (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and may not prevent or detect misstatements. Also, projections of any +evaluation of effectiveness to future periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree of compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and +criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2011. +The company’s independent registered public accounting firm has issued an attestation report on the +registrant’s internal control over financial reporting. +/s/ John A. Kraeutler +John A. Kraeutler +/s/ Melissa A. Lueke +Melissa A. Lueke +Chief Executive Officer +Executive Vice President and +November 29, 2011 +Chief Financial Officer +November 29, 2011 +- 45 - +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Shareholders +Meridian Bioscience, Inc. +We have audited the accompanying balance sheets of Meridian Bioscience, Inc. (an Ohio corporation) +and subsidiaries as of September 30, 2011 and 2010, and the related consolidated statements of +operations, shareholders’ equity, and cash flows for each of the three years in the period ended +September 30, 2011. Our audits of the basic financial statements included the financial statement +schedule listed in the index appearing under Schedule No. II. We also have audited Meridian +Bioscience, Inc.’s internal control over financial reporting as of September 30, 2011, based on +criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring +Organizations of the Treadway Commission (COSO). Meridian Bioscience, Inc.’s management is +responsible for these financial statements and financial statement schedule, for maintaining +effective internal control over financial reporting, and for its assessment of the effectiveness of +internal control over financial reporting, included in the accompanying Management’s Report on +Internal Control over Financial Reporting. Our responsibility is to express an opinion on these +financial statements and financial statement schedule and an opinion on Meridian Bioscience, Inc.’s +internal control over financial reporting based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight +Board (United States). Those standards require that we plan and perform the audits to obtain +reasonable assurance about whether the financial statements are free of material misstatement and +whether effective internal control over financial reporting was maintained in all material +respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining +an understanding of internal control over financial reporting, assessing the risk that a material +weakness exists, and testing and evaluating the design and operating effectiveness of internal +control based on the assessed risk. Our audits also included performing such other procedures as we +considered necessary in the circumstances. We believe that our audits provide a reasonable basis +for our opinions. +A company’s internal control over financial reporting is a process designed to provide reasonable +assurance regarding the reliability of financial reporting and the preparation of financial +statements for external purposes in accordance with generally accepted accounting principles. A +company’s internal control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the company; (2) provide reasonable assurance that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles, and that receipts and expenditures of the company +are being made only in accordance with authorizations of management and directors of the company; +and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized +acquisition, use, or disposition of the company’s assets that could have a material effect on the +financial statements. +- 46 - +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or +detect misstatements. Also, projections of any evaluation of effectiveness to future periods are +subject to the risk that controls may become inadequate because of changes in conditions, or that +the degree of compliance with the policies or procedures may deteriorate. +In our opinion, the financial statements referred to above present fairly, in all material +respects, the financial position of Meridian Bioscience, Inc. as of September 30, 2011 and 2010, +and the results of its operations and its cash flows for each of the three years in the period +ended September 30, 2011 in conformity with accounting principles generally accepted in the United +States of America. Also in our opinion, the related financial statement schedule, when considered +in relation to the basic consolidated financial statements taken as a whole, presents fairly, in +all material respects, the information set forth therein. +In our opinion, Meridian Bioscience, Inc. and subsidiaries, maintained, in all material respects, +effective internal control over financial reporting as of September 30, 2011, based on criteria +established in Internal Control—Integrated Framework issued by COSO. +/s/ GRANT THORNTON LLP +Cincinnati, Ohio +November 29, 2011 +- 47 - +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS +(in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2011 +2010 +2009 +Net Sales +$ +159,723 +$ +143,000 +$ +148,274 +Cost of Sales +59,916 +54,304 +55,832 +Cost of Sales — Plant consolidation +509 +— +— +Gross Profit +99,298 +88,696 +92,442 +Operating Expenses: +Research and development +9,822 +8,396 +8,274 +Selling and marketing +22,772 +18,250 +18,324 +General and administrative +24,883 +19,672 +17,065 +Sales and marketing leadership reorganization +1,240 +— +— +Plant consolidation costs +548 +— +— +Bioline Group transaction costs +— +1,240 +— +Total operating expenses +59,265 +47,558 +43,663 +Operating Income +40,033 +41,138 +48,779 +Other Income: +Interest income +115 +124 +456 +Other, net +352 +138 +88 +Total other income +467 +262 +544 +Earnings Before Income Taxes +40,500 +41,400 +49,323 +Income Tax Provision +13,669 +14,753 +16,564 +Net Earnings +$ +26,831 +$ +26,647 +$ +32,759 +Earnings Per Share Data: +Basic earnings per common share +$ +0.66 +$ +0.66 +$ +0.81 +Diluted earnings per common share +$ +0.65 +$ +0.65 +$ +0.80 +Common +shares used for basic earnings per common share +40,715 +40,515 +40,390 +Effect of dilutive stock options and restricted +shares and units +643 +634 +720 +Common shares used for diluted earnings per common +share +41,358 +41,149 +41,110 +Dividends declared per common share +$ +0.76 +$ +0.74 +$ +0.65 +Anti-dilutive Securities: +Common share options and restricted shares and units +191 +217 +138 +The accompanying notes are an integral part of these consolidated financial statements. +- 48 - +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2011 +2010 +2009 +Cash Flows From Operating Activities +Net earnings +$ +26,831 +$ +26,647 +$ +32,759 +Non-cash items: +Depreciation of property, plant and equipment +3,380 +3,104 +2,781 +Amortization of intangible assets +2,321 +1,581 +1,579 +Amortization of deferred illumigene contract costs +172 +— +— +Stock based compensation +2,504 +1,866 +1,092 +Deferred income taxes +(1,218 +) +12 +(500 +) +Loss on disposition and write-down of fixed assets +446 +26 +109 +Change in current assets, net of acquisition +(10,762 +) +2,429 +(5,353 +) +Change in current liabilities, net of acquisition +(570 +) +(5,775 +) +269 +Other, net +(648 +) +(157 +) +(244 +) +Net cash provided by operating activities +22,456 +29,733 +32,492 +Cash Flows From Investing Activities +Acquisition earnout payments +— +— +(7 +) +Purchases of property, plant and equipment +(9,139 +) +(3,083 +) +(3,643 +) +Proceeds +from dispositions of property, plant and equipment +— +— +5 +Proceeds from sales and calls of short-term investments +— +7,275 +475 +Acquisition of Bioline Group, net of cash received +— +(20,404 +) +— +Purchases of intangibles and other assets +(12 +) +(120 +) +(110 +) +Net cash used for investing activities +(9,151 +) +(16,332 +) +(3,280 +) +Cash Flows From Financing Activities +Dividends paid +(30,943 +) +(29,985 +) +(26,260 +) +Proceeds and tax benefits from exercises of stock options +3,423 +795 +1,624 +Net cash used for financing activities +(27,520 +) +(29,190 +) +(24,636 +) +Effect of Exchange Rate Changes on Cash and Equivalents +(38 +) +(362 +) +157 +Net Increase (Decrease) in Cash and Equivalents +(14,253 +) +(16,151 +) +4,733 +Cash and Equivalents at Beginning of Period +37,879 +54,030 +49,297 +Cash and Equivalents at End of Period +$ +23,626 +$ +37,879 +$ +54,030 +Supplemental Cash Flow Information +Cash paid for income taxes +$ +17,991 +$ +16,036 +$ +17,472 +The accompanying notes are an integral part of these consolidated financial statements. +- 49 - +Table of Contents +CONSOLIDATED BALANCE SHEETS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2011 +2010 +Assets +Current Assets: +Cash and equivalents +$ +23,626 +$ +37,879 +Accounts receivable, less allowances of $310 in +2011 and $241 in 2010 +24,844 +22,064 +Inventories +32,689 +28,420 +Prepaid expenses and other current assets +6,343 +5,071 +Deferred income taxes +2,852 +1,871 +Total current assets +90,354 +95,305 +Property, Plant and Equipment, at Cost: +Land +1,184 +991 +Buildings and improvements +23,033 +20,670 +Machinery, equipment and furniture +32,408 +31,945 +Construction in progress +3,887 +1,320 +Subtotal +60,512 +54,926 +Less: accumulated depreciation and amortization +33,973 +33,689 +Net property, plant and equipment +26,539 +21,237 +Other Assets: +Goodwill +23,124 +23,302 +Other intangible assets, net +10,947 +13,327 +Restricted cash +1,000 +1,000 +Deferred illumigene contract costs, net +3,304 +231 +Other assets +225 +239 +Total other assets +38,600 +38,099 +Total assets +$ +155,493 +$ +154,641 +The accompanying notes are an integral part of these consolidated financial statements. +- 50 - +Table of Contents +CONSOLIDATED BALANCE SHEETS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2011 +2010 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +5,548 +$ +4,466 +Accrued employee compensation costs +4,235 +3,451 +Other accrued expenses +4,692 +5,521 +Income taxes payable +789 +1,086 +Total current liabilities +15,264 +14,524 +Deferred Income Taxes +1,705 +2,756 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 41,237,120 +and 40,654,286 issued +— +— +Additional paid-in capital +100,010 +94,529 +Retained earnings +38,065 +42,177 +Accumulated other comprehensive income +449 +655 +Total shareholders’ equity +138,524 +137,361 +Total liabilities and shareholders’ equity +$ +155,493 +$ +154,641 +The accompanying notes are an integral part of these consolidated financial statements. +- 51 - +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +(Dollars and shares in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Accum. +Common +Additional +Other Comp. +Comp. +Shares +Paid-in +Retained +Income +Income +Issued +Capital +Earnings +(Loss) +(Loss) +Total +Balance at September 30, 2008 +40,314 +$ +89,107 +$ +39,016 +$ +366 +$ +128,489 +Cash dividends paid — $0.65 per share +— +— +(26,260 +) +— +(26,260 +) +Exercise of stock options +179 +1,476 +— +— +1,476 +Stock compensation expense +— +1,092 +— +— +1,092 +Cost of S-8 registration statement +— +(7 +) +— +— +(7 +) +Comprehensive income: +Net earnings +— +— +32,759 +$ +32,759 +32,759 +Hedging activity, net +— +— +— +(3 +) +(3 +) +(3 +) +Transfer of investments to trading status +— +— +— +270 +270 +270 +Other comprehensive income taxes +— +— +— +(190 +) +(190 +) +(190 +) +Foreign currency translation adjustment +— +— +— +279 +279 +279 +Comprehensive income +$ +33,115 +Balance at September 30, 2009 +40,493 +91,668 +45,515 +722 +137,905 +Cash dividends paid — $0.74 per share +— +(29,985 +) +— +(29,985 +) +Exercise of stock options +67 +995 +— +— +995 +Issuance of restricted shares, net of +forfeitures +94 +— +— +— +— +Stock compensation expense +— +1,866 +— +— +1,866 +Comprehensive income: +Net earnings +— +— +26,647 +$ +26,647 +26,647 +Other comprehensive income taxes +— +— +— +36 +36 +36 +Foreign currency translation adjustment +— +— +— +(103 +) +(103 +) +(103 +) +Comprehensive income +$ +26,580 +Balance at September 30, 2010 +40,654 +94,529 +42,177 +655 +137,361 +Cash dividends paid — $0.76 per share +— +(30,943 +) +— +(30,943 +) +Exercise of stock options +485 +2,977 +— +— +2,977 +Issuance of restricted shares, net of +forfeitures +165 +— +— +— +— +Cancellation of restricted shares +(85 +) +— +— +— +— +Conversion of restricted stock units +18 +— +— +— +— +Stock compensation expense +— +2,504 +— +— +2,504 +Comprehensive income: +Net earnings +— +— +26,831 +$ +26,831 +26,831 +Other comprehensive income taxes +— +— +— +114 +114 +114 +Foreign currency translation adjustment +— +— +— +(320 +) +(320 +) +(320 +) +Comprehensive income +$ +26,625 +Balance at September 30, 2011 +41,237 +$ +100,010 +$ +38,065 +$ +449 +$ +138,524 +The accompanying notes are an integral part of these consolidated financial statements. +- 52 - +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(dollars and shares in thousands, except per share data) +(1) Summary of Significant Accounting Policies +(a) +Nature of Business — Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, +nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other +biologicals for use by biopharmaceutical and biotechnology companies engaged in research for +new drugs and vaccines. +(b) +Principles of Consolidation — The consolidated financial statements include the accounts of +Meridian Bioscience, Inc. and its subsidiaries. All intercompany accounts and transactions +have been eliminated. Unless the context requires otherwise, references to “Meridian,” “we,” +“us, “ “our “ or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +(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 1 (f), 1 (g), 1 (h), 1 (i), 1 (k), 1 (l), 7 and 8 +(b). +(d) +Foreign Currency Translation - Assets and liabilities of foreign operations are translated +using year-end exchange rates with gains or losses resulting from translation included as a +separate component of accumulated other comprehensive income or loss. Revenues and expenses +are translated using exchange rates prevailing during the year. We also recognize foreign +currency transaction gains and losses on certain assets and liabilities that are denominated +in the Australian dollar, British pound and Euro currencies. These gains and losses are +included in other income and expense in the accompanying consolidated statements of +operations. +- 53 - +Table of Contents +(e) +Cash, Cash Equivalents and Investments — The primary objectives of our investment activities +are to preserve capital and provide sufficient liquidity to meet operating requirements and +fund strategic initiatives such as acquisitions. We maintain a written investment policy that +governs the management of our investments in fixed income securities. This policy, among +other things, provides that we may purchase only high credit-quality securities, that have +short-term ratings of at least A-1 and P-1 or better, and long-term ratings of at least A-2 +and A or better, by Moody’s and Standard & Poor’s, respectively, at the time of purchase. We +consider short-term investments with original maturities of 90 days or less to be cash +equivalents, including overnight repurchase agreements and institutional money market funds. +At times our investments of cash and equivalents with various high credit quality financial +institutions may be in excess of the Federal Deposit Insurance (FDIC) insurance limit. +Our investment portfolio includes the following components: +September 30, 2011 +September 30, 2010 +Cash and +Cash and +Equivalents +Other +Equivalents +Other +Repurchase agreements +$ +11,784 +$ +— +$ +14,862 +$ +— +Money market funds +— +— +10,249 +— +Cash on hand - +Restricted +— +1,000 +— +1,000 +Unrestricted +11,842 +— +12,768 +— +Total +$ +23,626 +$ +1,000 +$ +37,879 +$ +1,000 +(f) +Inventories — Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO) for substantially all of our inventories. +illumi gene ® instruments are carried in inventory until customer placement, at which +time they are transferred to deferred illumigene contract costs, unless sold outright. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf +life may expire before sale to customers, and other identified exposures. Such reserves were +$1,635 and $1,130 at September 30, 2011 and 2010, respectively. We estimate these reserves +based on assumptions about future demand and market conditions. If actual demand and market +conditions were to be less favorable than such estimates, additional inventory write-downs would +be required and recorded in the period known. Such adjustments would negatively affect gross +profit margin and overall results of operations. +(g) +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 are removed from the accounts and the resulting gain or loss is +reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation is +computed on the straight-line method in amounts sufficient to write-off the cost over the +estimated useful lives as follows: +Buildings and improvements — 18 to 40 years +Machinery, equipment and furniture — 3 to 10 years +Computer equipment and software — 3 to 5 years +- 54 - +Table of Contents +During the fourth quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, +and began the consolidation of manufacturing operations from this facility with our Memphis, +Tennessee facility. In connection with this consolidation, the carrying value of certain +property, plant and equipment, including the building, was determined to be impaired and a +write-down of approximately $425 has been recorded as of September 30, 2011. The building and +the property on which it sits have been written down to current value, less selling costs, as +determined by an independent outside appraisal. +(h) +Intangible Assets — Goodwill and other intangible assets with indefinite lives are subject to +an annual impairment review (or more frequently if impairment indicators arise) by applying a +fair-value based test. Fair value is determined via a market approach from three +perspectives. These three perspectives are (i) an allocation of our actual enterprise value +(defined as market capitalization plus debt less cash and cash equivalents) to each of the +reporting units based on revenue and EBITDA contributions to consolidated results; (ii) an +allocation of implied enterprise values to each of our reporting units based on average and +median EBITDA multiples from a comparable group of companies; and (iii) a review of enterprise +value to EBITDA multiples from recent industry merger and acquisition transactions. We +perform our annual impairment review as of June 30, the end of our third fiscal quarter. We +have no intangible assets with indefinite lives other than goodwill. There have been no +impairments from these analyses for fiscal 2011, 2010 or 2009. +The change in goodwill was a decrease of $178 and an increase of $13,436 in fiscal 2011 and +fiscal 2010, respectively. These changes related entirely to the Life Science operating +segment’s Bioline Group — fiscal 2010’s increase from the Bioline Group acquisition in July 2010 +and fiscal 2011’s decrease from the currency translation adjustments thereon. See Note 2. +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2011 and 2010 is as follows. +2011 +2010 +Gross +Gross +Carrying +Accum. +Carrying +Accum. +As of September 30, +Value +Amort. +Value +Amort. +Manufacturing technologies, core +products and cell lines +$ +11,626 +$ +8,545 +$ +11,644 +$ +7,693 +Trademarks, licenses and patents +3,538 +1,337 +3,547 +997 +Customer lists and supply +agreements +12,222 +6,557 +12,537 +5,816 +Non-compete agreements +— +— +126 +21 +$ +27,386 +$ +16,439 +$ +27,854 +$ +14,527 +- 55 - +Table of Contents +The actual aggregate amortization expense for these intangible assets for fiscal 2011, 2010 and +2009 was $2,321, $1,581 and $1,579, respectively. The estimated aggregate amortization expense +for these intangible assets for each of the five succeeding fiscal years is as follows: fiscal +2012 — $2,080, fiscal 2013 — $2,080, fiscal 2014 — $1,642, fiscal 2015 — $1,393 and fiscal 2016 +— $1,050. +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 asset’s future undiscounted cash flows to its +carrying value. If impairment has occurred, it is measured by a fair-value based test. +Our ability to recover our intangible assets, both identifiable intangibles and goodwill, is +dependent upon the future cash flows of the related acquired businesses and assets. We 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 and fixed assets, we also make judgments and assumptions +regarding useful lives. See Note 1 (g) regarding impairment write-downs related to the +consolidation of our Maine operations. +We consider 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. +(i) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the U.S. Diagnostics operating segment is reduced +at the date of sale for estimated rebates that will be claimed by customers. Management +estimates accruals for rebate agreements based on data provided by these customers, estimates +of inventories of our products held by these customers, historical statistics, current trends, +and other factors. Changes to the accruals are recorded in the period that they become known. +Our rebate accruals were $4,176 at September 30, 2011 and $5,273 at September 30, 2010, and +have been netted against accounts receivable. +- 56 - +Table of Contents +Revenue for our Diagnostics operating segments includes bundled product revenue for our +illumi gene ® molecular test system. The bundled product includes an instrument, +instrument accessories and test kits. If not sold outright, amounts invoiced for the +illumi gene ® test kits cover the instrument, accessories and test kits. Revenue is +recognized based on kit sales. If not sold outright, costs for the instruments are recognized in +cost of sales over the period that we have a pricing agreement in effect with the customer, generally +three years. +Life Science revenue for contract services may come from research and development services or +manufacturing services, including process development work, or a combination of both. Revenue +is recognized based on each of the deliverables in a given arrangement having distinct and +separate customer pricing. Pricing is often subject to a competitive bidding process. Contract +research and development services may be performed on a “time and materials” basis or “fixed +fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and +acceptance by the customer. For contract manufacturing services, revenue is generally +recognized upon delivery of product and acceptance by the customer. In some cases, customers +may request that we store on their behalf, clinical grade biologicals that we produce under +contract manufacturing agreements. These cases arise when customers do not have clinical grade +storage facilities or do not want to risk contamination during transport. For such cases, +revenue may be recognized on a bill-and-hold basis. No such bill-and-hold arrangements existed +at September 30, 2011 or September 30, 2010. +Trade accounts receivable are recorded in the accompanying consolidated balance sheets at +invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents our estimate of probable credit losses and is based on historical write-off +experience. The allowance for doubtful accounts and related metrics, such as days’ sales +outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed +individually for collectibility. Customer invoices are charged off against the allowance when +we believe it is probable that the invoices will not be paid. +(j) +Research and Development Costs — Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, costs for +development of instrumentation equipment, costs for clinical trials, and costs for facilities +and equipment. +(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. We prepare estimates of permanent +and temporary differences between income for financial reporting purposes and income for tax +purposes. These differences are adjusted to actual upon filing of our tax returns, typically +occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal +year’s estimates. +- 57 - +Table of Contents +We account for uncertain tax positions using a benefit recognition model with a two-step +approach: (i) a more-likely-than-not recognition criterion; and (ii) a measurement attribute +that measures the position as the largest amount of tax benefit that is greater than 50% likely +of being ultimately realized upon ultimate settlement. If it is not more likely than not that +the benefit will be sustained on its technical merits, no benefit is recorded. We recognize +accrued interest related to unrecognized tax benefits as a portion of our income tax provision +in the consolidated statements of operations. See Note 7. +(l) +Stock-based Compensation — We recognize compensation expense for all share-based awards made +to employees, based upon the fair value of the share-based award on the date of the grant. +See Note 8(b). +(m) +Comprehensive Income (Loss) — Comprehensive income (loss) represents the net change in +shareholders’ equity during a period from sources other than transactions with shareholders. +Our comprehensive income or loss is comprised of net earnings, foreign currency translation, +and the related income tax effects. Components of beginning and ending accumulated other +comprehensive income or loss, and related activity, are shown in the following table: +Foreign +Currency +Translation +Income +Adjustment +Taxes +Total +Balance at September 30, 2010 +$ +1,007 +$ +(352 +) +$ +655 +Currency translation +(320 +) +— +(320 +) +Income taxes +— +114 +114 +Balance at September 30, 2011 +$ +687 +$ +(238 +) +$ +449 +(n) +Recent Accounting Pronouncements — In May 2011, FASB issued Accounting Standards Update (ASU) +No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements +in U.S. GAAP and IFRSs. FASB ASU No. 2011-04 amends and clarifies the measurement and +disclosure requirements of FASB ASC 820, resulting in common requirements for measuring fair +value and for disclosing information about fair value measurements, clarification of how to +apply existing fair value measurement and disclosure requirements, and changes to certain +principles and requirements for measuring fair value and disclosing information about fair +value measurements. The new requirements are effective for fiscal years beginning after +December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at +this time does not anticipate that it will have a material impact on the Company’s +consolidated results of operations, cash flows or financial position. +- 58 - +Table of Contents +In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income , which amends +the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU +No. 2011-05 requires that all nonowner changes in shareholders’ equity be presented either in 1) +a single continuous statement of comprehensive income or 2) two separate but consecutive +statements, in which the first statement presents total net income and its components, and the +second statement presents total other comprehensive income and its components. These new +presentation requirements, as currently set forth, are effective for the Company beginning +October 1, 2012, with early adoption permitted. The Company will proceed with evaluating the +presentation alternatives provided within FASB ASU No. 2011-05, as well as the permitted dates +of adoption, and determine the most appropriate changes to be made to the current presentation +of comprehensive income within its Statement of Changes in Shareholders’ Equity and when to make +such changes. +In September 2011, FASB issued ASU No. 2011-08, Testing Goodwill for Impairment , which amended +goodwill impairment guidance to provide an option for entities to first assess qualitative +factors to determine whether the existence of events or circumstances leads to a determination +that it is more likely than not that the fair value of a reporting unit is less than its +carrying amount. After assessing the totality of events and circumstances, if an entity +determines that it is not more likely than not that the fair value of a reporting unit is less +than its carrying amount, performance of the two-step impairment test is no longer required. +This guidance is effective for annual and interim goodwill impairment tests performed for fiscal +years beginning after December 15, 2011, with early adoption permitted. Adoption of this +guidance is not expected to have any impact on the Company’s consolidated results of operations, +cash flow or financial position. +(o) +Shipping and Handling costs — Shipping and handling costs invoiced to customers are included +in net sales. Costs to distribute products to customers, including freight costs, warehousing +costs, and other shipping and handling activities are included in cost of goods sold. +(p) +Non-income Government-Assessed Taxes — We classify all non-income, government-assessed taxes +(sales, use, and value-added) collected from customers and remitted by us to appropriate +revenue authorities, on a net basis (excluded from net sales) in the accompanying consolidated +statements of operations. +(q) +Reclassifications — Certain reclassifications have been made to the prior fiscal year +financial statements to conform to the current fiscal year presentation. Such +reclassifications had no impact on net earnings or shareholders’ equity. +(2) Acquisition of Bioline Group +On July 20, 2010, we acquired all of the outstanding common stock of the Bioline group of companies +(collectively the “Bioline Group”). We paid $23,849 from cash and equivalents on hand to acquire +the Bioline Group. Headquartered in London, the Bioline Group is a leading manufacturer and +distributor of molecular biology reagents with additional operations in Germany, Australia and the +United States. The highly specialized molecular biology reagents it supplies to the life science +research, biotech, pharmaceutical and commercial diagnostics markets are the critical components +used in PCR testing for DNA, RNA and other genomic testing. +- 59 - +Table of Contents +As a result of the consideration paid exceeding the fair value of the net assets being acquired, +goodwill in the amount of $12,992 was recorded in connection with this acquisition, none of which +will be deductible for tax purposes. This goodwill results largely from the addition of key global +operations and direct sales capabilities, management talent and a research-oriented customer base, +to complement our existing Life Science operations. In addition to the Bioline Group’s results of +operations since the acquisition date, which are included in our fiscal 2011 and fiscal 2010 +Consolidated Statement of Operations and reported as part of the Life Science operating segment, +the consolidated results for fiscal 2011 and 2010 also include: +i) +$587 and $230 of Cost of Sales for fiscal 2011 and fiscal 2010, respectively, +related to the roll-out of fair value inventory adjustments for sales of products that +were in the Bioline Group’s inventory on the date of acquisition and, therefore, were +valued at fair value, rather than manufactured cost, in the opening balance sheet; +ii) +$1,003 and $166 of General and Administrative Expenses for fiscal 2011 and +fiscal 2010, respectively, related to the amortization of specific identifiable +intangible assets recorded on the opening balance sheet, including customer +relationships, license agreements, non-compete agreements, manufacturing processes and +trade names; and +iii) +$1,240 of transaction costs for fiscal 2010 reflected as Operating Expenses. +The results of the Bioline Group included in the consolidated results of the Company for fiscal +2011 and fiscal 2010 are as follows, reflecting the items noted above: +2011 +2010 +Net Sales +$ +14,869 +$ +2,084 +Operating Income (Loss) +$ +26 +$ +(126 +) +Net Earnings (Loss) +$ +240 +$ +(1,262 +) +- 60 - +Table of Contents +The recognized amounts of identifiable assets acquired and liabilities assumed in the acquisition +of the Bioline Group are as follows: +July 20, +2010 +Measurement +July 20, +(as initially +Period +2010 +reported) +Adjustments +(as adjusted) +Fair value of assets acquired - +Cash and equivalents +$ +3,445 +$ +3,445 +Accounts receivable +1,897 +1,897 +Inventories +2,807 +2,807 +Other current assets +371 +$ +(21 +) +350 +Property, plant and equipment, net +816 +816 +Goodwill +13,166 +(174 +) +12,992 +Other +intangible assets (estimated useful life): +Customer relationships (10 years) +3,898 +3,898 +Manufacturing processes (6 years) +1,467 +1,467 +License agreements (approximate +8 year wtd. avg.) +718 +718 +Non-compete agreements (1 year) +122 +122 +Trade names (10 years) +995 +995 +29,702 +(195 +) +29,507 +Fair value of liabilities assumed - +Accounts payable and accrued expenses +2,817 +364 +3,181 +Deferred income tax liabilities +3,036 +(559 +) +2,477 +Total consideration paid +$ +23,849 +$ +— +$ +23,849 +As of September 30, 2011, the purchase price allocation related to the acquisition of the Bioline +Group has been finalized and is reflected in the above fair values of the assets acquired and +liabilities assumed. These fair values are based on the information that was available as of the +acquisition date and the filing date of this Form 10-K and are reflected in the accompanying +Consolidated Balance Sheets, including retrospective adjustment of the September 30, 2010 +Consolidated Balance Sheet. +The consolidated pro forma results of the combined entities of Meridian and the Bioline Group, had +the acquisition date been October 1, 2008, are as follows for the periods indicated: +(UNAUDITED) +Fiscal Year Ended September 30, +2011 +2010 +2009 +Net Sales +$ +159,723 +$ +153,635 +$ +160,525 +Net Earnings +$ +27,282 +$ +27,833 +$ +31,700 +Diluted Earnings Per Common Share +$ +0.66 +$ +0.68 +$ +0.77 +- 61 - +Table of Contents +These pro forma amounts have been calculated after adjusting the results of the Bioline Group to +reflect the transaction costs incurred by the Company and the additional amortization that would +have been charged assuming the previously-discussed fair value adjustments to inventory and +identifiable intangible assets had been applied on October 1, 2008, together with the consequential +tax effects. Fiscal 2011 pro forma earnings exclude $694 related to amortization of the fair value +adjustments to inventory and certain of the identifiable intangible assets, and the related tax +effects, as these amounts have been included in the fiscal 2009 pro forma earnings. Fiscal 2010 +pro forma earnings (i) exclude $1,470 related to amortization of the fair value adjustments to +inventory and transaction costs incurred by the Company, and the related tax effects, as these +amounts have been included in the fiscal 2009 pro forma earnings and (ii) include an additional +$730 of amortization of identifiable intangible assets, and the related tax effects, that would +have resulted from applying the previously-discussed fair value adjustments as of October 1, 2008. +(3) Inventories +Inventories are comprised of the following: +As of September 30, +2011 +2010 +Raw materials +$ +7,598 +$ +6,221 +Work-in-process +7,427 +6,784 +Finished goods — illumigene instruments +4,179 +455 +Finished goods — kits and other +15,120 +16,090 +Gross Inventory +$ +34,324 +$ +29,550 +Reserves +(1,635 +) +(1,130 +) +Net Inventory +$ +32,689 +$ +28,420 +(4) Bank Credit Arrangements +We have a $30,000 credit facility with a commercial bank, which expires in September 2012. This +credit facility is collateralized by our business assets, except for those of non-U.S. +subsidiaries, which totaled approximately $128,000 at September 30, 2011. There were no borrowings +outstanding on this credit facility at September 30, 2011 or September 30, 2010. Available +borrowings under this credit facility were $30,000 at September 30, 2011 and September 30, 2010. +In connection with this bank credit facility, we are required to comply with financial covenants +that limit the amount of debt obligations and require a minimum amount of tangible net worth. We +are in compliance with all covenants. We are also required to maintain a cash compensating balance +with the bank in the amount of $1,000, pursuant to this bank credit facility and are in compliance +with this requirement. +(5) Hedging Transactions +Prior to February 1, 2009, we managed exchange rate risk related to forecasted intercompany sales +denominated in the Euro currency through the use of forward exchange contracts and designated such +forward contracts as cash flow hedges. As such, the effective portion of the gain or loss on the +derivative instrument was reported as a component of other comprehensive income and reclassified +into revenues in the Consolidated Statement of Operations in the same period or periods during +which the hedged transaction affected earnings. As of September 30, 2011 and September 30, 2010, +we had no such contracts outstanding. +- 62 - +Table of Contents +During January 2009, €500 notional amount of forward exchange contracts were settled in accordance +with their original maturities. The realized gain on these contracts was $32. Also during January +2009, we accelerated the settlement of the remaining €2,700 notional amount of forward exchange +contracts that were originally scheduled to mature between February 27, 2009 and December 31, 2009. +These transactions resulted in a gain of approximately $140 that was recorded in the second +quarter of fiscal 2009. We unwound these forward exchange contracts after completing a strategic +review of our foreign currency exposures. This strategic review revealed that we have natural +currency hedges in place for consolidated gross profit and operating income via certain +Meridian-branded diagnostic test kits that we purchase in Euros from suppliers in Spain and +Germany. +The amount of gain recognized in other comprehensive income on the effective portion of our foreign +exchange contracts was $0, $0 and $109 in fiscal 2011, 2010 and 2009, respectively. The amount of +gain reclassified from accumulated other comprehensive income into income on the effective portion +of these foreign exchange contracts was $0, $0 and $112, for fiscal 2011, 2010 and 2009, +respectively. No portion of the gain/loss was excluded from other comprehensive income due to +effectiveness testing. +(6) Fair Value Measurements +We use a fair value measurement to value our financial assets and liabilities. Fair value is the +price that would be received to sell an asset or paid to transfer a liability in an orderly +transaction between market participants at the measurement date. Fair value hierarchy prioritizes +inputs to valuation techniques used to measure fair value into three broad levels, which are +described below: +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are +accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the +highest priority to Level 1 inputs. +Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets +or liabilities, either directly or indirectly. These include quoted prices for +identical or similar assets or liabilities in markets that are not active, that is, markets in +which there are few transactions for the asset or liability, the prices are not current, or price +quotations vary substantially either over time or among market makers, or in which little +information is released publicly and inputs that are derived principally from or corroborated by +observable market data by correlation or other means. +Level 3: Unobservable inputs, developed using our estimates and assumptions, which reflect those +that the market participants would use. Such inputs are used when little or no market data is +available. The fair value hierarchy gives the lowest priority to Level 3 inputs. +- 63 - +Table of Contents +Determining where an asset or liability falls within the hierarchy depends on the lowest level +input that is significant to the fair value measurement as a whole. In determining fair value, we +utilize valuation techniques that maximize the use of observable inputs and minimize the use of +unobservable inputs to the extent possible and considers counterparty credit risk in the assessment +of fair value. +We had no financial assets or liabilities carried at fair value at September 30, 2011 to be +classified as Level 1, 2 or 3. As of September 30, 2010, financial assets and liabilities to be so +classified were comprised solely of money market funds totaling $10,249 classified as Level 1, with +no financial assets or liabilities classified as Level 2 or Level 3. +(7) Income Taxes +(a) +Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2011, 2010 and 2009 were as follows: +Year Ended September 30, +2011 +2010 +2009 +Domestic +$ +37,955 +$ +38,329 +$ +46,504 +Foreign +2,545 +3,071 +2,819 +Total earnings before income taxes +$ +40,500 +$ +41,400 +$ +49,323 +Provision (credit) for income taxes - +Federal - +Current provision +$ +13,336 +$ +13,626 +$ +15,094 +Temporary differences +Fixed asset basis differences and depreciation +(155 +) +58 +16 +Intangible asset basis differences and amortization +(312 +) +(335 +) +(363 +) +Currently non-deductible expenses and reserves +(627 +) +(29 +) +(134 +) +Stock based compensation +(706 +) +(618 +) +(373 +) +Other, net +35 +(75 +) +48 +Subtotal +11,571 +12,627 +14,288 +State and local +1,213 +1,186 +1,385 +Foreign +885 +940 +891 +Total income +tax provision +$ +13,669 +$ +14,753 +$ +16,564 +- 64 - +Table of Contents +(b) +The following is a reconciliation between the statutory U.S. income tax rate and the +effective rate derived by dividing the provision for income taxes by earnings before income +taxes: +Year Ended September 30, +2011 +2010 +2009 +Computed income taxes at statutory rate +$ +14,175 +35.0 +% +$ +14,490 +35.0 +% +$ +17,263 +35.0 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +834 +2.1 +777 +1.9 +904 +1.8 +Foreign tax rate differences +58 +0.1 +(87 +) +(0.2 +) +(43 +) +(0.1 +) +Qualified domestic production +incentives +(1,025 +) +(2.5 +) +(786 +) +(1.9 +) +(870 +) +(1.8 +) +Bioline Group transaction costs +— +— +434 +1.0 +— +— +U.S. book-to-return and +uncertain tax position +activity +(422 +) +(1.0 +) +8 +— +(412 +) +(0.8 +) +Other, net +49 +0.1 +(83 +) +(0.2 +) +(278 +) +(0.5 +) +$ +13,669 +33.8 +% +$ +14,753 +35.6 +% +$ +16,564 +33.6 +% +(c) +The components of net deferred tax assets (liabilities) were as follows: +As of September 30, +2011 +2010 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +1,529 +$ +1,128 +Stock compensation expense not deductible +2,562 +2,313 +Net operating loss carryforwards +767 +740 +Inventory basis differences +1,322 +630 +Other +— +125 +Subtotal +6,180 +4,936 +Less valuation allowance +(439 +) +(439 +) +Deferred tax assets +5,741 +4,497 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(731 +) +(721 +) +Intangible asset basis differences and amortization +(3,421 +) +(4,082 +) +Other +(442 +) +(579 +) +Deferred tax liabilities +(4,594 +) +(5,382 +) +Net deferred tax assets (liabilities) +$ +1,147 +$ +(885 +) +For income tax purposes, we have tax benefits related to operating loss carryforwards in the +countries of Australia, Belgium and France. These net operating loss carryforwards have no +expiration date. We have recorded deferred tax assets for these carryforwards totaling $767 and +$740 at September 30, 2011 and September 30, 2010, respectively, inclusive of valuation allowances +for the country of Belgium. This valuation allowance is for pre-acquisition net operating loss +carryforwards. If tax benefits are recognized in future years for these pre-acquisition net +operating loss carryforwards, such benefits will be allocated to reduce goodwill and acquired +intangible assets. +- 65 - +Table of Contents +The realization of deferred tax assets in foreign jurisdictions is dependent upon the generation of +future taxable income in these countries. We have 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, we believe 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. +Undistributed earnings reinvested indefinitely in our non-U.S. operations were approximately +$17,000 at September 30, 2011. U.S. deferred tax liabilities of approximately $6,000 on such +earnings have not been recorded. We believe that such U.S. taxes would be largely offset by +foreign tax credits for taxes paid in non-U.S. jurisdictions. +As described in Note 1, we utilize a comprehensive model for the recognition, measurement, +presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant +facts by the applicable tax authorities. The total amount of unrecognized tax benefits at +September 30, 2011 and September 30, 2010 related to such positions was $542 and $725, +respectively, of which the full amounts would favorably affect the effective tax rate if +recognized. We recognize interest and penalties related to uncertain tax positions as a component +of our income tax provision. During fiscal 2011 and 2010, we (decreased)/increased our tax +provision by approximately ($109) and $128, respectively, for such interest and penalties. We had +approximately $120 accrued for the payment of interest and penalties at September 30, 2011 compared +to $229 accrued at September 30, 2010. The amount of our liability for uncertain tax positions +expected to be paid or settled in the next 12 months is uncertain. +A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: +2011 +2010 +Unrecognized income tax benefits beginning of year +$ +725 +$ +572 +Additions for tax positions related to the current year +— +67 +Additions for tax positions of prior years +333 +206 +Reductions for tax positions of prior years +(269 +) +— +Tax examination settlements +(4 +) +— +Expirations of statute of limitations +(243 +) +(120 +) +Unrecognized income tax benefits at end of year +$ +542 +$ +725 +We are subject to examination by the tax authorities in the U.S. (both federal and state) and the +countries of Australia, Belgium, England, France, Germany, Holland and Italy. In the U.S., open +tax years are for fiscal 2010 and forward. The IRS has completed its examination of our federal +returns for fiscal 2008 and 2009. In countries outside the U.S., open tax years generally range +from fiscal 2006 and forward. However, in Belgium, the utilization of local net operating loss +carryforwards extends the statute of limitations for examination well into the foreseeable future. +Tax examinations in France were completed for fiscal years 2004-2006 during fiscal 2007. +- 66 - +Table of Contents +(8) Employee Benefits +(a) +Savings and Investment Plan - We have a profit sharing and retirement savings plan covering +substantially all full-time U.S. employees. Profit sharing contributions to the plan, which +are discretionary, are approved by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an +employee’s contributions, up to maximum match of 3% of eligible compensation. Our +discretionary and matching contributions to the plan amounted to approximately $1,228, $1,282 +and $1,188, during fiscal 2011, 2010 and 2009, respectively. +(b) +Stock-Based Compensation Plans - We have one active stock-based compensation plan, the 2004 +Equity Compensation plan, which became effective December 7, 2004, as amended (the “2004 +Plan”) and an Employee Stock Purchase Plan (the “ESP Plan”), which became effective October 1, +1997. Effective October 1, 1997, we began selling shares of stock to our 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. +We may grant new shares for options, restricted shares or restricted share units for up to 3,000 +shares under the 2004 Plan, of which we have granted 1,501 through September 30, 2011. Options +may be granted at exercise prices not less than 100% of the closing market value of the +underlying common shares on the date of grant and have maximum terms up to ten years. Vesting +schedules are established at the time of grant and may be set based on future service periods, +achievement of performance targets, or a combination thereof. 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. We have granted options for 4,479 shares +under similar plans that have expired. We recognize compensation expense for all share-based +payments made to employees, based upon the fair value of the share-based payment on the date of +the grant. +- 67 - +Table of Contents +On November 12, 2008, we granted approximately 94 restricted shares to certain employees subject +to attainment of a specified earnings target for fiscal 2009. While the dividends were paid on +these restricted shares throughout fiscal 2009, the fiscal 2009 target was not met and these +restricted shares were cancelled. On November 12, 2009, we granted approximately 105 restricted +shares and restricted share units (with a weighted-average grant date fair value of $22.18 per share) to +certain employees, with half of each employee’s grant being time-vested restricted shares or +restricted share units vesting in total on November 12, 2013, and the remaining half being +subject to attainment of a specified earnings target for fiscal 2010. Dividends were paid on +these shares and units throughout fiscal 2010. While the 2010 earnings target was not met, on +September 30, 2010, the Compensation Committee of the Board of Directors chose to convert the +performance-based restricted shares to time-vested restricted shares vesting in total on +November 12, 2013. This conversion impacted approximately fifty employees and resulted in +expense totaling $472, which was recorded in fiscal 2010 and is included in the total amount of +stock-based compensation set forth below. Similarly, during fiscal 2011, we granted +approximately 214 restricted shares and restricted share units (with a weighted-average grant +date fair value of $22.93 per share) to certain employees, with half of each employee’s grant being +time-vested restricted shares or restricted share units vesting in total on the fourth +anniversary of the grant date, and the remaining half being subject to attainment of a specified +earnings target for fiscal 2011. While dividends were paid on these shares and units throughout +fiscal 2011, the target for fiscal 2011 was not met and the performance-based portion of the +restricted shares and restricted share units granted during fiscal 2011 have been cancelled. +Giving effect to this cancellation and certain other activities throughout the year, including +conversions to common shares, forfeitures, and new hire and promotee grants, approximately 196 +restricted shares and restricted share units remain outstanding as of September 30, 2011, with a +weighted-average grant date fair value of $22.63 per share, a +weighted-average remaining vesting period of +2.32 years and an aggregate intrinsic value of $3,077. The weighted-average grant date +fair value of the approximate 18 restricted share units that vested during fiscal 2011 was +$22.83 per share. +The amount of stock-based compensation expense reported was $2,614, $1,866 and $1,092 in fiscal +2011, 2010 and 2009, respectively. The fiscal 2011 expense is comprised of $495 related to +stock options, $2,009 related to restricted shares and units, and $110 related to the granting +of unrestricted commons shares to a retiring director, while the fiscal 2010 expense is +comprised of $908 related to stock options and $958 related to restricted shares and units. The +total income tax benefit recognized in the income statement for these stock-based compensation +arrangements was $865, $665 and $367, for fiscal 2011, 2010 and 2009, respectively. As of +September 30, 2011, we expect future stock compensation expense for unvested options and +unvested restricted stock and units to total $387 and $1,996, respectively, which will be +recognized during fiscal years 2012 through 2015. +We recognize compensation expense only for the portion of shares that we expect to vest. As +such, we apply estimated forfeiture rates to our compensation expense calculations. These rates +have been derived using historical forfeiture data, stratified by several employee groups. +During fiscal 2011, 2010 and 2009, we recorded $39, $17 and $42, respectively, in stock +compensation expense to adjust estimated forfeiture rates to actual. +- 68 - +Table of Contents +We have elected to use the Black-Scholes option pricing model to determine grant-date fair value +for stock options, with the following assumptions: (i) expected share price volatility based on +average of Meridian’s historical volatility over the options’ expected lives and implied +volatility based on the value of tradable call options; (ii) expected life of options based on +contractual lives, employees’ historical exercise behavior and employees’ historical +post-vesting employment termination behavior; (iii) risk-free interest rates based on treasury +rates that correspond to the expected lives of the options; and (iv) dividend yield based on the +expected yield on underlying Meridian common stock. +Year ended September 30, +2011 +2010 +2009 +Risk-free interest rates +1.91 +% +2.93 +% +3.75 +% +Dividend yield +3.74 +% +3.12 +% +2.41 +% +Life of option +5.93 +yrs. +5.90 +yrs. +6.30-8.20 +yrs. +Share price volatility +34 +% +42 +% +57 +% +Forfeitures (by +employee group) +0%-10 +% +0%-10 +% +0%-13 +% +A summary of the status of our stock option plans at September 30, 2011 and changes during the +year is presented in the table and narrative below: +Wtd Avg +Wtd Avg +Aggregate +Exercise +Remaining +Intrinsic +Options +Price +Life (Yrs) +Value +Outstanding beginning of period +1,425 +$ +11.44 +Grants +73 +22.55 +Exercises +(485 +) +3.54 +Forfeitures +(18 +) +23.12 +Cancellations +(7 +) +22.48 +Outstanding end of period +988 +$ +15.86 +5.0515 +$ +3,039 +Exercisable end of period +859 +$ +14.60 +4.5635 +$ +3,039 +A summary of the status of our nonvested options as of September 30, 2011, and changes during +the year ended September 30, 2011, is presented below: +Weighted- +Average +Grant Date +Options +Fair Value +Nonvested beginning of period +639 +$ +3.75 +Granted +73 +4.97 +Vested +(565 +) +2.82 +Forfeited +(18 +) +7.92 +Nonvested end of period +129 +$ +7.91 +The weighted average grant-date fair value of options granted was $4.97, $6.70 and $11.05 for +fiscal 2011, 2010 and 2009, respectively. The total intrinsic value of options exercised was +$8,038, $813 and $2,560, for fiscal 2011, 2010 and 2009, respectively. The total grant-date +fair value of options that vested during fiscal 2011, 2010 and 2009 was $1,594, $1,558 and +$2,019, respectively. +- 69 - +Table of Contents +Cash received from options exercised was $1,721, $592 and $1,243 for fiscal 2011, 2010 and 2009, +respectively. Tax benefits realized and recorded to additional paid-in capital from option +exercises totaled $1,256, $403 and $233 for fiscal 2011, 2010 and 2009, respectively. +(9) Major Customers and Segment Data +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. +Initial segmentation between Diagnostics and Life Science has been determined based upon products +and customers, with further segmentation of Diagnostics between U.S. and European being based upon +geographic regions served and management responsibility. The U.S. Diagnostics operating segment +consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of +diagnostic test kits in the U.S. and countries outside of Europe, Africa and the Middle East. The +European Diagnostics operating segment consists of the sale and distribution of diagnostic test +kits in Europe, Africa and the Middle East. The Life Science operating segment consists of +manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca Raton, Florida; London, England; +Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, +antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically +and abroad. During the fourth quarter of fiscal 2011, plans were announced to consolidate the +Saco, Maine operations into the Memphis, Tennessee facility, with such consolidation commencing +early in the fiscal 2012 first quarter and expected to be completed near the end of the second +quarter of fiscal 2012. The Life Science operating segment also includes the contract development +and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical +and biotechnology companies engaged in research for new drugs and vaccines. +Sales to individual customers constituting 10% or more of consolidated net sales are as follows: +Year Ended September 30, +2011 +2010 +2009 +Customer A +$ +29,632 +(19 +)% +$ +33,821 +(24 +)% +$ +37,876 +(26 +)% +Customer B +$ +18,308 +(11 +)% +$ +18,204 +(13 +)% +$ +19,063 +(13 +)% +Combined international sales for the U.S. Diagnostics and Life Science operating segments were +$28,975, $19,350, and $15,568 in fiscal years 2011, 2010 and 2009, respectively. Our focus product +families — C. difficile, foodborne and H. pylori — accounted for 44%, 43% and 42% of consolidated +net sales in fiscal 2011, 2010 and 2009, respectively. Approximately 25% of the consolidated +accounts receivable balance at September 30, 2011 is largely dependent upon funds from the Italian +government. We currently sole-source from a U.S. manufacturer the illumi pro -10 ® +instrument on which our illumi gene ® molecular testing platform operates. Additionally, +two of our foodborne products sourced from another vendor accounted for 14%, 11% and 7% of +third-party sales for our U.S. Diagnostics operating segment in fiscal 2011, 2010 and 2009, +respectively. +- 70 - +Table of Contents +Significant sales information by country for the European Diagnostics and Life Science operating +segments is as follows. Sales are attributed to the geographic area based on the location to which +the product is shipped. +Year Ended September 30, +2011 +2010 +2009 +Italy +$ +8,544 +$ +8,183 +$ +8,289 +France +2,537 +2,590 +2,939 +United Kingdom +2,373 +2,646 +2,373 +Holland +2,142 +2,045 +1,828 +Belgium +1,289 +1,291 +1,875 +Other countries +7,302 +7,286 +8,566 +Total European Diagnostics +$ +24,187 +$ +24,041 +$ +25,870 +Year Ended September 30, +2011 +2010 +2009 +United States +$ +15,711 +$ +13,907 +$ +13,387 +Germany +4,922 +3,376 +2,816 +United Kingdom +4,890 +2,575 +474 +Australia +3,105 +1,289 +845 +France +1,111 +1,318 +745 +Other countries +8,664 +4,474 +5,167 +Total Life Science +$ +38,403 +$ +26,939 +$ +23,434 +Identifiable assets for our Italian distribution organization were $17,192, $17,378 and $16,797 at +September 30, 2011, 2010 and 2009, respectively. At September 30, 2011, identifiable assets for +the Bioline Group’s operations in the U.K., Germany and Australia totaled approximately $12,825, +$5,550 and $2,675, respectively; and totaled $16,990, $4,441 and $3,094, respectively, at September +30, 2010. +- 71 - +Table of Contents +Segment information for the years ended September 30, 2011, 2010 and 2009 is as follows: +U.S. +European +Diagnostics +Diagnostics +Life Science +Elim (1) +Total +Fiscal Year 2011 - +Net sales - +Third-party +$ +97,133 +$ +24,187 +$ +38,403 +$ +— +$ +159,723 +Inter-segment +10,322 +27 +756 +(11,105 +) +— +Operating income (2) +35,191 +2,199 +2,595 +48 +40,033 +Depreciation and amortization +2,854 +116 +2,903 +— +5,873 +Capital expenditures +4,964 +77 +4,098 +— +9,139 +Goodwill +1,381 +— +21,743 +— +23,124 +Other intangible assets +1,604 +— +9,343 +— +10,947 +Total assets +73,850 +19,390 +92,467 +(30,214 +) +155,493 +Fiscal Year 2010 - +Net sales - +Third-party +$ +92,020 +$ +24,041 +$ +26,939 +$ +— +$ +143,000 +Inter-segment +10,285 +20 +561 +(10,866 +) +— +Operating income (3) +33,432 +3,367 +3,615 +724 +41,138 +Depreciation and amortization +2,722 +86 +1,877 +— +4,685 +Capital expenditures +1,869 +213 +1,001 +— +3,083 +Goodwill +1,381 +— +21,921 +— +23,302 +Other intangible assets +2,283 +9 +11,035 +— +13,327 +Total assets +72,030 +18,044 +90,388 +(25,821 +) +154,641 +Fiscal Year 2009 - +Net sales - +Third-party +$ +98,970 +$ +25,870 +$ +23,434 +$ +— +$ +148,274 +Inter-segment +10,700 +6 +715 +(11,421 +) +— +Operating income +39,490 +4,459 +4,728 +102 +48,779 +Depreciation and amortization +2,680 +92 +1,588 +— +4,360 +Capital expenditures +2,082 +81 +1,480 +— +3,643 +Goodwill +1,381 +— +8,485 +— +9,866 +Other intangible assets +2,909 +24 +4,384 +— +7,317 +Total assets +102,506 +18,221 +55,592 +(20,322 +) +155,997 +(1) +Eliminations consist of intersegment transactions. +(2) +U.S. Diagnostics and European Diagnostics include $365 and $875, respectively, related to +sales and marketing leadership reorganization costs; and Life Science includes $1,057 related to consolidation +of the Maine operations into the Tennessee facility. +(3) +Life Science includes $1,240 of Bioline transaction costs. +Year Ended September 30, +2011 +2010 +2009 +Segment operating income +$ +40,033 +$ +41,138 +$ +48,779 +Interest income +115 +124 +456 +Other, net +352 +138 +88 +Consolidated earnings before income +taxes +$ +40,500 +$ +41,400 +$ +49,323 +- 72 - +Table of Contents +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. +(10) Commitments and Contingencies +(a) +Royalty Commitments — We have entered into various license agreements that require payment of +royalties based on a specified percentage of the sales of licensed products (1% to 14%). +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 $1,853, $734 and $572, respectively, for the fiscal years ended September 30, +2011, 2010 and 2009. +Meridian entered into a license agreement in October 2006 with a third party that provides +rights to a molecular technology for infectious disease testing in the United States, Europe and +other geographic markets. The agreement, as amended, calls for remaining payments of up to +approximately $3,500, based on the achievement of certain product development milestones and +on-going royalties once products are available for commercial sale. +(b) +Purchase Commitments — Excluding the operating lease commitments reflected in Note 10 (c) +below, we have purchase commitments primarily for inventory and service items as part of the +normal course of business. Commitments made under these obligations are $7,911, $103 and +$510 for fiscal 2012, 2013 and 2014, respectively. No purchase commitments have been made +beyond fiscal 2014. +(c) +Operating Lease Commitments — Meridian and its subsidiaries are lessees of (i) certain office +and warehouse buildings in the U.S., Europe and Australia; (ii) automobiles for use by the +direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as +facsimile and copier machines across all business units, under operating lease agreements that +expire at various dates. Amounts charged to expense under operating leases were $1,391, $759 +and $775 for fiscal 2011, 2010 and 2009, respectively. Operating lease commitments for each +of the five succeeding fiscal years are as follows: fiscal 2012 — $1,119, fiscal 2013 — $779, +fiscal 2014 — $412, fiscal 2015 — $330, and fiscal 2016 — $237. +(d) +Litigation — We are a party to various litigation matters from time to time that we believe +are in the normal course of business. The ultimate resolution of these matters is not +expected to have a material adverse effect on our financial position, results of operations or +cash flows. +- 73 - +Table of Contents +(e) +Indemnifications — In conjunction with certain contracts and agreements, we provide routine +indemnifications whose terms range in duration and in some circumstances are not explicitly +defined. The maximum obligation under some such indemnifications is not explicitly stated +and, as a result, cannot be reasonably estimated. We have not made any payments for these +indemnifications and no liability is recorded at September 30, 2011 or September 30, 2010. We +believe that if we were to incur a loss on any of these matters, the loss would not have a +material effect on our financial condition. +(11) Quarterly Financial Data (Unaudited) +The sum of the earnings per common share and cash dividends per share may not equal the +corresponding annual amounts due to interim quarter rounding. +For the Quarter Ended in Fiscal 2011 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +37,263 +$ +41,059 +$ +40,052 +$ +41,349 +Gross profit +23,502 +25,957 +25,351 +24,488 +Net earnings +6,025 +7,260 +6,836 +6,710 +Basic earnings per common share +0.15 +0.18 +0.17 +0.16 +Diluted earnings per common +share +0.15 +0.18 +0.17 +0.16 +Cash dividends per common share +0.19 +0.19 +0.19 +0.19 +For the Quarter Ended in Fiscal 2010 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +42,457 +$ +31,147 +$ +33,857 +$ +35,539 +Gross profit +25,404 +20,222 +21,803 +21,267 +Net earnings +8,921 +5,980 +6,424 +5,322 +Basic earnings per common share +0.22 +0.15 +0.16 +0.13 +Diluted earnings per common share +0.22 +0.15 +0.16 +0.13 +Cash dividends per common share +0.17 +0.19 +0.19 +0.19 +- 74 - +Table of Contents +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2011, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2011. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2011. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” +ITEM 9B. +OTHER INFORMATION +Not applicable. +- 75 - +Table of Contents +PART III +The information required by Items 10., 11., 12., 13. and 14., of Part III are incorporated by +reference from the Registrant’s Proxy Statement for its 2012 Annual Shareholders’ Meeting to be +filed with the Commission pursuant to Regulation 14A. +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(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 so identified under Item 8. No additional financial statements or schedules +are being filed since the requirements of paragraph (c) under Item 15 are not applicable to +Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +3.1 +Articles of Incorporation, including amendments not related +to Company name change (Incorporated by reference to +Registration Statement No. 333-02613 on Form S-3 filed with +the Securities and Exchange Commission on April 18, 1996 +and Meridian’s Form 8-K filed with the Securities and +Exchange Commission on May 16, 2007) +3.2 +Amended Code of Regulations (Incorporated by reference to +Meridian’s Form 8-K filed with the Securities and Exchange +Commission on July 23, 2008) +10.1 +* +Savings and Investment Plan Prototype Adoption Agreement +(Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2003) +10.2 +* +Salary Continuation Agreement between Meridian Bioscience, +Inc. and John A. Kraeutler, as amended April 24, 2001, +December 29, 2008 and August 3, 2011 (Incorporated by +reference to Meridian’s Quarterly Report on Form 10-Q for +the Quarterly Period Ended June 30, 2011) +10.3 +Dividend Reinvestment Plan (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year +Ended September 30, 1999) +10.4 +* +Employment Agreement Dated February 15, 2001, as amended +December 29, 2008 between Meridian and John A. Kraeutler +(Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2009) +10.5 +* +Agreement Concerning Disability and Death dated September 10, +2003, between Meridian and William J. Motto (Incorporated by +reference to Meridian’s Annual Report on Form 10-K for the Fiscal +Year Ended September 30, 2003) +10.6 +* +2004 Equity Compensation Plan, Amended and Restated through +January 22, 2008 (Incorporated by reference to Meridian’s Proxy +Statement filed with the Securities and Exchange Commission on +December 19, 2007 and Form 8-K filed January 28, 2008) +- 76 - +Table of Contents +Exhibit Number +Description of Exhibit +10.7 +* +Fiscal 2006 Officers’ Compensation Plan, Amended and Restated +through January 19, 2006 (Incorporated by reference to Meridian’s +Form 8-K filed with the Securities and Exchange Commission on +January 19, 2006) +10.8 +* +Sample Option Agreement dated November 14, 2007 (Incorporated by +reference to Meridian’s Annual Report on Form 10-K for the Fiscal +Year Ended September 30, 2007) +10.9 +* +Fiscal 2007 Officers’ Performance Compensation Plan (Incorporated +by reference to Meridian’s Form 8-K filed with the Securities and +Exchange Commission on November 21, 2006) +10.10 +Loan and Security Agreement among Meridian Bioscience, Inc., +Meridian Bioscience Corporation, Omega Technologies, Inc. Meridian +Life Science, Inc. and Fifth Third Bank dated August 1, 2007 +(Incorporated by reference to Meridian’s Annual Report on Form +10-K for the Fiscal Year Ended September 30, 2007) +10.10.1 +Amended +and Restated Revolving Note with Fifth Third Bank dated August 1, 2007 (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +10.10.2 +First Amendment to Loan and Security Agreement among Meridian +Bioscience, Inc., Meridian Bioscience Corporation, Omega +Technologies, Inc., Meridian Life Science, Inc. and Fifth Third +Bank dated September 2, 2010 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended +September 30, 2010) +10.10.3 +Second Amendment to Loan and Security Agreement among Meridian +Bioscience, Inc., Meridian Bioscience Corporation, Omega +Technologies, Inc., Meridian Life Science, Inc. and Fifth Third +Bank dated December 1, 2010 (Incorporated by reference to +Meridian’s Quarterly Report on Form 10-Q for the Quarterly Period +Ended December 31, 2010) +10.11 +* +Sample Time-Based Restricted Stock Agreement dated November 12, +2009 (Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2009) +10.12 +* +Sample Performance Award Restricted Stock Agreement dated November 12, 2009 +(Incorporated by reference to Meridian’s Annual Report on +Form 10-K for the Fiscal Year Ended September 30, 2009) +10.13 +Stock Purchase Agreement dated as of July 20, 2010 among Meridian Bioscience, Inc., +Meridian Bioscience Europe, S.A. and Marco Giuseppe Calzavara and Vittorio Giovanni +Calzavara (Incorporated by reference to Meridian’s Form 8-K filed with the Securities +and Exchange Commission on July 23, 2010) +10.14 +* +Meridian Bioscience, Inc. Change in Control Severance Compensation Policy dated March +18, 2011 (Incorporated by reference to Meridian’s Form 8-K filed with the Securities +and Exchange Commission on March 24, 2011) +10.15 +* +Antonio Interno Retirement-Related Agreements related to retirement as of March 31, +2011 (Incorporated by reference to Meridian’s Quarterly Report on Form 10-Q for the +Quarterly Period Ended March 31, 2011) +13 +2011 Annual Report to Shareholders (1) +14 +Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form 10-K for +the Fiscal Year Ended September 30, 2003) +- 77 - +Table of Contents +Exhibit Number +Description of Exhibit +21 +Subsidiaries of the Registrant (Filed herewith) +23 +Consent of Independent Registered Public Accounting Firm (Filed herewith) +31.1 +Certification of Principal Executive Officer required by Rule 13a-14(a) (Filed herewith) +31.2 +Certification of Principal Financial Officer required by Rule 13a-14(a) (Filed herewith) +32 +Section 1350 Certification of Chief Executive Officer and Chief Financial Officer +(Filed herewith) +* +Management Compensatory Contracts +(1) +Only specific portions of the 2011 Annual Report to Shareholders are incorporated by reference +in this Form 10-K as filed herewith. A supplemental paper copy of the 2011 Annual Report to +Shareholders has been furnished to the Securities and Exchange Commission for informational +purposes only. +Meridian will provide shareholders with any exhibit upon the payment of a specified reasonable fee, +which fee shall be limited to Meridian’s reasonable expenses in furnishing such exhibit. +- 78 - +Table of Contents +Pursuant to the requirements of Sections 13 or 15(d) 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/ John A. Kraeutler +Date: November 29, 2011 +John A. Kraeutler +Chief Executive Officer +- 79 - +Table of Contents +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 +William J. Motto +Executive Chairman of the Board of Directors +November 29, 2011 +/s/ John A. Kraeutler +John A. Kraeutler +Chief Executive Officer, Director +November 29, 2011 +/s/ Melissa A. Lueke +Melissa A. Lueke +Executive Vice President, Chief +Financial Officer, and Secretary +November 29, 2011 +/s/ James M. Anderson +James M. Anderson +Director +November 29, 2011 +/s/ Gary P. Kreider +Gary P. Kreider +Director +November 29, 2011 +/s/ David C. Phillips +David C. Phillips +Director +November 29, 2011 +/s/ Robert J. Ready +Robert J. Ready +Director +November 29, 2011 +- 80 - +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended September 30, 2011, 2010 and 2009 +Balance at +Charged to +Balance at +Beginning +Costs and +End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2011: +Allowance for doubtful accounts +$ +241 +$ +68 +$ +— +$ +1 +$ +310 +Inventory realizability reserves +1,130 +1,056 +(550 +) +(1 +) +1,635 +Valuation +allowances — deferred taxes +439 +— +— +— +439 +Year Ended September 30, 2010: +Allowance for doubtful accounts +$ +247 +$ +82 +$ +(56 +) +$ +(32 +) +$ +241 +Inventory realizability reserves +1,025 +717 +(610 +) +(2 +) +1,130 +Valuation allowances — deferred +taxes +470 +— +— +(31 +) +439 +Year Ended September 30, 2009: +Allowance for doubtful accounts +$ +230 +$ +33 +$ +(26 +) +$ +10 +$ +247 +Inventory realizability reserves +1,103 +613 +(691 +) +— +1,025 +Valuation allowances — deferred +taxes +466 +— +— +4 +470 +(a) +Balances reflect the effects of currency translation +- 81 - \ No newline at end of file diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/filing_metadata.csv b/raw/filings/0000794172/2011/0000950123-11-100817/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d3632092a6b865819c048ce85a735c9e6c82531e --- /dev/null +++ b/raw/filings/0000794172/2011/0000950123-11-100817/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2011-11-29,2011-09-30,2011-11-29T15:25:22.000Z,0000950123-11-100817,c25046e10vk.htm,FORM 10-K,6017879,1,0,https://www.sec.gov/Archives/edgar/data/794172/000095012311100817/c25046e10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095012311100817/,2011,2011,1 diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/item1.txt b/raw/filings/0000794172/2011/0000950123-11-100817/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a233b06c25b70fd95d644e40f529c5f3d8c06151 --- /dev/null +++ b/raw/filings/0000794172/2011/0000950123-11-100817/item1.txt @@ -0,0 +1,442 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company with principal businesses in (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract +development and manufacture of proteins and other biologicals under cGMP conditions for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. The +company was incorporated in Ohio in 1976. Our principal corporate offices are located in +Cincinnati, Ohio, USA. +Our +website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission (SEC). These +reports may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., +Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing +these filings and other information regarding Meridian at +www.sec.gov . The information on our +website is not part of this Annual Report on Form 10-K. +- 4 - +Table of Contents +Operating Segments +Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The +U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, +Africa and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; Boca +Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes +the contract development and manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Financial information for Meridian’s operating segments is included in Note 9 to the consolidated +financial statements. +Our primary source of revenues continues to be diagnostic products, which represents 76% of +consolidated net sales for fiscal 2011. Our diagnostic products provide accuracy, simplicity and +speed, enable early diagnosis and treatment of common, acute medical conditions, and provide for +better patient outcomes at reduced costs. We target diagnostics for disease states that (i) are +acute conditions where rapid diagnosis impacts patient outcomes; (ii) have opportunistic +demographic and disease profiles; (iii) are underserved by current diagnostic products; and (iv) +have difficult sample handling requirements. This approach has allowed us to establish significant +market share in our target disease states. The acquisition of the Bioline group of companies +(collectively the “Bioline Group”) in July 2010 dramatically increased the revenue base for our +Life Science operating segment; revenues for our Life Science operating segment represents 24% of +consolidated net sales for fiscal 2011. +U.S. Diagnostics Operating Segment +Overview +Our U.S. Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $97,000, $92,000 and $99,000 for fiscal +2011, 2010 and 2009, respectively, reflecting a three-year compound annual growth rate of 3%. As +of September 30, 2011, our U.S. Diagnostics operating segment had approximately 290 employees. +Our diagnostic test kits utilize immunodiagnostic and molecular technologies, which test samples of +stool, blood, urine and other body fluids or tissue for the presence of specific infectious +diseases. Specific immunodiagnostic technologies used in our diagnostic test kits include enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. Additionally, during 2010 we introduced into the marketplace our new +molecular amplification assay, illumi gene ® C.difficile . The illumi gene ® +molecular amplification assay detects the presence of the toxin producing region from the C. +difficile DNA, and provides highly accurate results in under an hour. During 2011, we continued +with the development of additional tests for the illumi gene ® molecular platform, +submitting illumi gene ® Group B Streptococcus (GBS) to the FDA for approval and we +expect to add three additional tests to the platform over the next 12 months — tests for Group A +Streptococcus , Mycoplasma pneumoniae and Bordetella pertussis/ parapertussis . +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of gastrointestinal diseases, such as +antibiotic-associated diarrhea (C. difficile ), pediatric diarrhea (Rotavirus and Adenovirus) and +stomach ulcers ( H. pylori ); foodborne diseases such as Enterohemorrhagic E. coli infection (EHEC) +and Campylobacter jejuni (Campy); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken +Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant infections); parasitic +diseases, such as Giardiasis, Cryptosporidiosis and Lyme; and respiratory diseases, such as +Pneumonia, Valley Fever, Influenza and Respiratory Syncytial Virus (RSV). The primary markets and +customers for these products are reference laboratories and hospitals. +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. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital group purchasing organizations 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. +Sales and Marketing +Our U.S. Diagnostics operating segment’s sales and distribution network in the U.S. consists of a +direct sales force complemented by independent distributors. The use of independent distributors +in the U.S. allows our products to reach any bed-size healthcare facility and also provides our +customers the option to purchase our products direct or through distribution along with other +supplies. For our export markets in Asia, Canada and South America, we use independent +distributors. Two independent distributors in the U.S. accounted for 10% or more of consolidated +net sales in fiscal 2011, 2010 and 2009: Cardinal Healthcare Corporation and Fisher Scientific. +Our sales to Cardinal were approximately $30,000, $34,000 and $38,000 during fiscal 2011, 2010 and +2009, respectively. Our sales to Fisher were approximately $18,000, $18,000 and $19,000 during +fiscal 2011, 2010 and 2009, respectively. +- 6 - +Table of Contents +Consolidation of the U.S. healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to multi-year supply agreements with group purchasing organizations and +major reference laboratories to stabilize pricing. +Products and Markets +We have 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. Our product technologies include DNA amplification, enzyme +immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement +fixation and chemical stains. As a result, we are able to develop and manufacture diagnostic tests +in a variety of formats that satisfy customer needs and preferences, whether in a hospital, +commercial or reference laboratory, or alternate site location. Our product offering consists of +approximately 140 medical diagnostic products. +Sales within our focus product families — C. difficile, foodborne and H. pylori — accounted for +58%, 51% and 48% of our U.S. Diagnostics operating segment’s third-party sales during fiscal 2011, +2010 and 2009, respectively. These same product families accounted for 44%, 43% and 42% of +consolidated net sales in fiscal 2011, 2010 and 2009, respectively. +Clostridium difficile +C. difficile , a serious hospital acquired bacterial infection, is our largest product family, +generating approximately $30,000 in global sales for fiscal 2011, or 10% growth from fiscal 2010. +This product family has experienced significant competition over the last three years from new +technologies, including molecular testing platforms. Our illumi gene ® molecular C. +difficile product has now been available in markets around the world for over 12 months. Sales of +this product were approximately $9,000 and $500 in fiscal 2011 and 2010, respectively. We have just +over 650 placements of illumi gene ® units worldwide to date, with approximately 90% of +these installed in the U.S. At the present time, it generally takes a customer 90 days from +purchase order placement to become revenue producing — a timeframe we are continually working to +reduce. Our illumi gene ® molecular C. difficile product has restored the C. difficile +product family to positive sales growth and has allowed us to begin to recover lost test volume +from our Toxin products. +- 7 - +Table of Contents +Our major competitors in this product family are Cepheid and Becton Dickinson. We believe that we +have two advantages to our competition. First, our instrumentation package has a smaller footprint +and significantly lower cost than those of Cepheid or Becton Dickinson, with no capital outlay +required. We believe that this advantage allows our product to fit into virtually any size +hospital or reference laboratory. Second, we believe that the breadth of our C. difficile product +offerings represents an advantage. With the launch of our molecular product and recent FDA +clearance and submission activities related to our common antigen C. difficile products — Premier +C. difficile GDH received FDA clearance in May 2011, and Immuo Card C. difficile GDH was submitted +to the FDA in July 2011 — we believe we are in a unique position to offer a full line of testing +solutions to our clinical laboratory customers around the world to counter the competitive +pressures surrounding this market. Additionally, we hold the only FDA-approved claim for C. +difficile testing in the pediatric population. +Foodborne +Our foodborne product family achieved approximately $18,000 in global sales for fiscal 2011, or +growth of 36%. Our foodborne products include tests for Enterohemorrhagic E. coli (EHEC) and +Campylobacter jejuni (Campy). Approximately 95% of our foodborne product sales are in the U.S. In the U.S. +market, we believe that there are potentially 20 million annual stool cultures that make up the +total available market. At present, we believe that we have a 13% market share for EHEC and a 3% +market share for Campy. +We believe that the primary competition for our foodborne products is laboratory culture methods. +We believe that our products have two principal advantages versus culture methods. The first +principal advantage is test accuracy. Independent evaluations have shown our products to have +higher sensitivity than culture methods. The second principal advantage is improved work flow of +the testing process, resulting in significantly shortened time to test result. Our single-use +rapid products provide a test result in approximately 20 minutes, whereas culture results can take +up to 24-48 hours. Time to test result can be a critical factor in the physician’s choice of +therapies, as the mortality rate for EHEC is estimated to be 5% to 10%. +Helicobacter pylori +H. pylori , a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to +duodenal ulcers and stomach cancer. H. pylori represents our second largest product family, +generating approximately $22,000 in global sales for 2011, or 9% growth. We offer both antibody +and direct antigen tests in alternative formats (single-use and high volume batch). Our major +competition in this product family is test-method alternatives, such as serology and urea breath, +and physicians who prescribe symptom-relieving medications without testing. In the U.S., our +strategy has been to partner with managed care companies to promote the health and economic +benefits of a test and treat strategy, and to move physician behavior away from serology-based +testing toward direct antigen testing. In the U.S. market, we believe that there are potentially +30 million annual tests, of which we believe that we currently have a 5% market share. +In European markets, we face a greater number of competitive products for this product family. As +a result, pricing pressures have led to slightly negative sales growth for fiscal 2011 for our +European Diagnostics operating segment. +- 8 - +Table of Contents +Research and Development +Our U.S. Diagnostics operating segment’s research and development organization has expertise in +biochemistry, immunology, mycology, bacteriology, virology, parasitology and molecular biology. +Research and development expenses for the U.S. Diagnostics operating segment for fiscal 2011, 2010 +and 2009 were approximately $7,000, $6,000 and $7,000, respectively. This research and development +organization focuses its activities on new applications for our existing technologies, improvements +to existing products and development of new technologies. Research and development efforts may +occur in-house or with collaborative partners. We believe that new product development is a key +source for sustaining revenue growth. The products within our C. difficile , foodborne, and H. +pylori product families were either developed solely in-house, or via collaboration with outside +partners. +The introduction of our molecular amplification assay, illumi gene ® C.difficile , +introduced in markets around the world over 12 months ago, followed nearly four years of +exploration and development of a molecular-based diagnostic testing technology to complement our +existing antigen/antibody-based testing technologies. As previously noted, the +illumi gene ® molecular amplification assay detects the presence of a key toxin producing +region from the C. difficile DNA, and provides highly accurate results in under an hour. We +believe this molecular assay uniquely positions us in the market to provide a full line of testing +solutions that will meet the needs of both our domestic and international customers and, as a +result, during 2011 we have continued with the development of additional tests for the +illumi gene ® molecular platform, submitting illumi gene ® Group B Streptococcus +(GBS) to the FDA for approval and we expect to add three additional tests to the platform over the +next 12 months — tests for Group A Streptococcus , Mycoplasma pneumoniae and Bordetella +pertussis/parapertussis . We currently hold registrations to sell illumi gene ® in 37 +countries, including the U.S., with registrations pending in 5 additional countries. +During fiscal 2008, we launched our first products under our patented TRU rapid test technology. +The design of this technology enhances laboratory safety by containing the specimen in a closed +system during testing as recommended by CDC guidelines. TRU tests also use less space than other +immunoassay technologies, which is an advantage in space-constrained clinical laboratories. +Products using this technology include TRU FLU ® , TRU RSV ® , TRU +EBV-M ® and TRU EBV-G ® . TRU Legionella is the latest addition to the TRU line +of products. Legionella was launched in ex-U.S. markets during the fourth quarter of fiscal 2011, +and is expected to be available in the U.S. market in fiscal 2012. +Manufacturing +Our immunodiagnostic and molecular products require the production of highly specific and sensitive +antigens, antibodies and primers. While we produce substantially all of our own requirements +including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial and +viral antigens, currently a number of the raw materials used in our illumi gene ® +molecular product are purchased from outside vendors. We believe that we have sufficient +manufacturing and sourcing capacity for anticipated growth in the near term. +- 9 - +Table of Contents +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our U.S. +Diagnostics operating segment. Sales of these products are as follows: +Number of +Product Family +products +% of consolidated sales +2011 +2010 +C. difficile +1 +6 +% +0 +% +H. pylori +2 +13 +% +13 +% +Respiratory +2 +2 +% +4 +% +Other +6 +1 +% +2 +% +Total patented products +11 +22 +% +19 +% +The patent for the C. difficile product expires in 2020; the patents for the two H. pylori products +expire between 2016 and 2017; and the patents for the two respiratory products expire in 2022 and +2027. The remaining six patented products for which we own or license patents are spread over +three product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate +our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) 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. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +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; however, we +can make no assurances in this regard. +Sales of our diagnostic 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. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common +gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious +diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our +diagnostic product lines reduces the risk that infections subject to seasonality and sporadic +outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that +revenues will not be impacted period over period by such factors. +- 10 - +Table of Contents +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our U.S. Diagnostics operating segment and by +third-party vendors. Approximately 66% of third-party sales for fiscal 2011 for this operating +segment were products purchased from our U.S. Diagnostics operating segment. Third-party sales for +this operating segment were approximately $24,000, $24,000 and $26,000 for fiscal 2011, 2010 and +2009, respectively. As of September 30, 2011, the European Diagnostics operating segment had +approximately 40 employees. Our European Diagnostics operating segment’s sales and distribution +network consists of direct sales forces in Belgium, France, Holland and Italy, and independent +distributors in other European countries, Africa and the Middle East. The European Diagnostics +operating segment maintains a distribution center near Milan, Italy. The primary markets and +customers for this operating segment are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into U.S. dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale and +distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and +bioresearch reagents used by researchers and other diagnostic companies, as well as contract +development and manufacturing services under clinical cGMP conditions. Third-party sales for this +operating segment were approximately $38,000, $27,000 and $23,000 for fiscal 2011, 2010 and 2009, +respectively. As of September 30, 2011, our Life Science operating segment had approximately 195 +employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells +and bioresearch reagents used by researchers and other diagnostic companies. During fiscal 2011, +15% of third-party sales for this segment were to two customers. For one of these two customers, +we have exclusive supply agreements that have annual, automatic renewal provisions. We have a +long-standing relationship with this customer; and although there can be no assurances, we intend +to renew these supply agreements in the normal course of business. +- 11 - +Table of Contents +In July 2010, we acquired the Bioline Group and in so doing added important technologies and +capabilities to our Life Science business and complemented our expanding life science product lines +sold into the research, pharmaceutical and commercial diagnostic markets. In addition to +technological capabilities, Bioline also added proprietary know-how in the production of +high-volume nucleotides and PCR enzymes, as well as a growing portfolio of intellectual property in +the form of patents and licenses. The Bioline Group contributed sales +of approximately $15,000 and $2,000 in fiscal 2011 and fiscal 2010, +respectively. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. The customer base for this aspect of our Life Science +business includes biopharmaceutical and biotechnology companies, as well as government agencies, +such as the National Institutes of Health. Revenues for our Life Science operating segment, in the +normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than our +immunodiagnostic and molecular biology products, as well as buying patterns of major customers. +See Note 1 (i) to the Consolidated Financial Statements herein for revenue recognition policies. +Our revenues for contract services were approximately $3,000, $2,000 and $2,000 in fiscal 2011, +2010 and 2009, respectively. +As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth +quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, and began the +transfer of our manufacturing operations from this facility to our Memphis, Tennessee facility. We +expect the consolidation of manufacturing operations in Memphis will provide a lower overall cost +structure and should be completed during the second fiscal quarter of 2012. Total costs to +complete the consolidation of facilities are expected to be approximately $2,200, consisting of +fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar +items. During the fourth quarter of 2011, we recognized $1,057 of these costs, and the balance +will be recognized during fiscal 2012, primarily during the first half of the fiscal year. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, OEM Concepts in fiscal 2005, and the +Bioline Group in July 2010). Historically, these businesses were run autonomously. In recent +years, growth strategies have been developed around sales and marketing integration, new product +development integration, and the acquisition of complementary product lines. +- 12 - +Table of Contents +Immunodiagnostic products such as antibodies, antigens and reagents are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These products are typically sold in bulk +quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales +efforts are focused on multi-year supply agreements in order to provide stability in volumes and +pricing. We believe this benefits both us and our customers. +Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed +primarily to research customers. These products are typically sold in small quantities. +Research and Development +Research and development expenses for our Life Science operating segment for fiscal 2011, 2010 and +2009 were approximately $3,000, $2,000 and $1,000, respectively. This research and development +organization is heavily involved in vaccine development and production activities for our cGMP +facility. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +The Meridian Life Science facilities are ISO 9001:2008 certified and EC 1069:2009 approved, where +appropriate and as required. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger than we are with greater financial, research, +manufacturing and marketing resources. Important competitive factors for 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 our product lines do not reflect technological advances, our ability to compete in +those product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of 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 new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo +Fisher and Siemens. We also compete with smaller companies such as Cepheid, Quidel Corporation and +Alere, Inc. +- 13 - +Table of Contents +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources, and where sole-source supply arrangements do not exist. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than purchase from outside +vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, +is also competitive. Important competitive factors include reputation, customer service and price. +Although the product application for this facility was built from our existing expertise in cell +culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the growth of our businesses. Our acquisition +objectives include, among other things, (i) enhancing product offerings; (ii) improving product +distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to +key biologicals or new technologies that lead to new products. Although we cannot provide any +assurance that we will consummate any additional acquisitions in the future, nor can we provide any +assurance that any acquisitions will accomplish these objectives, we expect that the potential for +acquisitions will continue to provide opportunities for revenues and earnings growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were +approximately $53,000 or 33% of consolidated fiscal 2011 sales, $43,000 or 30% of consolidated +fiscal 2010 sales and $41,000 or 28% of consolidated fiscal 2009 sales. We expect to continue to +look to international markets as a source of new revenues and growth in the future. See Notes 7 +and 9 to the Consolidated Financial Statements for information concerning sales, long-lived assets +and deferred tax assets by country. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA +identification number. We are in compliance with applicable portions of the federal and state +hazardous waste regulations and have never been a party to any environmental proceeding. +- 14 - +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/item13.txt b/raw/filings/0000794172/2011/0000950123-11-100817/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..1b869774c4b3cea875c68141ca838abf7b41264b --- /dev/null +++ b/raw/filings/0000794172/2011/0000950123-11-100817/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions, and Director Independence +76 \ No newline at end of file diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/item9a.txt b/raw/filings/0000794172/2011/0000950123-11-100817/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..294fc705b6bffa81a8a4d37fa751bae440ce6ced --- /dev/null +++ b/raw/filings/0000794172/2011/0000950123-11-100817/item9a.txt @@ -0,0 +1,14 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2011, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2011. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2011. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting.” \ No newline at end of file diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/rp_note.txt b/raw/filings/0000794172/2011/0000950123-11-100817/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2011/0000950123-11-100817/rpt_disclosure.txt b/raw/filings/0000794172/2011/0000950123-11-100817/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..d5e4bc7abadcf3af002c7409af9b52030a113c52 --- /dev/null +++ b/raw/filings/0000794172/2011/0000950123-11-100817/rpt_disclosure.txt @@ -0,0 +1,13 @@ +TRANSACTIONS WITH RELATED PERSONS +During fiscal 2011, Todd Motto, the adult son of William J. Motto, served as Business Development Coordinator, receiving $125,048 in compensation for +fiscal 2011. This compensation consisted of $110,256 of base salary, $2,000 of auto and professional allowances, $8,992 of retirement plan contributions, and $3,800 for dividends on restricted stock granted under the 2004 Plan. Effective +October 1, 2011, Todd Motto provides business development services on a limited basis at a rate of $250 per hour, primarily to wrap up projects he previously had in process. +Nasdaq rules require the Company to conduct an appropriate review of related party transactions required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential conflict +of interest situations on an ongoing basis and that all such transactions must be approved by the Audit Committee or another Committee comprised of independent Directors. As a result, the Audit Committee annually reviews all such related party +transactions and approves each related party transaction if it determines that it is in the best interests of the Company. Additionally, the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions +involving the Company and “related persons” (Directors and Executive Officers or their immediate family members, or shareholders owning five percent or greater of the Company’s outstanding stock). This also covers any related person +transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest). In +considering the transaction, the Audit Committee may consider all relevant factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related +person transaction; (iii) whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual +or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. This policy is included in the Company’s Employee Handbook. The +approval of such related person transactions are evidenced by internal Company resolutions or memoranda. \ No newline at end of file diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/filing.txt b/raw/filings/0000794172/2013/0001193125-13-457721/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..94c68fd8a228dfe5b3c4ec17097ea163861de49a --- /dev/null +++ b/raw/filings/0000794172/2013/0001193125-13-457721/filing.txt @@ -0,0 +1,3738 @@ +10-K +1 +d601230d10k.htm +10-K +10-K +Table of Contents +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 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2013. +¨ +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. +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID No. 31-0888197 +Incorporated under the Laws of Ohio +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange of which registered +Common Shares, No Par Value +The NASDAQ Stock Market LLC +(NASDAQ Global Select Market) +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the +registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. YES x NO ¨ +If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or +15(d) of the Securities Exchange Act. YES ¨ NO x +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 x NO ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web +site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such +files). YES x NO ¨ +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. YES ¨ NO x +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a +non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +x +Accelerated filer +¨ +Non-accelerated filer +¨ (Do not check if a smaller reporting company) +Smaller reporting company +¨ +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule +12b-2). YES ¨ NO x +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2013 was $926,647,632 based on a closing sale price of $22.82 per +share on March 31, 2013. As of October 31, 2013, 41,518,049 no par value Common Shares were issued and outstanding. +Documents +Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended September 30, 2013 furnished +to the Commission pursuant to Rule 14a-3(b) are incorporated by reference in Part II as specified and portions of the Registrant’s Proxy Statement to be filed with the Commission for its 2014 Annual +Shareholders’ Meeting are incorporated by reference in Part III as specified. +Table of Contents +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 +Business +4 +Item 1A +Risk Factors +14 +Item 1B +Unresolved Staff Comments +22 +Item 2 +Properties +22 +Item 3 +Legal Proceedings +23 +Item 4 +Mine Safety Disclosures +23 +Part II +Item 5 +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity +Securities +23 +Item 6 +Selected Financial Data +24 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +24 +Item 7A +Quantitative and Qualitative Disclosures about Market Risk +42 +Item 8 +Financial Statements and Supplementary Data +43 +Item 9 +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +73 +Item 9A +Controls and Procedures +73 +Item 9B +Other Information +73 +Part III +Item 10 +Directors, Executive Officers and Corporate Governance +74 +Item 11 +Executive Compensation +74 +Item 12 +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +74 +Item 13 +Certain Relationships and Related Transactions, and Director Independence +74 +Item 14 +Principal Accounting Fees and Services +74 +Item 15 +Exhibits and Financial Statement Schedules +75 +FORWARD LOOKING STATEMENTS +This Annual Report on Form 10-K contains 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. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as +amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, +“will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. Such statements, whether expressed or +implied, are based upon current expectations of the Company and speak only as of the date made. The Company assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any +projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following: +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, and its ability to effectively sell such products. 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. Meridian relies on proprietary, patented and licensed technologies, and the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would +impact its results. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which our customers +operate, as well as adverse trends in buying patterns from customers can change expected results. Costs and difficulties in complying with laws and regulations, including those 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. The international scope of Meridian’s operations, including changes in the relative strength or weakness of the U.S. dollar and general +economic conditions in foreign countries, can impact results and make them difficult to predict. One of Meridian’s 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 will be successfully integrated into Meridian’s operations. There may be risks that acquisitions may disrupt operations and may pose potential difficulties +in employee retention and there may be additional risks with respect to Meridian’s ability to recognize the benefits of acquisitions, including potential synergies and cost savings or the failure of acquisitions to achieve their plans and +objectives. The Company cannot predict the possible impact of recently-enacted United States healthcare legislation and any similar initiatives in other countries on its results of operations. In addition to the factors described in this paragraph, +Part I, Item 1A Risk Factors contains a list and description of uncertainties, risks and other matters that may affect the Company. +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. +See “Forward Looking Statements” above. Factors that could cause or contribute to such differences include those discussed in Item 1A. Risk Factors. In addition to the risk factors discussed herein, we are also subject to additional +risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these risks and uncertainties develop into actual events, our business, financial condition or results of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Meridian,” “we,” “us,” +“our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +In the discussion that follows, all dollars and +shares are in thousands (both tables and text), except per share data. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company with principal businesses in (i) the development, manufacture, sale and distribution of diagnostic +test kits, primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch +reagents used by researchers and other diagnostic manufacturers; and (iii) the contract development and manufacture of proteins and other biologicals under cGMP conditions for use by biopharmaceutical and biotechnology companies engaged in +research for new drugs and vaccines. The company was incorporated in Ohio in 1976. Our principal corporate offices are located near Cincinnati, Ohio, USA. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form +8-K and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission (SEC). These reports may also be +read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing these filings and other information regarding Meridian at +www.sec.gov . The information on our website is not and should not be considered part of this Annual Report on Form 10-K. +- 4 - +Table of Contents +Reportable Segments +Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and +distribution of diagnostic test kits in the U.S. and Canada (“North America”); Europe, Middle East and Africa (“EMEA”); and other countries outside of North America and EMEA (rest of the world, or “ROW”). The Life +Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, +nucleotides, competent cells and bioresearch reagents domestically and abroad, including a sales and business development location in Singapore. The Life Science segment also includes the contract development and manufacture of cGMP clinical grade +proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. Financial information for Meridian’s reportable segments is included in Note 7 to the consolidated financial +statements. +Diagnostics Segment +Overview of +Products and Markets +Our primary source of revenues continues to be diagnostic products, with our Diagnostics segment providing 77% of +consolidated net sales for fiscal 2013. Third-party sales for this segment were $145,000, $130,000 and $120,000 for fiscal 2013, 2012 and 2011, respectively, reflecting a three-year compound annual growth rate of 8%. As of September 30, 2013, +our Diagnostics segment had approximately 360 employees in six countries. +Our diagnostic products provide accuracy, simplicity and speed; enable early +diagnosis and treatment of common, acute medical conditions; and provide for better patient outcomes at reduced costs. We target diagnostics for disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes; +(ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; and (iv) have difficult sample handling requirements (stool, blood, urine and other body fluids). This approach has +allowed us to establish significant market share in our target disease states. +Our diagnostic products span a broad menu of testing platforms and +technologies, and also include transport media that store and preserve specimen samples from patient collection to laboratory testing. Our testing platforms include: +• +Isothermal DNA Amplification ( illumi gene ® brand ) – high sensitivity, molecular platform that is suitable for +virtually any size laboratory, whether centralized or decentralized; provides flexibility to process from 1 to 10 tests per run in generally under one hour; and requires no batching of samples. +• +Enzyme Immunoassay (TRU ® , Immuno Card ® and +Immuno Card STAT! ® brands) – single-use immunoassays that can be used in point-of-care settings; these tests have fast turnaround times +(generally under 20 minutes); and can reduce expensive send-outs for hospitals and outpatient clinics. +• +Enzyme-linked Immunoassay (Premier ® brand) – batch immunoassay platform that can process up to 96 tests per run; is highly +accurate and economical; and is adaptable to automation. +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of infectious diseases caused by various bacteria, +viruses, parasites and pathogens. Our focus product families in Diagnostics are C. difficile (antibiotic-associated diarrhea from a hospital-acquired infection), foodborne (Enterohemorrhagic E. coli (EHEC) and Campylobacter +jejuni (Campy)), and H. pylori (stomach ulcers). Sales within our focus product families – C. difficile, foodborne and H. pylori – accounted for 62%, 62% and 59% of our Diagnostics segment’s third-party sales +during fiscal 2013, 2012 and 2011, respectively. These same product families accounted for 47%, 47% and 44% of consolidated net sales in fiscal 2013, 2012 and 2011, respectively. +Our product portfolio, over 140 diagnostic tests and transport media, extends beyond our focus families, reaching into prenatal care (Group B +Streptococcus ), respiratory (Group A Streptococcus, influenza, respiratory syncytial virus, among others), and organ transplant infections (Cytomegalovirus), among other infectious disease areas. The primary markets and customers for +our products are acute care hospitals, reference laboratories and outpatient clinics in over 60 countries around the world. +We continue to invest +in new product development for our molecular testing platform, illumi gene ® . This platform now has four commercialized tests (assays), with three additional tests expected +to be available for sale in fiscal 2014: +1. +illumi gene ® C. difficile – commercialized in August 2010 +2. +illumi gene ® Group B Streptococcus (Group B Strep or GBS) – commercialized in December 2011 +3. +illumi gene ® Group A Streptococcus (Group A Strep) – commercialized in September 2012 +4. +illumi gene ® Mycoplasma ( M. pneumonia; walking pneumonia) – commercialized in June 2013 +5. +illumi gene ® Bordetella pertussis (whooping cough) – expected first half fiscal 2014 +6. +illumi gene ® Chlamydia trachomatis – expected second half fiscal 2014 +7. +illumi gene ® Neisseria gonorrhea – expected second half fiscal 2014 +Additional illumi gene tests in early-stage research or development include Herpes Simplex Virus I & II, enteric +parasites such as Giardia, foodborne pathogens such as E. coli , and bloodborne pathogens such as malaria. +We believe that our +illumi gene system has been well-accepted in our global markets. We currently have approximately 1,200 customer account placements. Of these account placements, approximately 1,000 accounts have completed +evaluations and validations and are regularly purchasing product, with the remaining account placements being in some stage of product evaluation and/or validation. Of our account placements, we have over 190 accounts that are multi-assay +users. +- 6 - +Table of Contents +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. +The increasing global +pressures to contain total health care costs have accelerated the increased use of diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, +shorter hospital stays and lower overall treatment cost. The creation of Accountable Care Organizations (ACOs) in our U.S. market, in particular, has the goal of increasing efficiency of healthcare delivery, reducing spending and improving clinical +outcomes. We believe our product portfolio positions us competitively with ACOs and healthcare systems that are transitioning from fee-for-service compensation models, to compensation models based on the total outcome costs of a given patient. Our +C. difficile , Group B Streptococcus , Group A Streptococcus , and H. pylori products are all examples of how a highly accurate diagnostic test on the front-end can mitigate or reduce down-stream costs for antibiotic use, +symptom-relieving drugs and hospital stays. +We also continue to see aggregation of buying power in our U.S. market via multi-hospital group +purchasing organizations and integrated delivery networks, consolidation among reference laboratories, and acquisition of physician practices by hospitals. We utilize multi-year supply agreements to secure our business where possible and +appropriate. +Cost containment pressures have also affected healthcare systems outside the U.S., particularly in Europe, where the healthcare systems are +generally government-run. The level of government budget deficits can have an adverse effect on the amount of government healthcare spend. We have seen this in Italy, for example. +Sales, Marketing and Focus Product Families +Our +Diagnostics segment’s sales and distribution network consists of the following for each of the broad geographic regions we serve: +North America +In North +America, our sales and distribution network consists of a direct sales force (U.S. only) complemented by independent distributors. The use of independent distributors in the U.S. allows our products to reach any size healthcare facility and also +provides our customers the option to purchase our products direct or through distribution along with other supplies. Two independent distributors in the U.S. accounted for 10% or more of consolidated net sales in fiscal 2013, 2012 and 2011: Cardinal +Healthcare Corporation and Thermo Fisher Scientific. Our sales to Cardinal were approximately $35,000, $33,000 and $30,000 during fiscal 2013, 2012 and 2011, respectively. Our sales to Fisher were approximately $25,000, $20,000 and $18,000 during +fiscal 2013, 2012 and 2011, respectively. +- 7 - +Table of Contents +EMEA +In EMEA, our sales and distribution network consists of direct sales forces in Belgium, France, Holland and Italy, and independent distributors +in other European countries, Africa and the Middle East. We maintain a distribution center near Milan, Italy. +ROW +With the exception of Australia, in which we utilize a direct sales force, we utilize independent distributors throughout the ROW. +Our Diagnostics segment’s focus product families are described below: +C. difficile +C. difficile , a serious hospital +acquired bacterial infection, is our largest product family, generating approximately $39,000 in global sales for fiscal 2013, or 8% growth from fiscal 2012 – reflecting a combination of sales of our molecular-based and traditional immunoassay +products. This product family has experienced significant competition in recent years from new technologies, including molecular testing platforms. See Competition discussion below. +Foodborne +Our foodborne product family achieved +approximately $24,000 in global sales for fiscal 2013, or growth of 15%, with over 95% of such sales occurring in the U.S. Our foodborne products include tests for Enterohemorrhagic E. coli (EHEC) and Campylobacter jejuni (Campy). In +the U.S. market, we believe that there are potentially 20 million stool cultures that are tested annually for foodborne illnesses. At present, we believe that we have less than a 20% market share for EHEC and less than a 5% market share for +Campy. +The primary competition for our foodborne products is laboratory culture methods. We believe that our products have two principal advantages +versus culture methods. The first principal advantage is test accuracy. Independent evaluations have shown our products to have higher sensitivity than culture methods. The second principal advantage is improved work flow of the testing process, +resulting in significantly shortened time to test result. Our single-use rapid products provide a test result in approximately 20 minutes, whereas culture results can take up to 24-48 hours. Time to test result can be a critical factor in the +physician’s choice of therapies, as the mortality rate for EHEC is estimated to be 5% to 10%. +- 8 - +Table of Contents +Helicobacter pylori +H. pylori , a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to duodenal ulcers and stomach cancer. H. pylori +represents our second largest product family, generating approximately $26,000 in global sales for 2013, or 11% growth. We offer both antibody and direct antigen tests in alternative formats (single-use and high volume batch). Our major competition +in this product family is test-method alternatives, serology and urea breath, and the prescription of symptom-relieving medications. Over 70% of our H. pylori product sales are in the U.S., where our strategy for this product line has been to +partner with managed care companies to promote the health and economic benefits of a test and treat strategy, and to move physician behavior away from serology-based testing toward direct antigen testing. In the U.S. market, we believe that there +are potentially 30 million people suffering from peptic ulcers and we believe that we currently have a 5% market share. +Competition +Our major competitors in molecular diagnostics are Cepheid and Becton Dickinson, who have systems with multiple-assay menus. We also face +competition in molecular diagnostics, but to a lesser degree, from companies such as Great Basin, Nanosphere and Quidel. These latter companies have a limited commercial menu and tend to compete strictly on price. We believe that our molecular +platform offers a number of competitive features: +• +Molecular assay sensitivity that is comparable to higher costing PCR; +• +Low capital investment with no instrument service cost; +• +Small footprint that is portable and does not consume much laboratory space; and +• +Product menu that fits with initiatives to improve clinical and economic outcomes. +Our major +competitors in rapid immunoassay diagnostics are primarily Alere and Quidel. These companies tend to compete strictly on price. We believe that the breadth and depth of our product portfolio provides us with a competitive advantage. For C. +difficile , we believe that we are the only company able to offer a full line of FDA-approved immunoassay (GDH and Toxin) and molecular products, allowing the customer to choose the solution that best suits them. +Research and Development +Our Diagnostics +segment’s research and development organization, which is located at our corporate headquarters in Newtown, Ohio, a suburb of Cincinnati, has expertise in biochemistry, immunology, mycology, bacteriology, virology, parasitology and molecular +biology. Research and development expenses for the Diagnostics segment for fiscal 2013, 2012 and 2011 were approximately $8,000, $8,000 and $7,000, respectively. This research and development organization focuses its activities on new product and +new technology development, new applications for our existing technologies, and improvements to existing products. Research and development efforts may occur in-house or with collaborative partners. We believe that new product development is a key +source for sustaining revenue growth. The products within our illumi gene molecular platform and H. pylori product family were developed solely in-house. +- 9 - +Table of Contents +Manufacturing +Our immunoassay and molecular products require the production of highly specific and sensitive antigens, antibodies, primers and enzymes. While +we produce substantially all of our own requirements including monoclonal and polyclonal antibodies, and a variety of fungal, bacterial and viral antigens, currently a number of the raw materials used in our products, including our +illumi gene molecular products, are purchased from outside vendors. We believe that we have, or can build, sufficient manufacturing and sourcing capacity for anticipated growth over the next several years. +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our Diagnostics segment. Sales of these products are as follows: +Product/Technology Family +Number of +products +% of consolidated sales +2013 +2012 +illumi gene +4 +18 +% +14 +% +H. pylori +2 +13 +% +13 +% +Respiratory +3 +3 +% +2 +% +Other +6 +1 +% +1 +% +Total patented products +15 +35 +% +30 +% +The patents for the illumi gene products expire between 2020 and 2022; the patents for the +two H. pylori products expire between 2016 and 2017; and the patents for the three respiratory products expire in 2022 (two products) and 2027. The remaining six patented products for which we own or license patents are spread over three +product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our production and +manufacturing technologies and processes. Our employees are required to execute confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are +regulated by the Food & Drug Administration (FDA) 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. +- 10 - +Table of Contents +Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA +pursuant to the 510(k) clearance process or is exempt from such requirements. We believe 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; however, we can make no assurances in this regard. +Sales of our diagnostic products in foreign countries are subject to foreign +government regulation, largely similar to that of the FDA. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485:2012. +Medical Device Tax +On January 1, 2013, the +medical device tax established as part of the U.S. healthcare reform legislation became effective and as a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2013, the Company recorded to cost of +sales approximately $1,300 of medical device tax expense related to this legislation. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious +diseases. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses, or pandemics such as the H1N1 influenza outbreak during fiscal 2009. While we believe that the +breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be impacted period over +period by such factors. +Life Science Segment +Overview of Products and Markets +Our Life Science +segment’s business focuses on the development, manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturing +companies, as well as contract development and manufacturing services under clinical cGMP conditions. Third-party sales for this segment were approximately $44,000, $43,000 and $38,000 for fiscal 2013, 2012 and 2011, respectively. As of +September 30, 2013, our Life Science segment had approximately 190 employees in five countries. +- 11 - +Table of Contents +Most of the revenue for our Life Science segment currently comes from the manufacture, sale and distribution of +bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturing companies focused on the development of immunoassay and molecular tests. Approximately 60% of +Life Science revenues are generated from the industrial market, defined as diagnostic manufacturers and the agriculture industry. This is an increasing focus for our Bioline molecular component business, which historically focused on the +academic/research market that comprises the remaining 40% of revenues. We utilize direct sales teams in key countries such as the U.S., the UK, Germany, France, Australia and Singapore, where we recently opened a sales and business development +office. This new office is designed to increase our presence and our revenue opportunities in Asia for both molecular and immunoassay components. We utilize a network of distributors in other major countries. During fiscal 2013, 17% of third-party +sales for this segment were to two diagnostic manufacturing customers. For one of these two customers, we have exclusive supply agreements that have annual automatic renewal provisions. We have a long-standing relationship with this customer; and +although there can be no assurances, we intend to renew these supply agreements in the normal course of business. +Products such as antibodies, antigens +and reagents are marketed primarily to diagnostic manufacturing customers as a source of raw materials for their immunoassay products, or as an outsourced step in their manufacturing processes. For example, Meridian Life Science supplies a number of +major diagnostic manufacturers with proteins used to detect Hepatitis A and Rubella. These products are typically sold in bulk quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales efforts are focused +on multi-year supply arrangements in order to provide stability in volumes and pricing. We believe this benefits both us and our customers. +Molecular +biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed to academic/research and industrial customers. These products are used in measuring DNA and RNA in clinical and agricultural applications. These reagents +improve the purity, yield and speed of PCR reactions. Products such as MyTaq ™ and SensiFAST ™ are examples of this type of PCR/qPCR +reagent. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling technology for process development and large-scale +manufacturing for biologicals used in new drugs and vaccines. The size of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials for biopharmaceutical, biotechnology and government agency +customers. Our revenues for contract services were approximately $3,000, $2,000 and $3,000 in fiscal 2013, 2012 and 2011, respectively. +Market +Trends +Throughout the market, sales of molecular components are growing at a faster pace than immunoassay components, and this is where we are +experiencing growth. Geographic expansion is a significant strategy for our Life Science segment, along with further penetration into industrial markets with our molecular products. +- 12 - +Table of Contents +Competition +The market for bulk biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service and reputation. +We face competitors, many of which have greater financial, research and development, sales and marketing, and manufacturing resources, and where sole-source supply arrangements do not exist. From time to time, customers may choose to manufacture +their biomedical reagents in-house rather than purchase from outside vendors such as Meridian. +The academic/research market is highly fragmented. +Individual purchases are typically of small quantities. The breadth of product offerings, quality, price and service, including on-line capabilities and technical resources, are important factors to building customer loyalty and repeat purchases. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, is also competitive. Important competitive factors +include reputation, customer service and price. Although the product application for this facility was built from our existing expertise in cell culture manufacturing techniques, we face competitors with greater experience in contract manufacturing +in a clinical cGMP environment. +Research and Development +Research and development expenses for our Life Science segment for fiscal 2013, 2012 and 2011 were approximately $3,000, $2,000 and $3,000, respectively. This +research and development organization is heavily involved in vaccine development and production activities for our cGMP facility and development of new molecular products. +Manufacturing and Government Regulation +The +Meridian Life Science facilities are ISO 9001:2008 certified, and where appropriate, comply with Regulation EC 1069:2009. +The cGMP clinical grade +proteins that are produced in our Memphis facility are intended to be used as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. Following clinical trials, +approval and licensing of these products is the responsibility of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, not Meridian Life Science. +Acquisitions +Acquisitions have played an important role +in the growth of our businesses. Our acquisition objectives include, among other things, (i) enhancing product offerings; (ii) improving product distribution capabilities; (iii) providing access to new markets; and/or +(iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide any assurance that we will consummate any additional acquisitions in the future, nor can we provide any assurance that any +acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenues and earnings growth in the future. +- 13 - +Table of Contents +International Markets +International markets are an important source of revenue and future growth opportunities for both of our segments. For both segments combined, sales made to +customers located outside of North America approximated $54,000 or 29% of consolidated fiscal 2013 sales, $53,000 or 31% of consolidated fiscal 2012 sales and $53,000 or 33% of consolidated fiscal 2011 sales. We expect to continue to look to +international markets as a source of new revenues and growth in the future. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA identification number. We are in compliance with applicable +portions of the federal and state hazardous waste regulations and have never been a party to any environmental proceeding. +ITEM 1A. +RISK FACTORS +In +addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause our +actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to +be immaterial also may materially adversely affect our business, financial condition and/or operating results. +Risks Affecting Growth and +Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable terms. +The medical diagnostic and life science industries are characterized by ongoing technological developments and changing customer requirements. As +such, our results of operations and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products and services or new products +and services that incorporate technological advances, meet customer requirements and respond to products developed by our competition. We cannot provide any assurance that we will be successful in developing or acquiring such rights to products and +services on a timely basis, or that such products and services will adequately address the changing needs of the marketplace, either of which could adversely affect our results of operations. +- 14 - +Table of Contents +In addition, we must regularly allocate considerable resources to research and development of new products, +services and technologies. The research and development process generally takes a significant amount of time from design stage to product launch. This process is conducted in various stages. During each stage, there is a risk that we will not +achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial resources. +We may be +unable to successfully integrate operations or to achieve expected cost savings from acquisitions we make. +One of our growth strategies is the +acquisition of companies and/or products. Although additional acquisitions of companies and products may enhance the opportunity to increase net earnings over time, such acquisitions could result in greater administrative burdens, increased exposure +to the uncertainties inherent in marketing new products and financial risks of additional operating costs. The principal benefits expected to result from any acquisitions we make will not be achieved fully unless we are able to successfully +integrate the operations of the acquired entities with our operations and realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses into our existing businesses. We cannot provide any assurance that +we will be able to identify and complete additional acquisitions on terms we consider favorable or that, if completed, will be successfully integrated into our operations. +Revenues for our Diagnostics segment may be impacted by our reliance upon two key distributors in North America, seasonal factors and sporadic +outbreaks, and changing diagnostic market conditions. +Key Distributors +Our Diagnostic segment’s sales through two U.S. distributors were 42% and 41%, respectively, of the Diagnostics segment’s total sales for fiscal 2013 +and fiscal 2012, or 32% and 31%, respectively, of our consolidated sales for fiscal 2013 and fiscal 2012. These parties distribute our products and other laboratory products to end-user customers. The loss of either of these distributors could +negatively impact our sales and results of operations unless suitable alternatives were timely found or lost sales to one distributor were absorbed by another distributor. Finding a suitable alternative on satisfactory terms may pose challenges in +our industry’s competitive environment. As an alternative, we could expand our efforts to distribute and market our products directly. This alternative, however, would require substantial investment in additional sales, marketing and logistics +resources, including hiring additional sales and customer service personnel, which would significantly increase our future selling, general and administrative expenses but would not necessarily result in lower net income levels. +In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, potentially leading to uneven concentration levels on a +quarterly basis. +- 15 - +Table of Contents +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious +diseases. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our diagnostic product +lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be negatively impacted period over period by such +factors. +Changing Diagnostic Market Conditions +Changes in the U.S. healthcare delivery system have resulted in consolidation among reference laboratories and the formation of multi-hospital alliances, +reducing the number of institutional customers for diagnostic test products. Consolidation in the U.S. healthcare industry has also led to the creation of group purchasing organizations (GPOs) and integrated delivery networks (IDNs) that aggregate +buying power for hospital groups and put pressure on our selling prices. Due to such consolidation, we may not be able to enter into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory commercial basis with +institutional customers, GPOs and IDNs, which could adversely affect our results of operations. +We could be adversely affected by healthcare reform +legislation. +Third-party payers for medical products and services, including state, federal and foreign governments, are increasingly concerned +about escalating health care costs and can indirectly affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. Following years of +increasing pressure, during 2010 the U.S. government enacted comprehensive healthcare reform. At present, given the early stages of the enacted reform, we are unable to predict what effect the legislation might ultimately have on reimbursement rates +for our products. If reimbursement amounts for diagnostic testing services are decreased in the future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for such services and consequently could place +constraints on the levels of overall pricing, which could have a material effect on our sales and/or results of operations. +In addition, on +January 1, 2013, the medical device tax established as part of the U.S. healthcare reform legislation became effective and as a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2013, the +Company recorded approximately $1,300 of medical device tax expense, which is reflected as a component of cost of sales in the accompanying Consolidated Statements of Operations. +- 16 - +Table of Contents +Revenues for our Life Science segment may be impacted by customer concentrations and buying patterns. +Our Life Science segment’s sales of purified antigens and reagents to two diagnostics manufacturing customers were 17% and 19%, respectively, +of the Life Science segment’s total sales for fiscal 2013 and fiscal 2012, or 4% and 5%, respectively, of our consolidated sales for fiscal 2013 and fiscal 2012. For one of these two customers, we have exclusive supply agreements that have +annual, automatic renewal provisions. Although we have a long-standing relationship with this customer, we cannot provide any assurance that we will be able to renew these supply agreements, which could adversely affect our sales and results of +operations. However, inclusion of our antigens and reagents in 510(k)-cleared products does, by nature of the related regulatory process, make them difficult to replace. +Our Life Science segment has four other significant customers who purchase antigens, antibodies and reagents, which together comprised 8% and 9%, +respectively, of the segment’s total sales for fiscal 2013 and fiscal 2012. Any significant alteration of buying patterns from these customers could adversely affect our period over period sales and results of operations. +Revenues relating to research, development and manufacturing services for our Life Science segment are generated on a contract by contract basis. The nature +of this business is such that each contract provides a unique product and/or service and corresponding revenue stream. While this business has historically generated annual revenue of approximately $2,000 to $4,000, there can be no assurance that +future contracts will be secured, and if secured, will be profitable. +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid change. Hundreds of companies around the world supply +diagnostic tests and purified reagents. These companies range from multinational healthcare entities, for which diagnostics is one line of business, to small start-up companies. Many of our competitors have significantly greater financial, +technical, manufacturing and marketing resources than we do. We cannot provide any assurance that our products and services will be able to compete successfully with the products and services of our competitors. +We depend on international sales, and our financial results may be adversely impacted by foreign currency, regulatory or other developments affecting +international markets. +We sell products and services into approximately 60 countries. Approximately 29% of our net sales for fiscal 2013 and +approximately 31% of our net sales for fiscal 2012 were attributable to markets outside of North America. For fiscal 2013, approximately 40% of our international sales were made in Euros and 40% were made in U.S. dollars, with the remaining 20% +being a combination of the British pound and Australian dollar. We are subject to the risks associated with fluctuations in the exchange rates for the Australian dollar, British pound, Euro and Singapore dollar to the U.S. dollar. We are also +subject to other risks associated with international operations, including longer customer payment cycles, tariff regulations, requirements for export licenses, instability of foreign governments, and governmental requirements with respect to the +importation and distribution of medical devices and immunodiagnostic and molecular biology reagents, all of which may vary by country. +- 17 - +Table of Contents +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations. +Medical device diagnostics and the manufacture, sale and distribution of bulk antigens, antibodies and reagents are highly regulated industries. We cannot +provide any assurance that we will be able to obtain necessary governmental clearances or approvals or timely clearances or approvals to market future products in the United States and other countries. Costs and difficulties in complying with laws +and regulations administered by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the Centers for Disease Control or other regulators can result in +unanticipated expenses and delays and interruptions to the sale of new and existing products. Contract manufacturing of proteins and other biologicals is regulated by the U.S. Food and Drug Administration. +Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs of approvals difficult to predict. The failure to comply +with these regulations can result in delay in obtaining authorization to sell products, seizure or recall of products, suspension or revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities would adversely affect our +business and operating results. +Products and services manufactured at facilities we own or lease comprised a majority of our revenues. Our global +supply of these products and services is dependent on the uninterrupted and efficient operation of these facilities. In addition, we currently rely on a small number of third-party manufacturers to produce certain of our diagnostic products and +product components. The operations of our facilities or these third-party manufacturing facilities could be adversely affected by power failures, natural or other disasters, such as earthquakes, floods, tornadoes or terrorist threats. Although we +carry insurance to protect against certain business interruptions at our facilities, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Any +significant interruption in the Company’s or third-party manufacturing capabilities could materially and adversely affect our operating results. +- 18 - +Table of Contents +We depend on sole-source suppliers for certain critical raw materials and components, and finished +products. A supply interruption could adversely affect our business. +Raw Materials and Components +Our diagnostic products are made from a wide variety of raw materials that are biological or chemical in nature, and that generally are available from multiple +sources of supply. We sole-source certain raw materials and components due to FDA regulations, which make it time consuming and costly to switch raw materials and components in FDA cleared products. If certain suppliers fail to supply required raw +materials or components, we will need to secure other sources which may require us to conduct additional development and testing and obtain regulatory approval. These activities require significant time and resources, and there is no assurance that +new sources will be secured or regulatory approvals, if necessary, will be obtained. +One third party manufactures our proprietary +illumi pro-10™ Incubator/Reader (instrument), a component of our illumi gene molecular system. This instrument is manufactured exclusively for Meridian according to our specifications, with the +cost of each instrument being relatively inexpensive. While other manufacturers for this type of instrument are available, we source solely from one manufacturer due to the FDA regulations and costs involved in clearing the system for marketing in +the United States. If this third-party manufacturer fails to supply us with instruments, we will need to secure another manufacturer, and it may take as long as 12 months to transfer instrument manufacturing. As revenues for our +illumi gene molecular system accounted for $34,000 or 18% of consolidated sales for fiscal 2013, $23,000 or 13% for fiscal 2012 and $9,000 or 6% for fiscal 2011, an interruption in the manufacturing of this system +could have a material adverse effect on our operating results. +Additionally, one third party manufactures one certain +reagent for use with our illumi gene assays. While alternative suppliers exist, we elect to utilize this third party exclusively in order to maintain consistency in our materials, which is critical in complying with +FDA regulatory requirements. +Finished Products +We outsource the manufacturing for certain finished diagnostic products to third parties. A disruption in the supply of these finished products could have a +material adverse effect on our business until we find another supplier or bring manufacturing in house. +Three products manufactured exclusively for us by +two separate and independent companies accounted for 14%, 13% and 12% of consolidated sales in fiscal 2013, 2012 and 2011, respectively. Meridian owns all right and title to the FDA 510(k) clearances for these products. +Activities undertaken by Meridian to reduce the risk of these sole-supplier arrangements include maintaining adequate inventory levels, supplier qualification +procedures, supplier audits, site visits and frequent communication. Additionally, we have identified potential alternate suppliers. +- 19 - +Table of Contents +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented technologies. In addition, we have licensed, and expect to +continue to license, various complementary technologies and methods from academic institutions and public and private companies. We cannot provide any assurance that the technologies that we own or license provide protection from competitive threats +or from challenges to our intellectual property. In addition, we cannot provide any assurances that we will be successful in obtaining and retaining licenses or proprietary or patented technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the market for diagnostics continues to grow and the number of +participants in the market increases, we may increasingly be subject to patent infringement claims. It is possible that a third-party may claim infringement against us. If found to infringe, we may attempt to obtain a license to such intellectual +property; however, we may be unable to do so on favorable terms, or at all. Additionally, if our products are found to infringe on third-party intellectual property, we may be required to pay damages for past infringement and lose the ability to +sell certain products, causing our revenues to decrease. We currently carry intellectual property insurance that covers damages and defense costs from our potential infringement on certain other third-party patents at levels that we believe are +commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on our profitability and the damage +to our reputation in the industry could have a material adverse effect on our business. +If product liability lawsuits are successfully brought +against us, we may incur substantial liabilities and may have to limit or cease sales of our products. +The testing, manufacturing and marketing of +medical diagnostic products involves an inherent risk of product liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. In certain customer contracts, we indemnify +third-parties for certain product liability claims related to our products. These indemnification obligations may cause us to pay significant sums of money for claims that are covered by these indemnifications. In addition, a defect in the design or +manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material +adverse effect on our profitability and the damage to our reputation in the industry could have a material adverse effect on our business. +- 20 - +Table of Contents +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire and retain key personnel. +Our future success depends on our continued ability to attract, hire and retain highly qualified personnel, including our executive officers and scientific, +technical, sales and marketing employees, and their ability to manage growth successfully. If such key employees were to leave and we were unable to obtain adequate replacements, our operating results could be adversely affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain financial ratios and tests. If we fail to comply with the +obligations in the credit agreement, we would be in default under the credit agreement. If an event of default is not cured or waived, it could result in acceleration of any indebtedness under our credit agreement, which could have a material +adverse effect on our business. At the present time, no borrowings are outstanding under our bank credit agreement. +We face risks related to global +economic conditions. +We currently generate significant operating cash flows, which combined with access to the credit markets provides us with +discretionary funding capacity for research and development and other strategic activities. However, as an enterprise with global operations and markets, our operations and financial performance are in part dependent upon global economic conditions, +and we could be negatively impacted by a global, regional or national economic crisis, including sovereign risk in the event of deterioration in the credit worthiness of or a default by local governments. We are particularly susceptible to the +economic conditions in countries where government-sponsored healthcare systems are the primary payers for healthcare, including those countries within the European Union that are reducing their public expenditures in an effort to achieve cost +savings. The uncertainty in global economic conditions poses a risk to the overall economy that could impact demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, +including financial institutions. As such, if global economic conditions deteriorate significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, supplier +or customer disruptions resulting from tighter credit markets and/or temporary interruptions in our ability to conduct day-to-day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, +vendors and suppliers. While to-date such factors have not had a significant negative impact on our results or operations, we continue to monitor and plan for the potential impact of these global economic factors. +Approximately $3,500 of our accounts receivable at September 30, 2013 is due from Italian hospital customers whose funding ultimately comes from the +Italian government, which is down from approximately $4,600 at September 30, 2012. +- 21 - +Table of Contents +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and +restrictions, including voting rights, of such shares without any future vote or action by the shareholders. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a change in control of our +company. Ohio corporation law contains provisions that may discourage takeover bids for our company that have not been negotiated with the board of directors. Such provisions could limit the price that investors might be willing to pay in the future +for shares of our common stock. In addition, sales of substantial amounts of such shares in the public market could adversely affect the market price of our common stock and our ability to raise additional capital at a price favorable to us. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Our corporate offices, +Diagnostics manufacturing facility, and Diagnostics research and development facility are located in four buildings totaling approximately 114,000 square feet on 10 acres of land in the Village of Newtown, a suburb of Cincinnati, Ohio. These +properties are owned by us. We also operate a Diagnostics sales and distribution center near Milan, Italy in an approximately 18,000 square foot two-story building. This facility is owned by our wholly-owned Italian subsidiary, Meridian Bioscience +Europe s.r.l. We also rent office space in Paris, France; and Nivelles, Belgium for sales and administrative functions. +Our Life Science operations are +conducted in several facilities in Memphis, Tennessee; Boca Raton, Florida; Taunton, Massachusetts; London, England; Luckenwalde, Germany; Sydney, Australia; and Singapore. Our facility in Memphis, Tennessee consists of two buildings totaling +approximately 44,000 square feet and is owned by us. Our leased facility in Boca Raton, Florida contains approximately 7,500 square feet of manufacturing space. In addition, we continue to own an approximately 23,000 square foot facility in Saco, +Maine, which we have been marketing for sale or lease. Following are details of our other Life Science facilities, all of which are leased: Taunton – approximately 10,000 square feet of sales and warehouse space; London – approximately +17,000 square feet of sales, warehouse, distribution, research and development, manufacturing and administrative office space; Luckenwalde – approximately 10,000 square feet of sales, warehouse and manufacturing space; Sydney – +approximately 4,000 square feet of sales, warehouse, research and development, and manufacturing space; Singapore – less than 1,000 square feet of sales and business development space. +- 22 - +Table of Contents +ITEM 3. +LEGAL PROCEEDINGS +We are a party to +various litigation matters that we believe are in the normal course of business. The ultimate resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows. No material +provision has been made in the accompanying consolidated financial statements for these matters. +ITEM 4. +MINE SAFETY DISCLOSURES +Not +applicable. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Refer to “Forward Looking Statements” following the Index in front of the Form 10-K and Item 1A “Risk Factors” on Pages 14 through +22 of this Annual Report. +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2013 and +“Quarterly Financial Data (Unaudited)” relating to our dividends in Note 9 to the Consolidated Financial Statements are incorporated herein by reference. Except as may otherwise be prohibited by applicable law, there are no restrictions on +cash dividend payments. +During fiscal 2013, our indicated annual dividend rate of $0.76 per share approximated 84% of full-year diluted earnings per +share, in line with our long-standing policy of setting a cash dividend payout ratio of between 75% and 85% of each fiscal year’s expected net earnings. We believe that this positive dividend payout relationship will continue, although no +assurances can be made in this regard. 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. At its meeting on November 6, 2013, the board of directors increased the indicated annual dividend rate to $0.80 per share for fiscal 2014. +We paid dividends of $0.76 per share in each of fiscal 2013, 2012 and 2011. +As of September 30, 2013, there were approximately 900 holders of record and approximately 15,900 beneficial owners of our common shares. +- 23 - +Table of Contents +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by +reference from inside front cover of the Annual Report to Shareholders for 2013. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A “Risk Factors” on pages 14 +through 22 of this Annual Report. +In the discussion that follows, all amounts are in thousands (both tables and text), except per share data . +Results of Operations : +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2013 increased 7% to $9,150, or $0.22 per diluted share, from net earnings for the fourth quarter of +fiscal 2012 of $8,573, or $0.21 per diluted share. This increase reflects the combined effects of both increased sales, consistent gross profit margins and increased operating expenses, along with the negative effect of $441 (pre-tax) of medical +device tax that did not exist in fiscal 2012 (see discussion in Medical Device Tax below). Consolidated sales for the fourth quarter of fiscal 2013 were $48,962, an increase of $5,479, or 13%, compared to the fourth quarter of fiscal 2012. Increased +sales across all of our diagnostic focus product families ( C. difficile , foodborne and H. pylori ), as well as in our Life Science segment, contributed to this increase. Included within the fourth quarter 2013 results were sales of our +illumi gene ® molecular platform of products totaling $9,400, representing a 44% increase over the fiscal 2012 fourth quarter. +Sales for the Diagnostics segment for the fourth quarter of fiscal 2013 increased 15% compared to the fourth quarter of fiscal 2012, reflecting growth +across all of our focus product families – 9% growth in our C. difficile products, 16% growth in our foodborne products, and 26% growth in our H. pylori products. With growth in both its molecular component and immunoassay +component business, sales of our Life Science segment increased by 5% during the fourth quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. +Fiscal Year +Net earnings for fiscal 2013 +increased 14% to $38,032, or $0.91 per diluted share from net earnings for fiscal 2012 of $33,371, or $0.80 per diluted share. This increase reflects the combined effects of both increased sales, increased gross profit margins and increased +operating expenses, along with the negative effect of $1,318 (pre-tax) of medical device tax that did not exist in fiscal 2012 (see discussion in Medical Device Tax below). Additionally, fiscal 2012 results included $1,013 of costs associated with +the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $659 or $0.02 per diluted share – see Non-GAAP Information below). +- 24 - +Table of Contents +Non-GAAP Information +The tables below provide information on net earnings, basic earnings per share and diluted earnings per share, excluding the effect of costs associated with +the consolidation of our Saco, Maine operations into our Memphis, Tennessee facility (fiscal 2012 and fiscal 2011) and costs of reorganizing our sales and marketing leadership (fiscal 2011), each of which is a non-GAAP financial measure, as well as +reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because: +1. +These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of non-routine costs related to consolidating the Maine operations (fiscal 2012 and fiscal +2011) and reorganizing our sales and marketing leadership (fiscal 2011); and +2. +These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from period to period in presentations to our board of +directors, and as a basis for strategic planning and forecasting. +2013 +2012 +2011 +Net Earnings— +U.S. GAAP basis +$ +38,032 +$ +33,371 +$ +26,831 +Facility consolidation costs (1) +— +659 +691 +Sales & marketing leadership reorganization (2) +— +— +872 +Adjusted earnings +$ +38,032 +$ +34,030 +$ +28,394 +Net Earnings per Basic Common Share— +U.S. GAAP basis +$ +0.92 +$ +0.81 +$ +0.66 +Facility consolidation costs (1) +— +0.02 +0.02 +Sales & marketing leadership reorganization (2) +— +— +0.02 +Adjusted Basic EPS +$ +0.92 +$ +0.83 +$ +0.70 +Net Earnings per Diluted Common Share— +U.S. GAAP basis +$ +0.91 +$ +0.80 +$ +0.65 +Facility consolidation costs (1) +— +0.02 +0.02 +Sales & marketing leadership reorganization (2) +— +— +0.02 +Adjusted Diluted EPS +$ +0.91 +$ +0.82 +$ +0.69 +(1) +These facility consolidation costs are net of income tax effects of $354 and $366 for fiscal 2012 and fiscal 2011, respectively, which were calculated using the effective tax rates of the jurisdictions in which the +costs were incurred. +(2) +These leadership reorganization costs are net of income tax effects of $368 for fiscal 2011, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred. +- 25 - +Table of Contents +REVENUE OVERVIEW +Below are analyses of the Company’s revenue, provided for each of the following: +• +By Reportable Segment & Geographic Region +• +By Product Platform/Type +• +By Disease Family (Diagnostics only) +Revenue Overview- By Reportable Segment & Geographic +Region +Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, +and the sale and distribution of diagnostic test kits in the U.S. and Canada (“North America”); Europe, Middle East and Africa (“EMEA”); and other countries outside of North America and EMEA (rest of the world, or +“ROW”). The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, +PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad, including a sales and business development location in Singapore. The Life Science segment also includes the contract development and manufacture of +cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Revenues for the Diagnostics segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, +seasonality and strength of certain diseases, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of arrangements for contract +services work, which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers, and foreign currency exchange rates. We believe that the overall breadth of our product +lines serves to reduce the variability in consolidated revenues. +- 26 - +Table of Contents +Revenues for each of our segments and the geographic regions therein are shown below. +2013 vs. +2012 +2012 vs. +2011 +2013 +2012 +2011 +Inc (Dec) +Inc (Dec) +Diagnostics- +North America +$ +116,509 +$ +101,391 +$ +90,387 +15 +% +12 +% +EMEA +21,378 +22,267 +24,059 +(4 +)% +(7 +)% +ROW +6,742 +6,522 +5,987 +3 +% +9 +% +Total Diagnostics +144,629 +130,180 +120,433 +11 +% +8 +% +Life Science- +North America +17,688 +17,917 +15,797 +(1 +)% +13 +% +EMEA +18,721 +18,050 +16,133 +4 +% +12 +% +ROW +7,648 +6,565 +6,473 +16 +% +1 +% +Total Life Science +44,057 +42,532 +38,403 +4 +% +11 +% +Consolidated +$ +188,686 +$ +172,712 +$ +158,836 +9 +% +9 +% +% of total sales- +Diagnostics +77 +% +75 +% +76 +% +Life Science +23 +% +25 +% +24 +% +Total +100 +% +100 +% +100 +% +Ex-North America +29 +% +31 +% +33 +% +- 27 - +Table of Contents +Revenue Overview- By Product Platform/Type +The revenues generated by each of our reportable segments result primarily from the sale of the following segment-specific categories of products: +Diagnostics +1) Molecular tests that operate on our illumi gene platform +2) Immunoassay tests +Life Science +1) Molecular components +2) Immunoassay components +Revenue for each product platform/type, as well as its relative percentage of segment revenue, is shown below. +2013 +2012 +2011 +2013 vs. +2012 +Inc (Dec) +2012 vs. +2011 +Inc (Dec) +Diagnostics- +Molecular +$ +33,597 +$ +23,248 +$ +9,042 +45 +% +157 +% +Immunoassay +111,032 +106,932 +111,391 +4 +% +(4 +)% +Total Diagnostics +$ +144,629 +$ +130,180 +$ +120,433 +11 +% +8 +% +Life Science- +Molecular components +$ +18,777 +$ +17,078 +$ +14,869 +10 +% +15 +% +Immunoassay components +25,280 +25,454 +23,534 +(1 +)% +8 +% +Total Life Science +$ +44,057 +$ +42,532 +$ +38,403 +4 +% +11 +% +% of Diagnostics sales- +Molecular +23 +% +18 +% +8 +% +Immunoassay +77 +% +82 +% +92 +% +Total Diagnostics +100 +% +100 +% +100 +% +% of Life Science sales- +Molecular components +43 +% +40 +% +39 +% +Immunoassay components +57 +% +60 +% +61 +% +Total Life Science +100 +% +100 +% +100 +% +Following is a discussion of the revenues generated by each of these product platforms/types: +Diagnostics Products +illumi gene Molecular Platform Products +We have approximately 1,200 customer account placements. Of these account placements, approximately 1,000 accounts have completed evaluations and validations +and are regularly purchasing product, with the balance of our account placements being in some stage of product evaluation and/or validation. Of our account placements, we have over 190 accounts that are regularly purchasing, evaluating and/or +validating two or more assays. +- 28 - +Table of Contents +We continue to invest in new product development for our molecular testing platform, +illumi gene . This platform now has four commercialized tests, with three additional tests expected to be available for sale in fiscal 2014: +1. +illumi gene ® C. difficile – commercialized in August 2010 +2. +illumi gene ® Group B Streptococcus (Group B Strep or GBS) – commercialized in December 2011 +3. +illumi gene ® Group A Streptococcus (Group A Strep) – commercialized in September 2012 +4. +illumi gene ® Mycoplasma ( M. pneumonia ; walking pneumonia) – commercialized in June 2013 +5. +illumi gene ® Bordetella pertussis (whooping cough) – expected first half fiscal 2014 +6. +illumi gene ® Chlamydia trachomatis – expected second half fiscal 2014 +7. +illumi gene ® Neisseria gonorrhea – expected second half fiscal 2014 +Additional illumi gene tests in early-stage research or development include Herpes Simplex Virus I & II, enteric +parasites such as Giardia, foodborne pathogens such as E. coli , and bloodborne pathogens such as malaria. +We believe that the +diagnostic testing market is continuing to move away from culture and immunoassay testing to molecular testing for diseases where there is a favorable cost/benefit position for the total cost of healthcare. While this market is competitive, with +molecular companies such as Cepheid and Becton Dickinson and new entrants such as Quidel, Great Basin, Nanosphere, and others, we believe we are well positioned to capitalize on the migration to molecular testing. Our simple, easy-to-use, +illumi gene platform, with its expanding menu, requires no expensive equipment purchase and little to no maintenance cost. These features, along with its small footprint and the performance of the +illumi gene assays, make illumi gene an attractive molecular platform to any size hospital. +Immunoassay Products +Sales of our +Diagnostic segment’s immunoassay products increased 4% in fiscal 2013, following a 4% decrease in fiscal 2012. The current year increase results primarily from the revenue growth of our H. pylori and foodborne products, as described +below. +Life Science Products +During fiscal +2013, sales of our Life Science segment increased 4%, with sales of our molecular component business increasing 10% over fiscal 2012 and sales of our immunoassay component business decreasing 1%. Life Science segment sales increased 11% in fiscal +2012, reflecting increases in both our molecular and immunoassay component businesses of 15% and 8%, respectively. Our molecular component business continues to benefit from new product launches and advancements – most notably SensiFAST™ +and MyTaq™ PCR components – while our bulk immunoassay component business is focusing on improving its operating efficiency and developing revenue opportunities in Asia. +- 29 - +Table of Contents +Diagnostic Revenue Overview- By Disease Family +Sales from our focus families ( C. difficile , foodborne and H. pylori ) comprised 62%, 62% and 59% of our Diagnostics segment’s revenue +during fiscal 2013, 2012 and 2011, respectively. Following is a discussion of the revenues generated by each product family: +C. difficile +Products +During fiscal 2013 our C. difficile product family sales totaled $39,000, representing growth of 8%. This followed growth +of 21% in fiscal 2012. This overall product family growth is largely driven by the growth of our illumi gene C. difficile product, which now represents over 70% of total C. difficile revenues. While the C. +difficile market continues to be highly competitive, we are the only company that can offer a full range of high performing, FDA cleared, C. difficile testing formats, including toxin, GDH and molecular tests. +Foodborne Products +With fiscal 2013 sales +totaling $24,000, we continue to see demand increases for foodborne products, all of which are immunoassay products, as laboratories realize the benefits of increased sensitivity and faster turnaround time with our tests for Enterohemorrhagic E. +coli (EHEC) and Campylobacter , compared to traditional culture methods. Sales increases for these products were 15% and 13% during fiscal 2013 and fiscal 2012, respectively. While historically the primary competition for our foodborne +products has been laboratory culture methods, during 2012 one of our competitors, Alere, cleared through the FDA a shiga toxin test that competes with our EHEC test. Despite this new competition, our revenue growth rate improved in fiscal 2013. We +believe that our products have two principal advantages versus culture methods: (i) test accuracy; and (ii) improved work flow, resulting in a significantly shortened time to test result (20 minutes vs. 24-48 hours for culture). +H. pylori Products +During fiscal +2013, sales of H. pylori products, all of which are immunoassay products, grew 11% to $26,000, which followed 7% growth during fiscal 2012. This increase continues to reflect the benefits of our partnerships with managed care companies in +promoting the health and economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving physician behavior away from serology-based testing toward direct antigen testing. A significant amount of the H. pylori +product sales are to reference labs, whose buying patterns may not be consistent period to period. +Respiratory Products +Total respiratory sales for our Diagnostics segment increased 17% to $17,000 during fiscal 2013, following a 3% decrease in the sales of such products in +fiscal 2012. Contributing to the current year increase were increased sales of influenza products, reflecting the strength of this year’s influenza season, compared to last year’s; and growth in our illumi gene Group A +Strep product, which as previously noted, received FDA approval in September 2012. +- 30 - +Table of Contents +Foreign Currency +During fiscal 2013, currency exchange rates had a negligible impact on revenue; $150 favorable within the Diagnostics segment and $150 unfavorable in the Life +Science segment. This compares to currency exchange having an approximate $1,700 unfavorable impact on revenue in fiscal 2012; $1,450 within the Diagnostics segment and $250 in the Life Science segment. +Significant Customers +Two U.S. distributors +accounted for 42%, 41% and 40% of our Diagnostics segment’s total sales for fiscal 2013, 2012 and 2011, respectively. These sales represented 32%, 31% and 30% of consolidated sales for fiscal 2013, 2012 and 2011, respectively. +Within our Life Science segment, two diagnostic manufacturing customers accounted for 17%, 19% and 15% of the segment’s total sales for fiscal 2013, 2012 +and 2011, respectively. These sales represented 4%, 5% and 4% of our consolidated sales for fiscal 2013, 2012 and 2011, respectively. +Medical +Device Tax +On January 1, 2013, the medical device tax established as part of the U.S. healthcare reform legislation became effective, and as +a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2013, the Company recorded approximately $1,300 of medical device tax expense, which is reflected as a component of cost of sales in the +accompanying Consolidated Statements of Operations. +Gross Profit : +2013 +2012 +2011 +2013 vs. +2012 +Inc (Dec) +2012 vs. +2011 +Inc (Dec) +Gross Profit +$ +121,044 +$ +109,048 +$ +98,411 +11 +% +11 +% +Gross Profit Margin +64 +% +63 +% +62 +% ++1 point ++1 point +The improvement in our overall gross profit margins from 2011 to 2013 reflects the combined effects of (i) mix of sales +from the Company’s segments; (ii) continued operating efficiencies in our Cincinnati, Ohio diagnostic manufacturing facility; (iii) lower overall cost structure from the consolidation of our Life Science immunoassay component +manufacturing facilities; and (iv) mix of products sold. +Our overall operations consist of the sale of diagnostic test kits for various disease +states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, PCR/qPCR reagents, nucleotides, competent cells, proficiency panels, and contract research and development, and contract manufacturing services. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points. +- 31 - +Table of Contents +Operating Expenses : +Research & +Development +Selling & +Marketing +General & +Administrative +Other +Total +Operating +Expenses +2011 Expenses +$ +9,822 +$ +21,885 +$ +24,883 +$ +1,788 +$ +58,378 +% of Sales +6 +% +14 +% +16 +% +1 +% +37 +% +Fiscal 2012 Increases (Decreases): +Diagnostics +644 +(1,080 +) +3,113 +(1,240 +) +1,437 +Life Science +(191 +) +1,287 +(1,624 +) +465 +(63 +) +2012 Expenses +$ +10,275 +$ +22,092 +$ +26,372 +$ +1,013 +$ +59,752 +% of Sales +6 +% +13 +% +15 +% +1 +% +35 +% +% Increase (Decrease) +5 +% +1 +% +6 +% +(43 +%) +2 +% +Fiscal 2013 Increases (Decreases): +Diagnostics +324 +572 +3,006 +— +3,902 +Life Science +188 +(240 +) +1,141 +(1,013 +) +76 +2013 Expenses +$ +10,787 +$ +22,424 +$ +30,519 +$ +— +$ +63,730 +% of Sales +6 +% +12 +% +16 +% +0 +% +34 +% +% Increase (Decrease) +5 +% +2 +% +16 +% +(100 +%) +7 +% +Overall, total operating expenses increased during both fiscal 2013 and fiscal 2012 relative to the immediately +preceding fiscal year, but decreased as a percentage of consolidated sales. The fiscal 2013 increase results in large part from the combined effects of our (i) ongoing efforts to control spending in each of our segments while investing the +necessary resources in our strategic areas of growth, including increased investment in Research & Development for our molecular platform products; (ii) increased sales personnel costs in Europe in connection with filling open +positions and upgrading talent; (iii) increased incentive compensation compared to fiscal 2012 based upon improved operating results; and (iv) costs incurred in connection with the consolidation of our Saco, Maine operations into our +Memphis, Tennessee location during fiscal 2012 of approximately $1,013. We expect to have higher levels of Research & Development spending during fiscal 2014 related to clinical trials for our illumi gene Chlamydia +trachomatis and Neisseria gonorrhea products. +During fiscal 2012, the increase in operating expenses resulted in large part from the +combined effects of our (i) fiscal 2012 efforts to control spending in each of our segments while investing the necessary resources in our strategic areas of growth; (ii) beginning to realize cost savings during 2012 from the consolidation +of our Life Science immunoassay component manufacturing operations into one facility in Tennessee; (iii) incurring costs in connection with the Maine-Tennessee facility consolidation of approximately $1,013 during fiscal 2012, and approximately +$1,057 during fiscal 2011 ($548 of an Operating Expense nature); and (iv) incurring during the second quarter of fiscal 2011 approximately $1,240 of costs in connection with the reorganization of our European and Global Sales and Marketing +Leadership. +- 32 - +Table of Contents +Operating expenses for the Diagnostics segment increased $3,902 for fiscal 2013 compared to fiscal 2012, and +increased $1,437 for fiscal 2012 compared to fiscal 2011. These overall increases result largely from the combined effects of the following: +Fiscal 2013 +General & Administrative +Improved corporate-wide operating profits, resulting in increased bonus expense of approximately $3,100, along with an approximate $500 +increase in stock-based compensation during fiscal 2013. +Fiscal 2012 +Research & Development +Overall increase in spending on new product development activities, related primarily to our illumi gene test for Group A +Streptococcus , including an approximate $350 increase in personnel-related costs. +Selling & Marketing +Field sales force realignment activities during the year resulting in decreased sales commission expenses of approximately $1,050. +General & Administrative +Improved corporate-wide operating profits, resulting in increased bonus, profit sharing and deferred compensation expenses of approximately +$2,800, partially offset by an approximate $650 decrease in stock-based compensation during fiscal 2012. +Operating expenses for the Life Science segment +increased $76 for fiscal 2013 compared to fiscal 2012, and decreased $63 for fiscal 2012 compared to fiscal 2011. The 2013 activity reflects in large part the combined effects of increased bonus expenses, investments in Bioline infrastructure and +the lack of Maine-Tennessee facility consolidation costs, which existed in fiscal 2012. The decrease in 2012 primarily results from realizing cost savings from the Maine-Tennessee facility consolidation and an increased investment in Bioline Group +sales resources. +The amount of stock-based compensation expense reported for fiscal 2013, 2012 and 2011 was $2,502, $1,987 and $2,614, respectively. +During fiscal 2011, we granted restricted shares and restricted share units to certain employees, with half of each employee’s grant being time-vested restricted shares or restricted share units vesting in full in four years, and the remaining +half being subject to attainment of a specified earnings target for fiscal 2011. Although dividend equivalents were paid on these shares and units throughout fiscal 2011, because Meridian’s net earnings did not reach the minimum level in fiscal +2011, the performance-based awards were not earned and no stock-based compensation was recorded for these performance-based awards. +- 33 - +Table of Contents +During fiscal 2012, we granted restricted share units to certain employees, with half of each employee’s +grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2012. Although dividend equivalents were paid +on these units throughout fiscal 2012, because Meridian’s net earnings did not reach the minimum level in fiscal 2012, the performance-based awards were not earned and no stock-based compensation was recorded for these performance-based awards. +Additionally, during fiscal 2012, we granted restricted share units and options to certain executive management employees to reward them for meeting Company revenue targets in advance of planned expectations. These awards can only be earned if +specified cumulative revenue thresholds are met one fiscal quarter in advance of planned revenue expectations through fiscal 2015, with the three measurement dates for ratably earning one-third of the grant being (i) the 21-month period ending +June 30, 2013, (ii) the 33-month period ending June 30, 2014 and (iii) the 45-month period ending June 30, 2015. To date, no expense has been recognized for these restricted share units and options, and as a result of the +cumulative threshold for the 21-month period ended June 30, 2013 not being met, one-third of the restricted share units and options granted have been cancelled. +Similar to previous years, during fiscal 2013, we granted restricted share units to certain employees, with half of each employee’s grant being +time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2013. Although dividend equivalents were paid on these +units throughout fiscal 2013, because Meridian’s net earnings did not reach the minimum level in fiscal 2013, the performance-based awards were not earned and no stock-based compensation was recorded for these performance-based awards. +Operating Income +Operating income increased 16% and 23% +in fiscal 2013 and fiscal 2012, respectively, as a result of the factors discussed above. +Income Taxes +The effective rate for income taxes has remained relatively stable during the fiscal years reflected at 34%, 33% and 34% for fiscal 2013, 2012 and 2011, +respectively. These rates reflect the net effects of various items, such as (i) the release of certain reserves for uncertain tax positions due to the passage of the relevant statutes of limitations, (ii) the effect of adjusting, upon +filing of the tax returns, the previously estimated permanent differences between income for financial reporting purposes and for tax purposes; and (iii) the net tax benefit on dividends from a foreign-based subsidiary. +- 34 - +Table of Contents +Impact of Inflation +To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe benefits +for employees and the cost of purchased materials and services. Inflation and changing prices did not have a material adverse impact on our gross margin, revenue or operating income in fiscal 2013, 2012 and 2011. +Liquidity and Capital Resources : +Liquidity +Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, consideration of acquisition plans, +and consideration of common share dividends. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities. Our investment portfolio presently consists of overnight +repurchase agreements. +We have an investment policy that guides the holdings of our investment portfolio. Our objectives in managing the investment +portfolio are to (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market +conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective. +We do not expect current conditions in the financial markets, or overall economic conditions, to have a significant impact on our liquidity needs, financial +condition, or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements and dividends from current cash flows from operating activities and cash on hand. If needed, we +also have an additional source of liquidity through our $30,000 bank credit facility. Approximately $3,500 of our accounts receivable at September 30, 2013 is due from Italian hospital customers whose funding ultimately comes from the Italian +government, which is down from approximately $4,600 at September 30, 2012. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tight for an extended period of +time, and such conditions impact the collectibility of our customer accounts receivable or impact credit terms with our vendors, or disrupt the supply of raw materials and services. +Fluctuations in overall stock market valuations may raise questions as to the potential impairment of goodwill and other long-lived assets. Our annual +goodwill impairment review takes place as of June 30 th each year. There have been no impairments from these annual reviews. As of September 30, 2013, our stock price was $23.63 per +share, compared to our book value per share of $3.73. This relationship, stock price trading at a 6.3x multiple of book value, is an indicator that the fluctuation in overall stock market valuations and its impact on our stock price has not been a +triggering event for impairment of our goodwill and other long-lived assets. +- 35 - +Table of Contents +Our overall cash position improved nearly $13,000 during fiscal 2013, to $44,000 at September 30, 2013. The +primary contributors to the increase in our cash position were the net effects of (i) our 14% increase in net earnings; (ii) our relatively modest capital expenditures; and (iii) our payment of approximately $31,000 of cash dividends. +Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements, capital expenditures and +dividends during the next twelve months. During fiscal 2013, the per share amount of our cash dividend represented 84% of our diluted earnings per share, in line with our long-standing policy of establishing a dividend payout ratio between 75% and +85% of diluted earnings per share. During fiscal 2014, we believe that this positive dividend payout relationship will continue, although no assurances can be made in this regard. +Capital Resources +We have a $30,000 credit +facility with a commercial bank which expires September 15, 2015. As of November 23, 2013, there were no borrowings outstanding on this facility and we had 100% borrowing capacity available to us. We have had no borrowings outstanding +under this facility during fiscal 2013, 2012 or 2011. +Our capital expenditures are estimated to range between approximately $7,500 to $9,000 for fiscal +2014, with the actual amount depending upon actual operating results and the phasing of certain projects. Such expenditures may be funded with cash and equivalents on hand, operating cash flows, and/or availability under the $30,000 credit facility +discussed above. This range of capital expenditures includes approximately $4,000 related to an expansion of our molecular diagnostic manufacturing capacity in Cincinnati, Ohio. +- 36 - +Table of Contents +Known Contractual Obligations : +Known contractual obligations and their related due dates were as follows as of September 30, 2013: +Total +Less than +1 Year +1-3 Years +4-5 Years +More than +5 Years +Operating leases (1) +$ +3,624 +$ +1,370 +$ +1,934 +$ +320 +$ +— +Purchase obligations (2) +8,091 +7,921 +170 +— +— +Uncertain income tax positions liability and interest (3) +208 +208 +— +— +— +Total +$ +11,923 +$ +9,499 +$ +2,104 +$ +320 +$ +— +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in Ohio, Massachusetts, Florida, Australia, Belgium, France, Holland, Germany and the U.K.; (ii) automobiles for use by the +diagnostic direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile machines and copier machines across all business units, under operating lease agreements that expire at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory and service items. These contractual commitments are not in excess of expected production requirements over the next twelve +months. +(3) +As of September 30, 2013, our liabilities for uncertain tax positions and related interest and penalties were $178 and $30, respectively. Due to inherent uncertainties in the timing of settlement of tax positions, +we are unable to estimate the timing of the effective settlement of these obligations. +Other Commitments and Off-Balance Sheet +Arrangements : +License Agreements +Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products (1% to +14%). Meridian expects that payments under these agreements will amount to approximately $5,000 in fiscal 2014. These royalty payments primarily relate to the Diagnostics segment. +Off-Balance Sheet Arrangements +Except for the +operating lease arrangements noted above, we have no off-balance sheet arrangements. +Market Risk Exposure : +Foreign Currency Risk +We have market risk exposure +related to foreign currency transactions from our operations outside the United States, as well as certain suppliers to our domestic businesses located outside the United States. The foreign currencies where we have market risk exposure are the +Australian dollar, the British pound, the Euro, and the Singapore dollar. Assessing foreign currency exposures is a component of our overall ongoing risk management process, with such currency risks managed as we believe appropriate. +- 37 - +Table of Contents +Concentration of Customers/Products Risk +Our Diagnostic segment’s sales through two U.S. distributors were 42% of the segment’s total sales or 32% of consolidated sales for fiscal +2013. Our C. difficile, foodborne and H. pylori product families accounted for 62% of our Diagnostics segment’s third-party sales during fiscal 2013, and 47% of our fiscal 2013 consolidated sales. +Our Life Science segment’s sales of purified antigens and reagents to two diagnostics manufacturing customers were 17% of the segment’s total sales +for fiscal 2013 or 4% of our fiscal 2013 consolidated sales. Our Life Science segment has four other significant customers who purchase antigens, antibodies and reagents, which together comprised 8% of the segment’s total sales for fiscal 2013. +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 require management to make judgments about +estimates and assumptions that affect the reported amounts 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 +Our revenue is generally +recognized from sales when product is shipped and title has passed to the customer. Revenue for the Diagnostics segment is reduced at the date of sale for product price adjustments due certain distributors under local contracts. Management estimates +accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, estimates of inventories of our products held by distributors, historical statistics, current trends, and other factors. Changes to the +accruals are recorded in the period that they become known. +Revenue for our Diagnostics segment includes revenue for our illumi gene +molecular test system. This system includes an instrument, instrument accessories and test kits. In markets where the test system is sold via multiple deliverable arrangements (i.e., the United States, Australia, Belgium, France, Holland +and Italy), the cost of the instrument and instrument accessories is deferred upon placement at a customer and amortized on a straight-line basis into cost of sales over the expected utilization period, generally three years. +- 38 - +Table of Contents +We evaluate whether each deliverable in the arrangement is a separate unit of accounting. The significant +deliverables are an instrument, instrument accessories (e.g., printer) and test kits. An instrument and instrument accessories are delivered to the customer prior to the start of the customer utilization period, in order to accommodate customer +set-up and installation. There is de minimis consideration received from the customer at the time of instrument placement. We have determined that the instrument and instrument accessories are not a separate unit of accounting because such +equipment can only be used to process and read the results from our illumi gene diagnostic tests (i.e., our instrument and test kits function together to deliver a diagnostic test result), and therefore the instrument and +instrument accessories do not have standalone value to the customer. Consequently, there is no revenue allocated to the placement of the instrument and instrument accessories. Test kits are delivered to the customer over the utilization period of +the instrument, which we estimate has a useful life of three years. Our average customer contract period, including estimated renewals, is at least equal to the estimated three-year utilization period. Revenue for the sale of test kits is recognized +upon shipment and transfer of title to the customers. +In markets where the test system is not sold via multiple deliverable arrangements (i.e., countries +other than the United States, Australia, Belgium, France, Holland and Italy), the cost of the instrument and instrument accessories is charged to cost of sales at the time of shipment and transfer of title to the customer. Revenue for the sales of +instruments and instrument accessories and test kits is recognized upon shipment and transfer of title to the customers. In these markets, our illumi gene molecular test system is sold to independent distributors who inventory +the instruments, instrument accessories and test kits for resale to end-users. +Our products are generally not subject to a customer right of return +except for product recall events under the rules and regulations of the Food and Drug Administration or equivalent agencies outside the United States. In this circumstance, the costs to replace affected products would be accrued at the time a loss +was probable and estimable. +Life Science revenue for contract services may come from research and development services or manufacturing services, +including process development work, or a combination of both. Revenue is recognized based on each of the deliverables in a given arrangement having distinct and separate customer pricing. Depending on the nature of the arrangement, revenue is +recognized as services are performed and billed, upon completion and acceptance by the customer, or upon delivery of product and acceptance by the customer. In some cases, customers may request that we store on their behalf, clinical grade +biologicals that we produce under contract manufacturing agreements. These cases arise when customers do not have clinical grade storage facilities or do not want to risk contamination during transport. For such cases, revenue may be recognized on a +bill-and-hold basis. No such bill-and-hold arrangements existed at September 30, 2013, 2012 or 2011. +- 39 - +Table of Contents +Inventories +Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) basis for substantially all of our inventories. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf life may expire before sale to customers, and other identified exposures. We estimate these reserves based on assumptions about future demand and market +conditions. If actual demand and market conditions were to be less favorable than such estimates, additional inventory write-downs would be required and recorded in the period known. Such adjustments would negatively affect gross profit margin and +overall results of operations. +Intangible Assets +Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include customer lists, supply agreements, manufacturing +technologies, patents, licenses and trade names. All of Meridian’s identifiable intangibles have finite lives. +Goodwill is subject to an annual +impairment review (or more frequently if impairment indicators arise) by applying a fair-value based test. There have been no impairments from these analyses. +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 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. There were no events or circumstances in fiscal 2013, 2012 or 2011 indicating that the carrying value of such assets may not be recoverable. +Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent upon the future cash flows of the related acquired +businesses and assets. We are required 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, we also make judgments and assumptions regarding useful lives. +We consider 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. +- 40 - +Table of Contents +Income Taxes +Our 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 purposes and income for tax purposes. We prepare estimates of permanent and temporary differences between income for financial reporting purposes and income for tax purposes. These differences are adjusted to +actual upon filing of our tax returns, typically occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates. +Our 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. We assess 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 assets considered realizable could be reduced in future years if estimates of future taxable income during the carryforward period +are reduced. +Undistributed earnings in our non-U.S. subsidiaries are considered by us to be permanently re-invested in such subsidiaries. Consequently, +U.S. deferred tax liabilities on such earnings have not been recorded. +From time to time, our tax returns in federal, state and foreign jurisdictions are +examined by the applicable tax authorities. To the extent that adjustments result from the completion of these examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the period known. We believe that the results +of any tax authority examinations would not have a significant adverse impact on financial condition or results of operations. +In September 2013, the +Internal Revenue Service issued Treasury Decision 9636, which enacted final tax regulations regarding the capitalization and expensing of amounts paid to acquire, produce, or improve tangible property. The regulations also include guidance regarding +the retirement of depreciable property. The regulations are required to be effective in taxable years beginning on or after January 1, 2014, although taxpayers may choose to apply them in taxable years beginning on or after January 1, +2012. The Company is currently assessing the impact of the final regulations on its financial statements. +Recent Accounting Pronouncements : +In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of +Accumulated Other Comprehensive Income , to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. Specifically, the new amendments to ASU No. 2013-02 will require, depending upon the items +being reclassified, the (i) presentation (either on the face of the statement where net income is presented or in the notes) of the effects on the line items of net income of significant amounts reclassified out of accumulated other +comprehensive income; and/or (ii) the cross-reference to other disclosures currently required under U.S. GAAP that provide additional detail about such items. These requirements are effective prospectively for the Company beginning +October 1, 2013, and we do not expect their adoption to have a significant impact on the Company’s consolidated results of operations, cash flows or financial position. +- 41 - +Table of Contents +Issued but not yet effective accounting pronouncements are not expected to have a material impact on the +Company’s Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +- 42 - +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +44 +Report of Independent Registered Public Accounting Firm +45 +Consolidated Statements of Operations for the years ended September 30, 2013, 2012 and 2011 +47 +Consolidated Statements of Comprehensive Income for the years ended September 30, 2013, 2012 and +2011 +48 +Consolidated Statements of Cash Flows for the years ended September 30, 2013, 2012 and 2011 +49 +Consolidated Balance Sheets as of September 30, 2013 and 2012 +50 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2013, 2012 and +2011 +52 +Notes to Consolidated Financial Statements +53 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September +30, 2013, 2012 and 2011 +78 +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. +- 43 - +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule +13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance +of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of +financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and +(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may +deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial +Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations +of the Treadway Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that its system of internal control over financial reporting was effective as of September 30, 2013. +The company’s independent registered public accounting firm has issued an attestation report on the registrant’s internal control over financial +reporting. +/s/ John A. Kraeutler +/s/ Melissa A. Lueke +John A. Kraeutler +Melissa A. Lueke +Chief Executive Officer +Executive Vice President and +November 29, 2013 +Chief Financial Officer +November 29, 2013 +- 44 - +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Shareholders +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio corporation) and Subsidiaries (the +“Company”) as of September 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, +2013. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Schedule No. II. We also have audited the Company’s internal control over financial reporting as of +September 30, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these +financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying +Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial +reporting based on our audits. +We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United +States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was +maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk +that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the +circumstances. We believe that our audits provide a reasonable basis for our opinions. +A company’s internal control over financial reporting is a +process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s +internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the +company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company +are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the +company’s assets that could have a material effect on the financial statements. +- 45 - +Table of Contents +Because of its inherent limitations, internal control over financial reporting may not prevent or detect +misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may +deteriorate. +In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial +position of Meridian Bioscience, Inc. and Subsidiaries as of September 30, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2013 in conformity with +accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in +all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013, based on criteria established in +Internal Control—Integrated Framework issued by COSO. +/s/ GRANT THORNTON LLP +Cincinnati, Ohio +November 29, 2013 +- 46 - +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2013 +2012 +2011 +Net Sales +$ +188,686 +$ +172,712 +$ +158,836 +Cost of Sales +67,642 +63,664 +59,916 +Cost of Sales—Plant consolidation +— +— +509 +Gross Profit +121,044 +109,048 +98,411 +Operating Expenses: +Research and development +10,787 +10,275 +9,822 +Selling and marketing +22,424 +22,092 +21,885 +General and administrative +30,519 +26,372 +24,883 +Plant consolidation costs +— +1,013 +548 +Sales and marketing leadership reorganization +— +— +1,240 +Total operating expenses +63,730 +59,752 +58,378 +Operating Income +57,314 +49,296 +40,033 +Other Income: +Interest income +44 +42 +115 +Other, net +4 +378 +352 +Total other income +48 +420 +467 +Earnings Before Income Taxes +57,362 +49,716 +40,500 +Income Tax Provision +19,330 +16,345 +13,669 +Net Earnings +$ +38,032 +$ +33,371 +$ +26,831 +Earnings Per Share Data: +Basic earnings per common share +$ +0.92 +$ +0.81 +$ +0.66 +Diluted earnings per common share +$ +0.91 +$ +0.80 +$ +0.65 +Common shares used for basic earnings per common share +41,226 +41,080 +40,715 +Effect of dilutive stock options and restricted shares and units +669 +528 +643 +Common shares used for diluted earnings per common share +41,895 +41,608 +41,358 +Dividends declared per common share +$ +0.76 +$ +0.76 +$ +0.76 +Anti-dilutive Securities: +Common share options and restricted shares and units +254 +320 +191 +The accompanying notes are an integral part of these consolidated financial statements. +- 47 - +Table of Contents +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2013 +2012 +2011 +Net Earnings +$ +38,032 +$ +33,371 +$ +26,831 +Foreign currency translation adjustment +650 +(354 +) +(206 +) +Comprehensive Income +$ +38,682 +$ +33,017 +$ +26,625 +The accompanying notes are an integral part of these consolidated financial statements. +- 48 - +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2013 +2012 +2011 +Cash Flows From Operating Activities +Net earnings +$ +38,032 +$ +33,371 +$ +26,831 +Non-cash items included in net earnings: +Depreciation of property, plant and equipment +3,354 +3,490 +3,380 +Amortization of intangible assets +2,269 +2,165 +2,321 +Amortization of deferred illumi gene instrument costs +1,529 +942 +172 +Stock-based compensation +2,502 +1,987 +2,504 +Deferred income taxes +(1,823 +) +(1,448 +) +(1,218 +) +Loss on disposition and write-down of fixed assets and other assets +30 +359 +446 +Change in current assets +(3,486 +) +1,234 +(10,762 +) +Change in current liabilities +2,669 +3,216 +(570 +) +Other, net +(640 +) +(2,870 +) +(648 +) +Net cash provided by operating activities +44,436 +42,446 +22,456 +Cash Flows From Investing Activities +Purchases of property, plant and equipment +(3,234 +) +(3,530 +) +(9,139 +) +Proceeds from sale of assets +— +400 +— +Purchases of intangibles and other assets +(43 +) +(1,305 +) +(12 +) +Net cash used for investing activities +(3,277 +) +(4,435 +) +(9,151 +) +Cash Flows From Financing Activities +Dividends paid +(31,354 +) +(31,226 +) +(30,943 +) +Proceeds and tax benefits from exercises of stock options +2,752 +552 +3,423 +Net cash used for financing activities +(28,602 +) +(30,674 +) +(27,520 +) +Effect of Exchange Rate Changes on Cash and Equivalents +132 +630 +(38 +) +Net Increase (Decrease) in Cash and Equivalents +12,689 +7,967 +(14,253 +) +Cash and Equivalents at Beginning of Period +31,593 +23,626 +37,879 +Cash and Equivalents at End of Period +$ +44,282 +$ +31,593 +$ +23,626 +Supplemental Cash Flow Information +Cash paid for income taxes +$ +20,093 +$ +16,010 +$ +17,991 +The accompanying notes are an integral part of these consolidated financial statements. +- 49 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2013 +2012 +Assets +Current Assets: +Cash and equivalents +$ +44,282 +$ +31,593 +Accounts receivable, less allowances of $233 in 2013 and $574 in 2012 +26,183 +24,183 +Inventories +34,835 +31,682 +Prepaid expenses and other current assets +4,643 +6,203 +Deferred income taxes +4,145 +2,929 +Total current assets +114,088 +96,590 +Property, Plant and Equipment, at Cost: +Land +1,183 +1,175 +Buildings and improvements +26,848 +25,983 +Machinery, equipment and furniture +38,502 +34,917 +Construction in progress +554 +1,149 +Subtotal +67,087 +63,224 +Less: accumulated depreciation and amortization +40,996 +37,069 +Net property, plant and equipment +26,091 +26,155 +Other Assets: +Goodwill +23,115 +23,146 +Other intangible assets, net +8,057 +10,264 +Restricted cash +1,000 +1,000 +Deferred illumi gene instrument costs, net +3,270 +3,958 +Deferred income taxes +823 +— +Other assets +304 +268 +Total other assets +36,569 +38,636 +Total assets +$ +176,748 +$ +161,381 +The accompanying notes are an +integral part of these consolidated financial statements. +- 50 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2013 +2012 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +5,592 +$ +5,794 +Accrued employee compensation costs +9,670 +5,827 +Other accrued expenses +5,462 +5,247 +Income taxes payable +979 +1,594 +Total current liabilities +21,703 +18,462 +Deferred Income Taxes +— +171 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 41,517,839 and 41,284,485 issued +— +— +Additional paid-in capital +107,412 +102,443 +Retained earnings +46,888 +40,210 +Accumulated other comprehensive income +745 +95 +Total shareholders’ equity +155,045 +142,748 +Total liabilities and shareholders’ equity +$ +176,748 +$ +161,381 +The accompanying notes are an integral part of these consolidated financial statements. +- 51 - +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars and shares in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Common +Shares +Issued +Additional +Paid-in +Capital +Retained +Earnings +Accum Other +Comp +Income +(Loss) +Total +Balance at September 30, 2010 +40,654 +$ +94,529 +$ +42,177 +$ +655 +$ +137,361 +Cash dividends paid—$0.76 per share +— +— +(30,943 +) +— +(30,943 +) +Exercise of stock options +485 +2,977 +— +— +2,977 +Issuance of restricted shares, net of forfeitures +165 +— +— +— +— +Cancellation of restricted shares +(85 +) +— +— +— +— +Conversion of restricted stock units +18 +— +— +— +— +Stock compensation expense +— +2,504 +— +— +2,504 +Net earnings +— +— +26,831 +— +26,831 +Foreign currency translation adjustment +— +— +— +(206 +) +(206 +) +Balance at September 30, 2011 +41,237 +100,010 +38,065 +449 +138,524 +Cash dividends paid—$0.76 per share +— +— +(31,226 +) +— +(31,226 +) +Exercise of stock options +47 +446 +— +— +446 +Issuance of restricted shares, net of forfeitures +(5 +) +— +— +— +— +Conversion of restricted stock units +5 +— +— +— +— +Stock compensation expense +— +1,987 +— +— +1,987 +Net earnings +— +— +33,371 +— +33,371 +Foreign currency translation adjustment +— +— +— +(354 +) +(354 +) +Balance at September 30, 2012 +41,284 +102,443 +40,210 +95 +142,748 +Cash dividends paid—$0.76 per share +— +— +(31,354 +) +— +(31,354 +) +Exercise of stock options +226 +2,564 +— +— +2,564 +Conversion of restricted stock units +8 +— +— +— +— +Stock compensation expense +— +2,405 +— +— +2,405 +Net earnings +— +— +38,032 +— +38,032 +Foreign currency translation adjustment +— +— +— +650 +650 +Balance at September 30, 2013 +41,518 +$ +107,412 +$ +46,888 +$ +745 +$ +155,045 +The accompanying notes are an integral part of these consolidated financial statements. +- 52 - +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(dollars +and shares in thousands, except per share data) +(1) Summary of Significant Accounting Policies +(a) +Nature of Business - Meridian is a fully-integrated life science company whose principal businesses are (i) the development, manufacture and distribution of diagnostic test kits primarily for certain +gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other +diagnostic manufacturers; and (iii) the contract development and manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +(b) +Principles of Consolidation - The consolidated financial statements include the accounts of Meridian Bioscience, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated. Unless +the context requires otherwise, references to “Meridian,” “we,” “us,” “our” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +(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. +(d) +Foreign Currency Translation - Assets and liabilities of foreign operations are translated using year-end exchange rates with gains or losses resulting from translation included as a separate component of +accumulated other comprehensive income or loss. Revenues and expenses are translated using exchange rates prevailing during the year. We also recognize foreign currency transaction gains and losses on certain assets and liabilities that are +denominated in the Australian dollar, British pound, Euro and Singapore dollar currencies. These gains and losses are included in other income and expense in the accompanying consolidated statements of operations. +(e) +Cash, Cash Equivalents and Investments - The primary objectives of our investment activities are to preserve capital and provide sufficient liquidity to meet operating requirements and fund strategic initiatives +such as acquisitions. We maintain a written investment policy that governs the management of our investments in fixed income securities. This policy, among other things, provides that we may purchase only high credit-quality securities, that have +short-term ratings of at least A-2, P-2 and F-2 or better, and long-term ratings of at least A, Baa1 and A or better, by Standard & Poor’s, Moody’s and Fitch, respectively, at the time of purchase. We consider short-term +investments with original maturities of 90 days or less to be cash equivalents, including overnight repurchase agreements and institutional money market funds. At times our investments of cash and equivalents with various high credit quality +financial institutions may be in excess of the Federal Deposit Insurance (FDIC) insurance limit. +- 53 - +Table of Contents +Our investment portfolio includes the following components: +September 30, 2013 +September 30, 2012 +Cash and +Equivalents +Other +Cash and +Equivalents +Other +Overnight repurchase agreements +$ +32,103 +$ +— +$ +13,492 +$ +— +Cash on hand – +Restricted +— +1,000 +— +1,000 +Unrestricted +12,179 +— +18,101 +— +Total +$ +44,282 +$ +1,000 +$ +31,593 +$ +1,000 +(f) +Inventories - Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis (FIFO) for substantially all of our inventories. illumi gene ® instruments are carried in inventory until customer placement, at which time they are transferred to deferred illumi gene instrument costs, unless sold outright. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf life may expire before sale +to customers, and other identified exposures. Such reserves were $2,499 and $2,271 at September 30, 2013 and 2012, respectively. We estimate these reserves based on assumptions about future demand and market conditions. If actual demand and +market conditions were to be less favorable than such estimates, additional inventory write-downs would be required and recorded in the period known. Such adjustments would negatively affect gross profit margin and overall results of operations. +During the fourth quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, and began the consolidation of +manufacturing operations from this facility with our Memphis, Tennessee facility. In connection with this consolidation, inventory write-downs totaling $509 were recorded as cost of sales – plant consolidation during the fiscal year ended +September 30, 2011 in the accompanying consolidation statements of operations. +- 54 - +Table of Contents +(g) +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 are +removed from the accounts and the resulting gain or loss is reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation is computed on the straight-line method in amounts sufficient to write-off the cost over the estimated +useful lives as follows: +Buildings and improvements—18 to 40 years +Machinery, equipment and furniture—3 to 10 years +Computer equipment and software—3 to 5 years +In connection with the consolidation of our Maine facility noted in Note 1 (f) above, the carrying value of certain property, plant and +equipment, including the building, was determined to be impaired and a write-down of approximately $210 and $425 was recorded as a component of plant consolidation costs during the fiscal years ended September 30, 2012 and 2011, respectively, +in the accompanying consolidation statements of operations. The building and the property on which it sits have been written down to current value, less selling costs, as determined by an independent outside appraisal. +(h) +Intangible Assets - Goodwill is subject to an annual impairment review (or more frequently if impairment indicators arise) by applying a fair-value based test. Fair value is determined via a market +approach from three perspectives. These three perspectives are (i) an allocation of our actual enterprise value (defined as market capitalization plus debt less cash and cash equivalents) to each of the reporting units based on revenue and +EBITDA contributions to consolidated results; (ii) an allocation of implied enterprise values to each of our reporting units based on average and median EBITDA multiples from a comparable group of companies; and (iii) a review of +enterprise value to EBITDA multiples from recent industry merger and acquisition transactions. We perform our annual impairment review as of June 30, the end of our third fiscal quarter. We have no intangible assets with indefinite lives other +than goodwill. There have been no impairments from these analyses for fiscal 2013, 2012 or 2011. +The change in +goodwill was a decrease of $31 in fiscal 2013 and an increase of $22 in fiscal 2012. Both years reflect the effect of the Life Science segment’s Bioline Group and the currency translation adjustments thereon. +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, 2013 and 2012 is as follows. +2013 +2012 +As of September 30, +Gross +Carrying +Value +Accum. +Amort. +Gross +Carrying +Value +Accum. +Amort. +Manufacturing technologies, core products and cell lines +$ +11,676 +$ +10,097 +$ +11,678 +$ +9,327 +Trademarks, licenses and patents +4,748 +2,130 +4,704 +1,616 +Customer lists and supply agreements +12,353 +8,493 +12,360 +7,535 +$ +28,777 +$ +20,720 +$ +28,742 +$ +18,478 +- 55 - +Table of Contents +The actual aggregate amortization expense for these intangible assets for fiscal 2013, 2012 and +2011 was $2,269, $2,165 and $2,321, respectively. The estimated aggregate amortization expense for these intangible assets for each of the five succeeding fiscal years is as follows: fiscal 2014—$1,471, fiscal 2015—$1,242, fiscal +2016—$916, fiscal 2017—$736 and fiscal 2018—$716. +Long-lived assets, excluding goodwill, 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 asset’s future undiscounted cash flows to +its carrying value. If impairment has occurred, it is measured by a fair-value based test. +Our ability to recover our intangible assets, +both identifiable intangibles and goodwill, is dependent upon the future cash flows of the related acquired businesses and assets. We 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 and fixed assets, we also make judgments and assumptions regarding useful lives. See Note 1 (g) regarding impairment write-downs related +to the consolidation of our Maine operations. +We consider 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. +(i) +Revenue Recognition - Revenue is generally recognized from sales when product is shipped and title has passed to the customer. Revenue for the Diagnostics segment is reduced at the date of sale for product price +adjustments due certain distributors under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, estimates of inventories of our products held by +distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Such accruals were $3,866 at September 30, 2013 and $3,877 at September 30, 2012, and have +been netted against accounts receivable. +Revenue for our Diagnostics segment includes revenue for our +illumi gene molecular test system. This system includes an instrument, instrument accessories and test kits. In markets where the test system is sold via multiple deliverable arrangements (i.e., the United States, +Australia, Belgium, France, Holland and Italy), the cost of the instrument and instrument accessories is deferred upon placement at a customer and amortized on a straight-line basis into cost of sales over the expected utilization period, generally +three years. +- 56 - +Table of Contents +We evaluate whether each deliverable in the arrangement is a separate unit of accounting. The +significant deliverables are an instrument, instrument accessories (e.g., printer) and test kits. An instrument and instrument accessories are delivered to the customer prior to the start of the customer utilization period, in order to accommodate +customer set-up and installation. There is de minimis consideration received from the customer at the time of instrument placement. We have determined that the instrument and instrument accessories are not a separate unit of accounting +because such equipment can only be used to process and read the results from our illumi gene diagnostic tests (i.e., our instrument and test kits function together to deliver a diagnostic test result), and therefore the +instrument and instrument accessories do not have standalone value to the customer. Consequently, there is no revenue allocated to the placement of the instrument and instrument accessories. Test kits are delivered to the customer over the +utilization period of the instrument, which we estimate has a useful life of three years. Our average customer contract period, including estimated renewals, is at least equal to the estimated three-year utilization period. Revenue for the sale of +test kits is recognized upon shipment and transfer of title to the customers. +In markets where the test system is not sold via multiple +deliverable arrangements (i.e., countries other than the United States, Australia, Belgium, France, Holland and Italy), the cost of the instrument and instrument accessories is charged to cost of sales at the time of shipment and transfer of title +to the customer. Revenue for the sales of instruments and instrument accessories and test kits is recognized upon shipment and transfer of title to the customers. In these markets, our illumi gene molecular test system is sold to +independent distributors who inventory the instruments, instrument accessories and test kits for resale to end-users. +Our products are +generally not subject to a customer right of return except for product recall events under the rules and regulations of the Food and Drug Administration or equivalent agencies outside the United States. In this circumstance, the costs to replace +affected products would be accrued at the time a loss was probable and estimable. +Life Science revenue for contract services may come from +research and development services or manufacturing services, including process development work, or a combination of both. Revenue is recognized based on each of the deliverables in a given arrangement having distinct and separate customer pricing. +Depending on the nature of the arrangement, revenue is recognized as services are performed and billed, upon completion and acceptance by the customer, or upon delivery of product and acceptance by the customer. In some cases, customers may request +that we store, on their behalf, clinical grade biologicals that we produce under contract manufacturing agreements. These cases arise when customers do not have clinical grade storage facilities or do not want to risk contamination during transport. +For such cases, revenue may be recognized on a bill-and-hold basis. No such bill-and-hold arrangements existed at September 30, 2013, 2012 or 2011. +- 57 - +Table of Contents +Trade accounts receivable are recorded in the accompanying consolidated balance sheets at +invoiced amounts less provisions for distributor price adjustments under local contracts and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historical write-off experience and +known conditions that would likely lead to non-payment. The allowance for doubtful accounts and related metrics, such as days’ sales outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed individually for +collectibility. Customer invoices are charged off against the allowance when we believe it is probable that the invoices will not be paid. +(j) +Research and Development Costs - Research and development costs are charged to expense as incurred. Research and development costs include, among other things, salaries and wages for research scientists, +materials and supplies used in the development of new products, costs for development of instrumentation equipment, costs for clinical trials, and costs for facilities and equipment. +(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. We prepare estimates of permanent and temporary differences between income for financial reporting purposes and income for tax purposes. These differences are adjusted to actual upon filing of our tax returns, +typically occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates. +We account for uncertain tax positions using a benefit recognition model with a two-step approach: (i) a more-likely-than-not recognition +criterion; and (ii) a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon ultimate settlement. If it is not more likely than not that the +benefit will be sustained on its technical merits, no benefit is recorded. We recognize accrued interest related to unrecognized tax benefits as a portion of our income tax provision in the consolidated statements of operations. See Note 5. +(l) +Stock-based Compensation - We recognize compensation expense for all share-based awards made to employees, based upon the fair value of the share-based award on the date of the grant. See Note 6(b). +(m) +Comprehensive Income (Loss) - Comprehensive income (loss) represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders. As reflected in the +accompanying consolidated statements of comprehensive income, our comprehensive income or loss is comprised of net earnings and foreign currency translation. +- 58 - +Table of Contents +(n) +Shipping and Handling costs - Shipping and handling costs invoiced to customers are included in net sales. Costs to distribute products to customers, including freight costs, warehousing costs, and other +shipping and handling activities are included in cost of sales. +(o) +Non-income Government-Assessed Taxes - We classify all non-income, government-assessed taxes (sales, use and value-added) collected from customers and remitted by us to appropriate revenue authorities, on +a net basis (excluded from net sales) in the accompanying consolidated statements of operations. +(p) +Recent Accounting Pronouncements - In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU +No. 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820, resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply +existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements were effective for fiscal years +beginning after December 15, 2011. The Company’s adoption of this amended guidance on October 1, 2012 had no material impact on the Company’s consolidated results of operations, cash flows or financial position. +In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income , which amends the +disclosure and presentation requirements of Comprehensive Income. Specifically, ASU No. 2011-05 requires that all nonowner changes in shareholders’ equity be presented either in (i) a single continuous statement of comprehensive +income; or (ii) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. The Company adopted these +new presentation requirements upon their October 1, 2012 effective date, and has presented Consolidated Statements of Comprehensive Income for fiscal years 2013, 2012 and 2011 that are compliant with the requirements. Adoption of these +requirements had no impact on the Company’s consolidated results of operations, cash flows or financial position. +In September +2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment , which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or +circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more +likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance was effective for annual and interim goodwill impairment tests performed for +fiscal years beginning after December 15, 2011, with early adoption permitted. The Company’s adoption of this guidance effective October 1, 2012 had no impact on the Company’s consolidated results of operations, cash flow or +financial position. +- 59 - +Table of Contents +In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): +Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. Specifically, the new amendments to ASU No. 2013-02 +will require, depending upon the items being reclassified, the (i) presentation (either on the face of the statement where net income is presented or in the notes) of the effects on the line items of net income of significant amounts +reclassified out of accumulated other comprehensive income; and/or (ii) the cross-reference to other disclosures currently required under U.S. GAAP that provide additional detail about such items. These requirements are effective prospectively +for the Company beginning October 1, 2013, and we do not expect their adoption to have a significant impact on the Company’s consolidated results of operations, cash flows or financial position. +(q) +Reclassifications - Certain reclassifications have been made to the prior fiscal year financial statements to conform to the current year presentation. Such reclassifications had no impact on net earnings +or shareholders’ equity. +(2) Inventories +Inventories are comprised of the following: +As of September 30, +2013 +2012 +Raw materials +$ +7,170 +$ +6,916 +Work-in-process +8,585 +9,540 +Finished goods— illumi gene instruments +1,980 +2,326 +Finished goods—kits and reagents +17,100 +12,900 +Total +$ +34,835 +$ +31,682 +(3) Bank Credit Arrangements +We have a $30,000 credit facility with a commercial bank, which expires in September 2015. This credit facility is collateralized by our +business assets, except for those of non-U.S. subsidiaries, which totaled approximately $149,000 at September 30, 2013. There were no borrowings outstanding on this credit facility at September 30, 2013 or September 30, 2012. +Available borrowings under this credit facility were $30,000 at September 30, 2013 and September 30, 2012. In connection with this bank credit facility, we are required to comply with financial covenants that limit the amount of debt +obligations and require a minimum amount of tangible net worth. We are in compliance with all covenants. We are also required to maintain a cash compensating balance with the bank in the amount of $1,000, pursuant to this bank credit facility and +are in compliance with this requirement. +- 60 - +Table of Contents +(4) Fair Value Measurements +We use a fair value measurement to value our financial assets and liabilities. Fair value is the price that would be received to sell an +asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, which are +described below: +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date +for assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. +Level 2: Inputs other than quoted prices included +within Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few +transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly and inputs that are derived principally from or +corroborated by observable market data by correlation or other means. +Level 3: Unobservable inputs, developed using our estimates and assumptions, which +reflect those that the market participants would use. Such inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. +Determining where an asset or liability falls within the hierarchy depends on the lowest level input that is significant to the fair value measurement as a +whole. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in the assessment of fair value. +We had no financial assets or liabilities carried at fair value at September 30, 2013 or 2012 to be classified as Level 1, 2 or 3. +- 61 - +Table of Contents +(5) Income Taxes +(a) +Earnings before income taxes, and the related provision for income taxes for the years ended September 30, 2013, 2012 and 2011 were as follows: +Year Ended September 30, +2013 +2012 +2011 +Domestic +$ +53,963 +$ +44,774 +$ +37,955 +Foreign +3,399 +4,942 +2,545 +Total earnings before income taxes +$ +57,362 +$ +49,716 +$ +40,500 +Provision (credit) for income taxes— +Federal— +Current +$ +18,311 +$ +15,077 +$ +13,336 +Temporary differences +Fixed asset basis differences and depreciation +121 +2 +(155 +) +Intangible asset basis differences and amortization +(339 +) +(354 +) +(312 +) +Currently non-deductible expenses and reserves +(425 +) +(397 +) +(627 +) +Stock-based compensation +(282 +) +(599 +) +(706 +) +Tax credit carryforwards +(717 +) +— +— +Other, net +43 +74 +35 +Subtotal +16,712 +13,803 +11,571 +State and local +2,013 +1,521 +1,213 +Foreign +605 +1,021 +885 +Total income tax provision +$ +19,330 +$ +16,345 +$ +13,669 +(b) +The following is a reconciliation between the statutory U.S. income tax rate and the effective rate derived by dividing the provision for income taxes by earnings before income taxes: +Year Ended September 30, +2013 +2012 +2011 +Computed income taxes at statutory rate +$ +20,078 +35.0 +% +$ +17,398 +35.0 +% +$ +14,175 +35.0 +% +Increase (decrease) in taxes resulting from— +State and local income taxes +1,270 +2.2 +994 +2.0 +834 +2.1 +Net benefit on foreign dividend +(84 +) +(0.2 +) +(373 +) +(0.8 +) +— +— +Qualified domestic production incentives +(1,621 +) +(2.8 +) +(1,226 +) +(2.5 +) +(1,025 +) +(2.5 +) +Uncertain tax position activity +(80 +) +(0.1 +) +(71 +) +(0.1 +) +(397 +) +(1.0 +) +Other, net +(233 +) +(0.4 +) +(377 +) +(0.7 +) +82 +0.2 +$ +19,330 +33.7 +% +$ +16,345 +32.9 +% +$ +13,669 +33.8 +% +- 62 - +Table of Contents +(c) +The components of net deferred tax assets were as follows: +As of September 30, +2013 +2012 +Deferred tax assets— +Valuation reserves and non-deductible expenses +$ +1,784 +$ +1,575 +Stock compensation expense not deductible +3,381 +3,067 +Net operating loss carryforwards +734 +765 +Tax credit carryforwards +717 +— +Inventory basis differences +1,626 +1,376 +Other +33 +— +Subtotal +8,275 +6,783 +Less valuation allowance +(296 +) +(450 +) +Deferred tax assets +7,979 +6,333 +Deferred tax liabilities— +Fixed asset basis differences and depreciation +(862 +) +(761 +) +Intangible asset basis differences and amortization +(1,924 +) +(2,508 +) +Other +(225 +) +(306 +) +Deferred tax liabilities +(3,011 +) +(3,575 +) +Net deferred tax assets +$ +4,968 +$ +2,758 +For income tax purposes, we have tax benefits related to operating loss carryforwards in the countries of Australia and +Belgium. These net operating loss carryforwards have no expiration date. We have recorded deferred tax assets for these carryforwards totaling $734 and $765 at September 30, 2013 and September 30, 2012, respectively, excluding valuation +allowances for Australia in 2013, and Australia and Belgium in 2012. +The realization of deferred tax assets in foreign jurisdictions is dependent upon +the generation of future taxable income in these countries. We have 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, we believe 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. +Undistributed earnings reinvested indefinitely in our non-U.S. operations were approximately $14,000 at September 30, 2013. U.S. deferred tax liabilities +of approximately $1,000 on such earnings, after consideration of foreign tax credits, have not been recorded as of September 30, 2013. +- 63 - +Table of Contents +As described in Note 1, we utilize a comprehensive model for the recognition, measurement, presentation and +disclosure of uncertain tax positions, assuming full knowledge of all relevant facts by the applicable tax authorities. The total amount of unrecognized tax benefits at September 30, 2013 and September 30, 2012 related to such positions +was $208 and $471, respectively, of which the full amounts would favorably affect the effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as a component of our income tax provision. During fiscal +2013 and fiscal 2012, we decreased our tax provision by approximately $72 and $18, respectively, for such interest and penalties. We had approximately $30 accrued for the payment of interest and penalties at September 30, 2013 compared to $102 +accrued at September 30, 2012. The amount of our liability for uncertain tax positions expected to be paid or settled in the next 12 months is uncertain. +A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: +2013 +2012 +Unrecognized income tax benefits beginning of year +$ +471 +$ +542 +Additions for tax positions of prior years +61 +159 +Reductions for tax positions of prior years +(103 +) +— +Tax examination and other settlements +(183 +) +— +Expirations of statute of limitations +(38 +) +(230 +) +Unrecognized income tax benefits at end of year +$ +208 +$ +471 +We are subject to examination by the tax authorities in the U.S. (both federal and state) and the countries of Australia, +Belgium, England, France, Germany, Holland and Italy. In the U.S., open tax years are for fiscal 2010 and fiscal 2012, with the IRS having completed its examination of our federal return for fiscal 2011. In countries outside the U.S., open tax years +generally range from fiscal 2008 and forward. However, in Belgium, the utilization of local net operating loss carryforwards extends the statute of limitations for examination well into the foreseeable future. +(6) Employee Benefits +(a) +Savings and Investment Plan - We have a profit sharing and retirement savings plan covering substantially all full-time U.S. employees. Profit sharing contributions to the plan, which are discretionary, +are approved by the board of directors. The plan permits participants to contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an employee’s contributions, up to maximum match of 3% of eligible compensation. +Our discretionary and matching contributions to the plan amounted to approximately $1,539, $2,033 and $637, during fiscal 2013, 2012 and 2011, respectively. +(b) +Stock-Based Compensation Plans - During fiscal 2013, we had two active stock-based compensation plans, the 2004 Equity Compensation Plan, which became effective December 7, 2004, as amended (the +“2004 Plan”) and the 2012 Stock Incentive Plan, which became effective January 25, 2012 (the “2012 Plan”). In addition, we have an Employee Stock Purchase Plan (the “ESP Plan”), which became effective +October 1, 1997. Under the ESP Plan, we sell shares of stock to our full-time and part-time employees 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. +- 64 - +Table of Contents +Each of the 2004 Plan and 2012 Plan authorized the granting of new shares for options, restricted +shares or restricted share units for up to 3,000 shares, with the non-granted portion of the 2004 Plan permitted to be carried forward and added to the 2012 Plan authorized limit. As of September 30, 2013, we have granted 2,256 and 191 shares +under the 2004 Plan and 2012 Plan, respectively, thereby resulting in a remaining authorized limit of 3,553 shares. Options may be granted at exercise prices not less than 100% of the closing market value of the underlying common shares on the date +of grant and have maximum terms up to ten years. Vesting schedules for options, restricted shares and restricted share units are established at the time of grant and may be set based on future service periods, achievement of performance targets, or +a combination thereof. 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. We recognize compensation expense for all +share-based payments made to employees, based upon the fair value of the share-based payment on the date of the grant. +During fiscal 2011, +we granted approximately 214 restricted shares and restricted share units (with a weighted-average grant date fair value of $22.93 per share) to certain employees, with half of each employee’s grant being time-vested restricted shares or +restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2011. While dividend equivalents were paid on these shares and units +throughout fiscal 2011, the target for fiscal 2011 was not met and the performance-based portion of the restricted shares and restricted share units granted during fiscal 2011 were cancelled. +During fiscal 2012, we granted approximately 210 restricted share units (with a weighted-average grant date fair value of $17.99 per share) to +certain employees, generally with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings +target for fiscal 2012. While dividend equivalents were paid on these units throughout fiscal 2012, the target for fiscal 2012 was not met and the performance-based portion of the restricted share units granted during fiscal 2012 were cancelled. +Additionally, during fiscal 2012, we granted approximately 110 restricted share units (with a grant date fair value of $17.57 per share) and 1,035 options (with a weighted-average grant date fair value of $4.66 per option, as included in the options +table below) to certain executive management employees to incentivize the achievement of Company revenue targets in advance of planned expectations. These awards can only be earned if specified cumulative revenue thresholds are met one fiscal +quarter in advance of planned revenue expectations through fiscal 2015, with the three measurement dates for ratably earning one-third of the grant being (i) the 21-month period ending June 30, 2013; (ii) the 33-month period ending +June 30, 2014; and (iii) the 45-month period ending June 30, 2015. As a result of the cumulative threshold for the 21-month period ended June 30, 2013 not having been met, one-third of the restricted share units and options +granted have been cancelled. +- 65 - +Table of Contents +Similar to previous years, during fiscal 2013, we granted approximately 204 restricted share +units (with a weighted-average grant date fair value of $19.38 per share) to certain employees, with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the +remaining half being subject to attainment of a specified earnings target for fiscal 2013. While dividend equivalents were paid on these units throughout fiscal 2013, the target for fiscal 2013 was not met and the performance-based portion of the +restricted share units granted during fiscal 2013 have been cancelled. +Giving effect to these grants, cancellations and certain other +activities for restricted shares and restricted share units throughout the years, including conversions to common shares, forfeitures, and new hire and employee promotion grants, approximately 450 restricted shares and restricted share units remain +outstanding as of September 30, 2013, with a weighted-average grant date fair value of $19.92 per share, a weighted-average remaining vesting period of 1.75 years and an aggregate intrinsic value of $10,704. The weighted-average grant date fair +value of the approximate 15 restricted share units that vested during fiscal 2013 was $21.76 per share. +The amount of stock-based +compensation expense reported was $2,502, $1,987 and $2,614 in fiscal 2013, 2012 and 2011, respectively. The fiscal 2013 expense is comprised of $336 related to stock options, $2,069 related to restricted shares and units, and $97 related to the +granting of unrestricted common shares to two executive officers; the fiscal 2012 expense is comprised of $426 related to stock options and $1,561 related to restricted shares and units; and the fiscal 2011 expense is comprised of $495 related to +stock options, $2,009 related to restricted shares and units, and $110 related to the granting of unrestricted common shares to a retiring director. The total income tax benefit recognized in the income statement for these stock-based compensation +arrangements was $850, $588 and $865, for fiscal 2013, 2012 and 2011, respectively. As of September 30, 2013, we expect future stock compensation expense for unvested options and unvested restricted stock and units to total $191 and $1,959, +respectively, which will be recognized during fiscal years 2014 through 2017. +We recognize compensation expense only for the portion of +shares that we expect to vest. As such, we apply estimated forfeiture rates to our compensation expense calculations. These rates have been derived using historical forfeiture data, stratified by several employee groups. During fiscal 2013, 2012 and +2011, we recorded $93, $73 and $39, respectively, in stock compensation expense to adjust estimated forfeiture rates to actual. +- 66 - +Table of Contents +We have elected to use the Black-Scholes option pricing model to determine grant-date fair value +for stock options, with the following assumptions: (i) expected share price volatility based on the average of Meridian’s historical volatility over the options’ expected lives and implied volatility based on the value of tradable +call options; (ii) expected life of options based on contractual lives, employees’ historical exercise behavior and employees’ historical post-vesting employment termination behavior; (iii) risk-free interest rates based on +treasury rates that correspond to the expected lives of the options; and (iv) dividend yield based on the expected yield on underlying Meridian common stock. +Year ended September 30, +2013 +2012 +2011 +Risk-free interest rates +0.88% +1.24% +1.91% +Dividend yield +4.1% +3.42% +3.74% +Life of option +6.23 yrs. +6.22 yrs. +5.93 yrs. +Share price volatility +36% +39% +34% +Forfeitures (by employee group) +0%-10% +0%-10% +0%-10% +A summary of the status of our stock option plans at September 30, 2013 and changes during the year is +presented in the table and narrative below: +Options +Wtd Avg +Exercise +Price +Wtd Avg +Remaining +Life (Yrs) +Aggregate +Intrinsic +Value +Outstanding beginning of period +2,026 +$ +16.93 +Grants +66 +21.08 +Exercises +(225 +) +10.03 +Forfeitures +(8 +) +20.68 +Cancellations +(351 +) +17.74 +Outstanding end of period +1,508 +$ +17.93 +6.11 +$ +9,486 +Exercisable end of period +721 +$ +17.90 +3.87 +$ +5,017 +A summary of the status of our nonvested options as of September 30, 2013, and changes during the year +ended September 30, 2013, is presented below: +Options +Weighted- +Average +Grant Date +Fair Value +Nonvested beginning of period +1,162 +$ +4.95 +Granted +66 +4.19 +Vested +(88 +) +8.07 +Forfeitures +(8 +) +5.11 +Cancelled +(351 +) +4.66 +Nonvested end of period +781 +$ +4.66 +- 67 - +Table of Contents +The weighted average grant-date fair value of options granted was $4.19, $4.68 and $4.97 for +fiscal 2013, 2012 and 2011, respectively. The total intrinsic value of options exercised was $2,483, $452 and $8,038, for fiscal 2013, 2012 and 2011, respectively. The total grant-date fair value of options that vested during fiscal 2013, 2012 and +2011 was $712, $361 and $1,594, respectively. +Cash received from options exercised was $2,258, $431 and $1,721 for fiscal 2013, 2012 and +2011, respectively. Tax benefits realized and recorded to additional paid-in capital from option exercises totaled $306, $15 and $1,256 for fiscal 2013, 2012 and 2011, respectively. +(7) Reportable Segment and Major Concentrations Data +In the fourth quarter of fiscal 2013, we aggregated our Diagnostics operating segments into a single reportable segment, thereby resulting +in our reportable segments being Diagnostics and Life Science, with segmentation between the two determined based upon the nature of products and the types of customers. This aggregation in the fourth quarter of fiscal 2013 is consistent with +aggregation criteria and reflects the current manner in which management reviews and manages our business. In addition, we believe that it provides financial statement users with the information most conducive to analyzing and understanding our +Company. The prior period information reflected herein has been conformed to the current period presentation. +The Diagnostics segment consists of +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits domestically and abroad. The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; +Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science segment also includes the +contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Sales to individual customers constituting 10% or more of consolidated net sales are as follows: +Year Ended September 30, +2013 +2012 +2011 +Customer A +$ +35,082 +(19 +)% +$ +32,771 +(19 +)% +$ +29,632 +(19 +)% +Customer B +$ +25,457 +(13 +)% +$ +19,903 +(12 +)% +$ +18,308 +(11 +)% +Accounts receivable from these two Diagnostics distributor customers accounted for 17% and 14% of consolidated accounts +receivable at September 30, 2013 and September 30, 2012, respectively. In addition, approximately 16% of the consolidated accounts receivable balance at September 30, 2013 is largely dependent upon funds from the Italian government. +The Company’s international sales totaled $56,224, $54,909, and $54,047 in fiscal years 2013, 2012 and 2011, respectively. Our diagnostic focus product families – C. difficile, foodborne and H. pylori – accounted for +47%, 47% and 44% of consolidated net sales in fiscal 2013, 2012 and 2011, respectively. We currently sole-source from a U.S. manufacturer the illumi pro-10™ instrument on which our +illumi gene molecular testing platform operates. Additionally, two of our foodborne products sourced from another vendor accounted for 14%, 13% and 12% of third-party sales for our Diagnostics segment in fiscal 2013, 2012 +and 2011, respectively. +- 68 - +Table of Contents +Significant sales information by country for the Diagnostics and Life Science segments is as follows. Sales are +attributed to the geographic area based on the location to which the product is delivered. +Year Ended September 30, +2013 +2012 +2011 +United States +$ +114,935 +$ +99,998 +$ +89,078 +Italy +7,427 +7,473 +8,544 +United Kingdom +2,141 +2,441 +2,373 +France +1,936 +2,149 +2,537 +Holland +1,764 +1,818 +2,142 +Belgium +1,285 +1,271 +1,289 +Canada +1,248 +941 +892 +Other countries +13,893 +14,089 +13,578 +Total Diagnostics +$ +144,629 +$ +130,180 +$ +120,433 +Year Ended September 30, +2013 +2012 +2011 +United States +$ +17,527 +$ +17,805 +$ +15,711 +Germany +6,465 +4,872 +4,922 +United Kingdom +5,590 +5,251 +4,890 +Australia +3,454 +3,423 +3,105 +France +1,440 +1,282 +1,111 +Other countries +9,581 +9,899 +8,664 +Total Life Science +$ +44,057 +$ +42,532 +$ +38,403 +Identifiable assets for our Italian distribution organization were $10,760 and $12,537 at September 30, 2013 and 2012, +respectively. At September 30, 2013, identifiable assets for the Bioline Group’s operations in the U.K., Germany and Australia totaled approximately $14,220, $7,965 and $4,239, respectively; and totaled $13,464, $6,684 and $4,568, +respectively, at September 30, 2012. +- 69 - +Table of Contents +Segment information for the years ended September 30, 2013, 2012 and 2011 is as follows: +Diagnostics +Life Science +Elim (1) +Total +Fiscal Year 2013— +Net sales – +Third-party +$ +144,629 +$ +44,057 +$ +— +$ +188,686 +Inter-segment +533 +1,223 +(1,756 +) +— +Operating income +46,735 +10,627 +(48 +) +57,314 +Depreciation and amortization +4,328 +2,824 +— +7,152 +Capital expenditures +2,031 +1,203 +— +3,234 +Goodwill +1,250 +21,865 +— +23,115 +Other intangible assets +1,561 +6,496 +— +8,057 +Total assets +112,054 +110,111 +(45,417 +) +176,748 +Fiscal Year 2012— +Net sales – +Third-party +$ +130,180 +$ +42,532 +$ +— +$ +172,712 +Inter-segment +599 +1,097 +(1,696 +) +— +Operating income (2) +40,648 +8,473 +175 +49,296 +Depreciation and amortization +3,732 +2,865 +— +6,597 +Capital expenditures +2,341 +1,189 +— +3,530 +Goodwill +1,250 +21,896 +— +23,146 +Other intangible assets +2,239 +8,025 +— +10,264 +Total assets +96,928 +101,706 +(37,253 +) +161,381 +Fiscal Year 2011— +Net sales – +Third-party +$ +120,433 +$ +38,403 +$ +— +$ +158,836 +Inter-segment +152 +756 +(908 +) +— +Operating income (3) +37,698 +2,595 +(260 +) +40,033 +Depreciation and amortization +2,970 +2,903 +— +5,873 +Capital expenditures +5,041 +4,098 +— +9,139 +Goodwill +1,381 +21,743 +— +23,124 +Other intangible assets +1,604 +9,343 +— +10,947 +Total assets +104,179 +92,467 +(41,153 +) +155,493 +(1) +Eliminations consist of intersegment transactions. +(2) +Life Science includes $1,013 related to consolidation of the Maine operations into the Tennessee facility. +(3) +Diagnostics includes $1,240 related to sales and marketing leadership reorganization costs; and Life Science includes $1,057 related to consolidation of the Maine operations into the Tennessee facility. +- 70 - +Table of Contents +A reconciliation of segment operating income to consolidated earnings before income taxes for the years ended +September 30, 2013, 2012 and 2011 is as follows: +Year Ended September 30, +2013 +2012 +2011 +Segment operating income +$ +57,314 +$ +49,296 +$ +40,033 +Interest income +44 +42 +115 +Other, net +4 +378 +352 +Consolidated earnings before income taxes +$ +57,362 +$ +49,716 +$ +40,500 +Transactions between segments are accounted for at established intercompany prices for internal and management purposes with +all intercompany amounts eliminated in consolidation. +(8) Commitments and Contingencies +(a) +Royalty Commitments - We have entered into various license agreements that require payment of royalties based on a specified percentage of the sales of licensed products (1% to 14%). 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 $3,611, $3,040 and $1,853, respectively, for the fiscal years ended +September 30, 2013, 2012 and 2011. +(b) +Purchase Commitments - Excluding the operating lease commitments reflected in Note 8 (c) below, we have purchase commitments primarily for inventory and service items as part of the normal course of +business. Commitments made under these obligations are $7,921 and $170 for fiscal 2014 and 2015, respectively. No purchase commitments have been made beyond fiscal 2015. +(c) +Operating Lease Commitments - Meridian and its subsidiaries are lessees of (i) certain office and warehouse buildings in the U.S., Europe and Australia; (ii) automobiles for use by the direct sales +forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile and copier machines across all business units, under operating lease agreements that expire at various dates. Amounts charged to expense under operating leases +were $1,744, $1,524 and $1,391 for fiscal 2013, 2012 and 2011, respectively. Operating lease commitments for each of the five succeeding fiscal years are as follows: fiscal 2014—$1,370, fiscal 2015—$922, fiscal 2016—$670, fiscal +2017—$342, and fiscal 2018—$320. +(d) +Litigation - We are a party to various litigation matters from time to time that we believe are in the normal course of business. The ultimate resolution of these matters is not expected to have a material +adverse effect on our financial position, results of operations or cash flows. +- 71 - +Table of Contents +(e) +Indemnifications - In conjunction with certain contracts and agreements, we provide routine indemnifications whose terms range in duration and in some circumstances are not explicitly defined. The maximum +obligation under some such indemnifications is not explicitly stated and, as a result of our having no history of paying such indemnifications, cannot be reasonably estimated. We have not made any payments for these indemnifications and no liability +is recorded at September 30, 2013 or September 30, 2012. We believe that if we were to incur a loss on any of these matters, the loss would not have a material effect on our financial condition. +(9) Quarterly Financial Data (Unaudited) +The sum of the earnings per common share and cash dividends per share may not equal the corresponding annual amounts due to interim quarter +rounding. +For the Quarter Ended in Fiscal 2013 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +45,351 +$ +47,265 +$ +47,108 +$ +48,962 +Gross profit +28,796 +30,743 +30,631 +30,874 +Net earnings +8,474 +10,249 +10,159 +9,150 +Basic earnings per common share +0.21 +0.25 +0.25 +0.22 +Diluted earnings per common share +0.20 +0.24 +0.24 +0.22 +Cash dividends per common share +0.38 +* +— +* +0.19 +0.19 +For the Quarter Ended in Fiscal 2012 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +40,075 +$ +47,239 +$ +41,915 +$ +43,483 +Gross profit +24,542 +29,548 +27,417 +27,541 +Net earnings +6,578 +9,626 +8,594 +8,573 +Basic earnings per common share +0.16 +0.23 +0.21 +0.21 +Diluted earnings per common share +0.16 +0.23 +0.21 +0.21 +Cash dividends per common share +0.19 +0.19 +0.19 +0.19 +* +As a result of accelerating the declaration and payment of the quarterly cash dividend historically declared and paid during the second quarter of the fiscal year, two quarterly cash dividends were declared and paid +during the three months ended December 31, 2012, with none occurring during the three months ended March 31, 2013. +(10) Subsequent Events +We evaluated subsequent events after the balance sheet date of September 30, 2013 and there were no material subsequent events that +required recognition or additional disclosure in these financial statements. +- 72 - +Table of Contents +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Not applicable. +ITEM 9A. +CONTROLS AND PROCEDURES +As of +September 30, 2013, an evaluation was completed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our +disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2013. There have been no changes in our internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the fourth fiscal +quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting, or in other factors that could significantly affect internal control subsequent to September 30, 2013. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the caption “Management’s Report on Internal +Control over Financial Reporting.” +ITEM 9B. +OTHER INFORMATION +Not applicable. +- 73 - +Table of Contents +PART III +The information required by Items 10., 11., 12. (other than that portion set forth below), 13. and 14., of Part III are incorporated +by reference from the Registrant’s Proxy Statement for its 2014 Annual Shareholders’ Meeting to be filed with the Commission pursuant to Regulation 14A. +ITEM 12. +EQUITY COMPENSATION INFORMATION +The +following table presents summary information as of September 30, 2013 with respect to all of our equity compensation plans (number of securities information in thousands). +Plan Category +(a) +Number of +Securities to be +issued upon +exercise of +outstanding +options, warrants +and rights +(b) +Weighted- +average exercise +price of +outstanding +options, +warrants and +rights +(c) +Number of securities +remaining available +for future issuance +under equity +compensation plans +(excluding +securities +reflected in column +(a)) +Equity compensation plans approved by security holders (1) +1,508 +$ +17.934 +3,553 +Total (2) +1,508 +$ +17.934 +3,553 +(1) +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan, as amended +2012 Stock Incentive Plan +(2) +Weighted-average remaining term of 6.11 years +- 74 - +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(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 so identified under Item 8. No additional financial statements or schedules are being filed since the requirements of +paragraph (c) under Item 15 are not applicable to Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +3.1 +Articles of Incorporation, including amendments not related to Company name change (Incorporated by reference to Registration Statement No. 333-02613 on Form S-3 filed with the Securities and Exchange Commission on April 18, 1996 +and Meridian’s Form 8-K filed with the Securities and Exchange Commission on May 16, 2007) +3.2 +Amended Code of Regulations (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on November 13, 2012) +10.1* +Savings and Investment Plan Prototype Adoption Agreement (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +10.2* +Supplemental Benefit Agreement between Meridian and John A. Kraeutler, as amended April 24, 2001, December 29, 2008, August 3, 2011 and June 12, 2012 (referred to as the Salary Continuation Agreement prior to June 12, 2012) +(Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 14, 2012) +10.3 +Dividend Reinvestment Plan (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1999) +10.4* +Amended and Restated Employment Agreement Dated June 12, 2012 between Meridian and John A. Kraeutler (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 14, +2012) +10.5* +Agreement Concerning Disability and Death dated September 10, 2003, between Meridian and William J. Motto (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, +2003) +10.6* +2004 Equity Compensation Plan, amended and restated effective January 25, 2012 (Incorporated by reference to Meridian’s Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 2011) +10.7* +2012 Stock Incentive Plan, effective January 25, 2012 (Incorporated by reference to Meridian’s Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 2011) +10.8* +Fiscal 2013 Officers’ Performance Compensation Plan (Filed herewith) +10.9 +Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc. Meridian Life Science, Inc. and Fifth Third Bank dated August 1, 2007 (Incorporated by reference to +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +- 75 - +Table of Contents +10.9.1 +Amended and Restated Revolving Note with Fifth Third Bank dated September 15, 2012 (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2012) +10.9.2 +First Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth Third Bank dated September 2, 2010 (Incorporated +by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2010) +10.9.3 +Second Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth Third Bank dated December 1, 2010 (Incorporated +by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2010) +10.9.4 +Third Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth Third Bank dated September 15, 2012 (Incorporated +by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2012) +10.10* +Sample Time-Based Restricted Stock Unit Award Agreement dated November 7, 2012 (Filed herewith) +10.11* +Sample Performance Award Restricted Stock Unit Award Agreement dated November 7, 2012 (Filed herewith) +10.12* +Meridian Bioscience, Inc. Change in Control Severance Compensation Policy dated March 18, 2011 (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on March 24, 2011) +13 +2013 Annual Report to Shareholders (1) +14 +Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +21 +Subsidiaries of the Registrant (Filed herewith) +23 +Consent of Independent Registered Public Accounting Firm (Filed herewith) +31.1 +Certification of Principal Executive Officer required by Rule 13a-14(a) (Filed herewith) +31.2 +Certification of Principal Financial Officer required by Rule 13a-14(a) (Filed herewith) +32 +Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (Filed herewith) +101 +The following financial information from Meridian Bioscience Inc.’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 filed with the SEC on November 29, 2013, formatted in XBRL includes: (i) Consolidated +Statements of Operations for the years ended September 30, 2013, 2012 and 2011; (ii) Consolidated Statements of Comprehensive Income for the years ended September 30, 2013, 2012 and 2011; (iii) Consolidated Statements of Cash Flows for the years +ended September 30, 2013, 2012 and 2011; (iv) Consolidated Balance Sheets as of September 30, 2013 and 2012; (v) Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2013, 2012 and 2011; and (vi) the Notes to +Consolidated Financial Statements. +* +Management Compensatory Contracts +(1) +Only specific portions of the 2013 Annual Report to Shareholders are incorporated by reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2013 Annual Report to Shareholders has been furnished +to the Securities and Exchange Commission for informational purposes only. +Meridian will provide shareholders with any exhibit upon the +payment of a specified reasonable fee, which fee shall be limited to Meridian’s reasonable expenses in furnishing such exhibit. +- 76 - +Table of Contents +SIGNATURES +Pursuant to the requirements of Sections 13 or 15(d) 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/ John A. Kraeutler +Date: November 29, 2013 +John A. Kraeutler +Chief Executive Officer +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 +William J. Motto +Executive Chairman of the Board of Directors +November 29, 2013 +/s/ John A. Kraeutler +John A. Kraeutler +Chief Executive Officer, Director +November 29, 2013 +/s/ Melissa A. Lueke +Melissa A. Lueke +Executive Vice President, Chief Financial Officer, and Secretary (Principal Financial and Accounting Officer) +November 29, 2013 +/s/ James M. Anderson +James M. Anderson +Director +November 29, 2013 +/s/ David C. Phillips +David C. Phillips +Director +November 29, 2013 +/s/ Robert J. Ready +Robert J. Ready +Director +November 29, 2013 +- 77 - +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and +Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended +September 30, 2013, 2012 and 2011 +Description +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Deductions +Other (a) +Balance at +End of +Period +Year Ended September 30, 2013: +Allowance for doubtful accounts +$ +574 +$ +(116 +) +$ +(239 +) +$ +14 +$ +233 +Inventory realizability reserves +2,271 +1,132 +(938 +) +34 +2,499 +Valuation allowances – deferred taxes +450 +150 +(289 +) +(15 +) +296 +Year Ended September 30, 2012: +Allowance for doubtful accounts +$ +310 +$ +370 +$ +(89 +) +$ +(17 +) +$ +574 +Inventory realizability reserves +3,175 +198 +(1,024 +) +(78 +) +2,271 +Valuation allowances – deferred taxes +603 +— +(140 +) +(13 +) +450 +Year Ended September 30, 2011: +Allowance for doubtful accounts +$ +241 +$ +68 +$ +— +$ +1 +$ +310 +Inventory realizability reserves +2,670 +1,056 +(550 +) +(1 +) +3,175 +Valuation allowances – deferred taxes +439 +172 +— +(8 +) +603 +(a) +Balances reflect the effects of currency translation. +- 78 - \ No newline at end of file diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/filing_metadata.csv b/raw/filings/0000794172/2013/0001193125-13-457721/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b0b9204158e0c78e90fa3e242e11081a59ec2e98 --- /dev/null +++ b/raw/filings/0000794172/2013/0001193125-13-457721/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2013-11-29,2013-09-30,2013-11-29T14:33:55.000Z,0001193125-13-457721,d601230d10k.htm,10-K,6403482,1,0,https://www.sec.gov/Archives/edgar/data/794172/000119312513457721/d601230d10k.htm,https://www.sec.gov/Archives/edgar/data/794172/000119312513457721/,2013,2013,1 diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/item1.txt b/raw/filings/0000794172/2013/0001193125-13-457721/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..2c745987d68a2c41cab85f46204c3ae59bd8d8c9 --- /dev/null +++ b/raw/filings/0000794172/2013/0001193125-13-457721/item1.txt @@ -0,0 +1,284 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company with principal businesses in (i) the development, manufacture, sale and distribution of diagnostic +test kits, primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch +reagents used by researchers and other diagnostic manufacturers; and (iii) the contract development and manufacture of proteins and other biologicals under cGMP conditions for use by biopharmaceutical and biotechnology companies engaged in +research for new drugs and vaccines. The company was incorporated in Ohio in 1976. Our principal corporate offices are located near Cincinnati, Ohio, USA. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form +8-K and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission (SEC). These reports may also be +read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing these filings and other information regarding Meridian at +www.sec.gov . The information on our website is not and should not be considered part of this Annual Report on Form 10-K. +- 4 - +Table of Contents +Reportable Segments +Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and +distribution of diagnostic test kits in the U.S. and Canada (“North America”); Europe, Middle East and Africa (“EMEA”); and other countries outside of North America and EMEA (rest of the world, or “ROW”). The Life +Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, +nucleotides, competent cells and bioresearch reagents domestically and abroad, including a sales and business development location in Singapore. The Life Science segment also includes the contract development and manufacture of cGMP clinical grade +proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. Financial information for Meridian’s reportable segments is included in Note 7 to the consolidated financial +statements. +Diagnostics Segment +Overview of +Products and Markets +Our primary source of revenues continues to be diagnostic products, with our Diagnostics segment providing 77% of +consolidated net sales for fiscal 2013. Third-party sales for this segment were $145,000, $130,000 and $120,000 for fiscal 2013, 2012 and 2011, respectively, reflecting a three-year compound annual growth rate of 8%. As of September 30, 2013, +our Diagnostics segment had approximately 360 employees in six countries. +Our diagnostic products provide accuracy, simplicity and speed; enable early +diagnosis and treatment of common, acute medical conditions; and provide for better patient outcomes at reduced costs. We target diagnostics for disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes; +(ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; and (iv) have difficult sample handling requirements (stool, blood, urine and other body fluids). This approach has +allowed us to establish significant market share in our target disease states. +Our diagnostic products span a broad menu of testing platforms and +technologies, and also include transport media that store and preserve specimen samples from patient collection to laboratory testing. Our testing platforms include: +• +Isothermal DNA Amplification ( illumi gene ® brand ) – high sensitivity, molecular platform that is suitable for +virtually any size laboratory, whether centralized or decentralized; provides flexibility to process from 1 to 10 tests per run in generally under one hour; and requires no batching of samples. +• +Enzyme Immunoassay (TRU ® , Immuno Card ® and +Immuno Card STAT! ® brands) – single-use immunoassays that can be used in point-of-care settings; these tests have fast turnaround times +(generally under 20 minutes); and can reduce expensive send-outs for hospitals and outpatient clinics. +• +Enzyme-linked Immunoassay (Premier ® brand) – batch immunoassay platform that can process up to 96 tests per run; is highly +accurate and economical; and is adaptable to automation. +- 5 - +Table of Contents +Our diagnostic products are used principally in the detection of infectious diseases caused by various bacteria, +viruses, parasites and pathogens. Our focus product families in Diagnostics are C. difficile (antibiotic-associated diarrhea from a hospital-acquired infection), foodborne (Enterohemorrhagic E. coli (EHEC) and Campylobacter +jejuni (Campy)), and H. pylori (stomach ulcers). Sales within our focus product families – C. difficile, foodborne and H. pylori – accounted for 62%, 62% and 59% of our Diagnostics segment’s third-party sales +during fiscal 2013, 2012 and 2011, respectively. These same product families accounted for 47%, 47% and 44% of consolidated net sales in fiscal 2013, 2012 and 2011, respectively. +Our product portfolio, over 140 diagnostic tests and transport media, extends beyond our focus families, reaching into prenatal care (Group B +Streptococcus ), respiratory (Group A Streptococcus, influenza, respiratory syncytial virus, among others), and organ transplant infections (Cytomegalovirus), among other infectious disease areas. The primary markets and customers for +our products are acute care hospitals, reference laboratories and outpatient clinics in over 60 countries around the world. +We continue to invest +in new product development for our molecular testing platform, illumi gene ® . This platform now has four commercialized tests (assays), with three additional tests expected +to be available for sale in fiscal 2014: +1. +illumi gene ® C. difficile – commercialized in August 2010 +2. +illumi gene ® Group B Streptococcus (Group B Strep or GBS) – commercialized in December 2011 +3. +illumi gene ® Group A Streptococcus (Group A Strep) – commercialized in September 2012 +4. +illumi gene ® Mycoplasma ( M. pneumonia; walking pneumonia) – commercialized in June 2013 +5. +illumi gene ® Bordetella pertussis (whooping cough) – expected first half fiscal 2014 +6. +illumi gene ® Chlamydia trachomatis – expected second half fiscal 2014 +7. +illumi gene ® Neisseria gonorrhea – expected second half fiscal 2014 +Additional illumi gene tests in early-stage research or development include Herpes Simplex Virus I & II, enteric +parasites such as Giardia, foodborne pathogens such as E. coli , and bloodborne pathogens such as malaria. +We believe that our +illumi gene system has been well-accepted in our global markets. We currently have approximately 1,200 customer account placements. Of these account placements, approximately 1,000 accounts have completed +evaluations and validations and are regularly purchasing product, with the remaining account placements being in some stage of product evaluation and/or validation. Of our account placements, we have over 190 accounts that are multi-assay +users. +- 6 - +Table of Contents +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. +The increasing global +pressures to contain total health care costs have accelerated the increased use of diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, +shorter hospital stays and lower overall treatment cost. The creation of Accountable Care Organizations (ACOs) in our U.S. market, in particular, has the goal of increasing efficiency of healthcare delivery, reducing spending and improving clinical +outcomes. We believe our product portfolio positions us competitively with ACOs and healthcare systems that are transitioning from fee-for-service compensation models, to compensation models based on the total outcome costs of a given patient. Our +C. difficile , Group B Streptococcus , Group A Streptococcus , and H. pylori products are all examples of how a highly accurate diagnostic test on the front-end can mitigate or reduce down-stream costs for antibiotic use, +symptom-relieving drugs and hospital stays. +We also continue to see aggregation of buying power in our U.S. market via multi-hospital group +purchasing organizations and integrated delivery networks, consolidation among reference laboratories, and acquisition of physician practices by hospitals. We utilize multi-year supply agreements to secure our business where possible and +appropriate. +Cost containment pressures have also affected healthcare systems outside the U.S., particularly in Europe, where the healthcare systems are +generally government-run. The level of government budget deficits can have an adverse effect on the amount of government healthcare spend. We have seen this in Italy, for example. +Sales, Marketing and Focus Product Families +Our +Diagnostics segment’s sales and distribution network consists of the following for each of the broad geographic regions we serve: +North America +In North +America, our sales and distribution network consists of a direct sales force (U.S. only) complemented by independent distributors. The use of independent distributors in the U.S. allows our products to reach any size healthcare facility and also +provides our customers the option to purchase our products direct or through distribution along with other supplies. Two independent distributors in the U.S. accounted for 10% or more of consolidated net sales in fiscal 2013, 2012 and 2011: Cardinal +Healthcare Corporation and Thermo Fisher Scientific. Our sales to Cardinal were approximately $35,000, $33,000 and $30,000 during fiscal 2013, 2012 and 2011, respectively. Our sales to Fisher were approximately $25,000, $20,000 and $18,000 during +fiscal 2013, 2012 and 2011, respectively. +- 7 - +Table of Contents +EMEA +In EMEA, our sales and distribution network consists of direct sales forces in Belgium, France, Holland and Italy, and independent distributors +in other European countries, Africa and the Middle East. We maintain a distribution center near Milan, Italy. +ROW +With the exception of Australia, in which we utilize a direct sales force, we utilize independent distributors throughout the ROW. +Our Diagnostics segment’s focus product families are described below: +C. difficile +C. difficile , a serious hospital +acquired bacterial infection, is our largest product family, generating approximately $39,000 in global sales for fiscal 2013, or 8% growth from fiscal 2012 – reflecting a combination of sales of our molecular-based and traditional immunoassay +products. This product family has experienced significant competition in recent years from new technologies, including molecular testing platforms. See Competition discussion below. +Foodborne +Our foodborne product family achieved +approximately $24,000 in global sales for fiscal 2013, or growth of 15%, with over 95% of such sales occurring in the U.S. Our foodborne products include tests for Enterohemorrhagic E. coli (EHEC) and Campylobacter jejuni (Campy). In +the U.S. market, we believe that there are potentially 20 million stool cultures that are tested annually for foodborne illnesses. At present, we believe that we have less than a 20% market share for EHEC and less than a 5% market share for +Campy. +The primary competition for our foodborne products is laboratory culture methods. We believe that our products have two principal advantages +versus culture methods. The first principal advantage is test accuracy. Independent evaluations have shown our products to have higher sensitivity than culture methods. The second principal advantage is improved work flow of the testing process, +resulting in significantly shortened time to test result. Our single-use rapid products provide a test result in approximately 20 minutes, whereas culture results can take up to 24-48 hours. Time to test result can be a critical factor in the +physician’s choice of therapies, as the mortality rate for EHEC is estimated to be 5% to 10%. +- 8 - +Table of Contents +Helicobacter pylori +H. pylori , a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to duodenal ulcers and stomach cancer. H. pylori +represents our second largest product family, generating approximately $26,000 in global sales for 2013, or 11% growth. We offer both antibody and direct antigen tests in alternative formats (single-use and high volume batch). Our major competition +in this product family is test-method alternatives, serology and urea breath, and the prescription of symptom-relieving medications. Over 70% of our H. pylori product sales are in the U.S., where our strategy for this product line has been to +partner with managed care companies to promote the health and economic benefits of a test and treat strategy, and to move physician behavior away from serology-based testing toward direct antigen testing. In the U.S. market, we believe that there +are potentially 30 million people suffering from peptic ulcers and we believe that we currently have a 5% market share. +Competition +Our major competitors in molecular diagnostics are Cepheid and Becton Dickinson, who have systems with multiple-assay menus. We also face +competition in molecular diagnostics, but to a lesser degree, from companies such as Great Basin, Nanosphere and Quidel. These latter companies have a limited commercial menu and tend to compete strictly on price. We believe that our molecular +platform offers a number of competitive features: +• +Molecular assay sensitivity that is comparable to higher costing PCR; +• +Low capital investment with no instrument service cost; +• +Small footprint that is portable and does not consume much laboratory space; and +• +Product menu that fits with initiatives to improve clinical and economic outcomes. +Our major +competitors in rapid immunoassay diagnostics are primarily Alere and Quidel. These companies tend to compete strictly on price. We believe that the breadth and depth of our product portfolio provides us with a competitive advantage. For C. +difficile , we believe that we are the only company able to offer a full line of FDA-approved immunoassay (GDH and Toxin) and molecular products, allowing the customer to choose the solution that best suits them. +Research and Development +Our Diagnostics +segment’s research and development organization, which is located at our corporate headquarters in Newtown, Ohio, a suburb of Cincinnati, has expertise in biochemistry, immunology, mycology, bacteriology, virology, parasitology and molecular +biology. Research and development expenses for the Diagnostics segment for fiscal 2013, 2012 and 2011 were approximately $8,000, $8,000 and $7,000, respectively. This research and development organization focuses its activities on new product and +new technology development, new applications for our existing technologies, and improvements to existing products. Research and development efforts may occur in-house or with collaborative partners. We believe that new product development is a key +source for sustaining revenue growth. The products within our illumi gene molecular platform and H. pylori product family were developed solely in-house. +- 9 - +Table of Contents +Manufacturing +Our immunoassay and molecular products require the production of highly specific and sensitive antigens, antibodies, primers and enzymes. While +we produce substantially all of our own requirements including monoclonal and polyclonal antibodies, and a variety of fungal, bacterial and viral antigens, currently a number of the raw materials used in our products, including our +illumi gene molecular products, are purchased from outside vendors. We believe that we have, or can build, sufficient manufacturing and sourcing capacity for anticipated growth over the next several years. +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our Diagnostics segment. Sales of these products are as follows: +Product/Technology Family +Number of +products +% of consolidated sales +2013 +2012 +illumi gene +4 +18 +% +14 +% +H. pylori +2 +13 +% +13 +% +Respiratory +3 +3 +% +2 +% +Other +6 +1 +% +1 +% +Total patented products +15 +35 +% +30 +% +The patents for the illumi gene products expire between 2020 and 2022; the patents for the +two H. pylori products expire between 2016 and 2017; and the patents for the three respiratory products expire in 2022 (two products) and 2027. The remaining six patented products for which we own or license patents are spread over three +product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our production and +manufacturing technologies and processes. Our employees are required to execute confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are +regulated by the Food & Drug Administration (FDA) 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. +- 10 - +Table of Contents +Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA +pursuant to the 510(k) clearance process or is exempt from such requirements. We believe 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; however, we can make no assurances in this regard. +Sales of our diagnostic products in foreign countries are subject to foreign +government regulation, largely similar to that of the FDA. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485:2012. +Medical Device Tax +On January 1, 2013, the +medical device tax established as part of the U.S. healthcare reform legislation became effective and as a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2013, the Company recorded to cost of +sales approximately $1,300 of medical device tax expense related to this legislation. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious +diseases. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses, or pandemics such as the H1N1 influenza outbreak during fiscal 2009. While we believe that the +breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be impacted period over +period by such factors. +Life Science Segment +Overview of Products and Markets +Our Life Science +segment’s business focuses on the development, manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturing +companies, as well as contract development and manufacturing services under clinical cGMP conditions. Third-party sales for this segment were approximately $44,000, $43,000 and $38,000 for fiscal 2013, 2012 and 2011, respectively. As of +September 30, 2013, our Life Science segment had approximately 190 employees in five countries. +- 11 - +Table of Contents +Most of the revenue for our Life Science segment currently comes from the manufacture, sale and distribution of +bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturing companies focused on the development of immunoassay and molecular tests. Approximately 60% of +Life Science revenues are generated from the industrial market, defined as diagnostic manufacturers and the agriculture industry. This is an increasing focus for our Bioline molecular component business, which historically focused on the +academic/research market that comprises the remaining 40% of revenues. We utilize direct sales teams in key countries such as the U.S., the UK, Germany, France, Australia and Singapore, where we recently opened a sales and business development +office. This new office is designed to increase our presence and our revenue opportunities in Asia for both molecular and immunoassay components. We utilize a network of distributors in other major countries. During fiscal 2013, 17% of third-party +sales for this segment were to two diagnostic manufacturing customers. For one of these two customers, we have exclusive supply agreements that have annual automatic renewal provisions. We have a long-standing relationship with this customer; and +although there can be no assurances, we intend to renew these supply agreements in the normal course of business. +Products such as antibodies, antigens +and reagents are marketed primarily to diagnostic manufacturing customers as a source of raw materials for their immunoassay products, or as an outsourced step in their manufacturing processes. For example, Meridian Life Science supplies a number of +major diagnostic manufacturers with proteins used to detect Hepatitis A and Rubella. These products are typically sold in bulk quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales efforts are focused +on multi-year supply arrangements in order to provide stability in volumes and pricing. We believe this benefits both us and our customers. +Molecular +biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed to academic/research and industrial customers. These products are used in measuring DNA and RNA in clinical and agricultural applications. These reagents +improve the purity, yield and speed of PCR reactions. Products such as MyTaq ™ and SensiFAST ™ are examples of this type of PCR/qPCR +reagent. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling technology for process development and large-scale +manufacturing for biologicals used in new drugs and vaccines. The size of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials for biopharmaceutical, biotechnology and government agency +customers. Our revenues for contract services were approximately $3,000, $2,000 and $3,000 in fiscal 2013, 2012 and 2011, respectively. +Market +Trends +Throughout the market, sales of molecular components are growing at a faster pace than immunoassay components, and this is where we are +experiencing growth. Geographic expansion is a significant strategy for our Life Science segment, along with further penetration into industrial markets with our molecular products. +- 12 - +Table of Contents +Competition +The market for bulk biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service and reputation. +We face competitors, many of which have greater financial, research and development, sales and marketing, and manufacturing resources, and where sole-source supply arrangements do not exist. From time to time, customers may choose to manufacture +their biomedical reagents in-house rather than purchase from outside vendors such as Meridian. +The academic/research market is highly fragmented. +Individual purchases are typically of small quantities. The breadth of product offerings, quality, price and service, including on-line capabilities and technical resources, are important factors to building customer loyalty and repeat purchases. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, is also competitive. Important competitive factors +include reputation, customer service and price. Although the product application for this facility was built from our existing expertise in cell culture manufacturing techniques, we face competitors with greater experience in contract manufacturing +in a clinical cGMP environment. +Research and Development +Research and development expenses for our Life Science segment for fiscal 2013, 2012 and 2011 were approximately $3,000, $2,000 and $3,000, respectively. This +research and development organization is heavily involved in vaccine development and production activities for our cGMP facility and development of new molecular products. +Manufacturing and Government Regulation +The +Meridian Life Science facilities are ISO 9001:2008 certified, and where appropriate, comply with Regulation EC 1069:2009. +The cGMP clinical grade +proteins that are produced in our Memphis facility are intended to be used as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. Following clinical trials, +approval and licensing of these products is the responsibility of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, not Meridian Life Science. +Acquisitions +Acquisitions have played an important role +in the growth of our businesses. Our acquisition objectives include, among other things, (i) enhancing product offerings; (ii) improving product distribution capabilities; (iii) providing access to new markets; and/or +(iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide any assurance that we will consummate any additional acquisitions in the future, nor can we provide any assurance that any +acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenues and earnings growth in the future. +- 13 - +Table of Contents +International Markets +International markets are an important source of revenue and future growth opportunities for both of our segments. For both segments combined, sales made to +customers located outside of North America approximated $54,000 or 29% of consolidated fiscal 2013 sales, $53,000 or 31% of consolidated fiscal 2012 sales and $53,000 or 33% of consolidated fiscal 2011 sales. We expect to continue to look to +international markets as a source of new revenues and growth in the future. +Environmental +We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA identification number. We are in compliance with applicable +portions of the federal and state hazardous waste regulations and have never been a party to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/item13.txt b/raw/filings/0000794172/2013/0001193125-13-457721/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..a8a01f1af25ec4471b108107f7006f23d1a76b45 --- /dev/null +++ b/raw/filings/0000794172/2013/0001193125-13-457721/item13.txt @@ -0,0 +1,3 @@ +Item 13 +Certain Relationships and Related Transactions, and Director Independence +74 \ No newline at end of file diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/item9a.txt b/raw/filings/0000794172/2013/0001193125-13-457721/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..87126e44d01dfb5b5489e03a3a6a46a9a6bb74c1 --- /dev/null +++ b/raw/filings/0000794172/2013/0001193125-13-457721/item9a.txt @@ -0,0 +1,9 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of +September 30, 2013, an evaluation was completed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our +disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2013. There have been no changes in our internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the fourth fiscal +quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting, or in other factors that could significantly affect internal control subsequent to September 30, 2013. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the caption “Management’s Report on Internal +Control over Financial Reporting.” \ No newline at end of file diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/rp_note.txt b/raw/filings/0000794172/2013/0001193125-13-457721/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2013/0001193125-13-457721/rpt_disclosure.txt b/raw/filings/0000794172/2013/0001193125-13-457721/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..00e44386312cd982b544d1d76f71cd95f90d5002 --- /dev/null +++ b/raw/filings/0000794172/2013/0001193125-13-457721/rpt_disclosure.txt @@ -0,0 +1,13 @@ +TRANSACTIONS WITH RELATED PERSONS +During fiscal 2013, the Company leased certain office space from an entity controlled by Marco G. Calzavara, President and Managing Director, Meridian +Bioscience Europe. Payments made under such arrangements during fiscal 2013 totaled approximately $190,000. +Nasdaq rules require the +Company to conduct an appropriate review of related party transactions required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential conflict of interest situations on an ongoing basis and that all such +transactions must be approved by the Audit Committee or another Committee comprised of independent Directors. As a result, the Audit Committee annually reviews all such related party transactions and approves each related party transaction if it +determines that it is in the best interests of the Company. Additionally, the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions involving the Company and “related persons” (Directors and +Executive Officers or their immediate family members, or shareholders owning five percent or greater of the Company’s outstanding stock). This also covers any related person transaction that meets the minimum threshold for disclosure in the +proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest). In considering the transaction, the Audit Committee may consider all +relevant factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms +comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to +prevent such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. This policy is included in the Company’s Employee Handbook. The approval of such related person transactions are evidenced by +internal Company resolutions or memoranda. \ No newline at end of file