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+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,2003-12-22,2003-09-30,2003-12-22T15:34:05.000Z,0000950152-03-010438,l04579ae10vk.htm,"MERIDIAN BIOSCIENCE, INC.   10-K/FYE 9-30-2003",1159786,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015203010438/l04579ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015203010438/,2003,2003,1

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+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 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 
+As a result of changes that occurred in February 2003 in the organization and
+management of Meridian’s businesses, effective with the quarter beginning
+January 1, 2003, Meridian changed its reportable operating segments to US
+Diagnostics (formerly referred to as Meridian Bioscience, Inc. or MBI),
+European Diagnostics (formerly referred to as Meridian Bioscience Europe or
+MBE) and Life Science. While the scientific foundation of these three segments
+is essentially the same, the market dynamics, competitive trends, regulatory
+requirements and sales and marketing approach vary substantially. The US
+Diagnostics operating segment consists of research and development and
+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 research and development and
+manufacturing operations in Memphis, Tennessee and Saco, Maine, and the sale
+and distribution of bulk antigens, antibodies and bioresearch reagents
+domestically and abroad. Manufacturing operations for the Life Science
+operating segment include a protein production laboratory for the contract
+manufacture of proteins and other biologicals used by biopharmaceutical and
+biotechnology companies in research for new drugs and vaccines. Financial
+information for Meridian’s operating segments is included in Note 10 to the
+consolidated financial statements contained herein.
+Meridian’s primary source of revenues continues to be its core diagnostic
+products. Meridian’s diagnostic products provide accuracy, simplicity and
+speed, and 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 favorable
+- 2 - 
+Table of Contents 
+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 expects that its Life Science operating segment will serve as a key
+platform for sourcing biologicals and technologies, by acquisition or license,
+for development of new products for all of Meridian’s operating segments. One
+of Meridian’s specific strategies in this area is to target biologicals that
+have commercial product applications across multiple markets, such as human
+diagnostics, veterinary diagnostics and therapeutics. This strategy is
+expected to leverage research and development resources as products can be
+developed with all three markets in mind, rather than on a market-by-market
+basis.
+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, as soon as reasonably
+practicable after such material has been electronically filed with the
+Securities and Exchange Commission.
+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 $39,906,000,
+$34,171,000 and $32,557,000 for fiscal 2003, 2002 and 2001, respectively. As
+of September 30, 2003, the US Diagnostics operating segment had 240 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 stains. The enzyme
+immunoassay technology is used in multiple test formats; the Premier™ products
+for large volume users and the ImmunoCard® products for single test, low volume
+users.
+Meridian’s diagnostic products are used principally in the detection of
+respiratory diseases, such as pneumonia, valley fever, flu and 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 Cytomegolovirus (organ transplant
+infections);
+- 3 - 
+Table of Contents 
+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. 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.
+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 three regional sales managers, one
+corporate health systems manager, 21 technical sales representatives and two
+inside sales representatives. Meridian utilizes two primary independent
+distributors in the US, who accounted for 39% of the US Diagnostics operating
+segment’s third-party sales in fiscal 2003. Meridian participates in the
+selling effort for key customers where these independent distributors are
+utilized. Therefore, Meridian believes that the loss of either of these
+independent distributors would not have a material adverse effect on it.
+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.
+- 4 - 
+Table of Contents 
+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 over 200 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) – 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™
+product for large volume users, and in 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™, 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 Spin-CON.
+Research and Development 
+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 2003, 2002 and
+2001 were $2,527,000, $1,730,000 and $2,147,000, respectively. This research
+and development organization focuses
+- 5 - 
+Table of Contents 
+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 internally developed products are a key
+source for sustaining revenue growth. Meridian’s internally developed products
+include Premier™ Platinum HpSA and Premier™ Toxins A & B, which accounted for
+25% of the US Diagnostics operating segment’s third-party sales during fiscal
+2003.
+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™
+Platinum HpSA. 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. Meridian believes that its products and
+technologies do not infringe the proprietary rights of any third parties.
+Government Regulation 
+Meridian’s diagnostic 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 in the US 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
+- 6 - 
+Table of Contents 
+processes comparable to a diagnostic product or process, approval by the FDA
+involves the more lengthy pre-market approval procedures.
+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.
+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, those manufactured by the US Diagnostics
+operating segment and others manufactured by third-party vendors.
+Approximately 65% of third-party sales for fiscal 2003 were products
+manufactured by the US Diagnostics operating segment. Third-party sales for
+this operating segment were $13,756,000, $11,920,000 and $12,421,000 for fiscal
+2003, 2002 and 2001, respectively. As of September 30, 2003, the European
+Diagnostics operating segment had 38 employees, including 13 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 distribution centers in Nivelle, Belgium and Milan, Italy. The
+primary markets and customers for this operating segment are hospitals and
+reference laboratories. Sales to customers in Italy are mainly to hospitals
+and laboratories that are funded by the Italian government.
+During the last three years, competitive factors and government reimbursement
+policies have slowed growth in European markets. In response to these 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
+restructuring has improved overall operating results for the European
+Diagnostics operating segment by lowering its cost structure. Based on
+operating results for fiscal 2003 and expectations for fiscal 2004, Meridian
+believes that sales levels in local currency have stabilized, and in fact,
+believes that market conditions have begun to improve and will yield modest
+growth.
+The European Diagnostics operating segment’s functional currency is the Euro.
+The translation of Euros into US dollars is subject to exchange rate risk.
+- 7 - 
+Table of Contents 
+Life Science Operating Segment 
+Overview 
+The Life Science operating segment’s business currently focuses on the
+development, manufacture, sale and distribution of bulk antigens and reagents
+used by researchers and other diagnostic companies, as well as the contract
+manufacturing of proteins and other biologicals used by biopharmaceutical and
+biotechnology companies engaged in research for new drugs and vaccines.
+Third-party sales for this operating segment were $12,202,000, $13,013,000 and
+$11,549,000 for fiscal 2003, 2002 and 2001, respectively. The Life Science
+operating segment consists of Meridian’s Viral Antigens and BIODESIGN
+subsidiaries. As of September 30, 2003, the Life Science operating segment
+had 78 employees.
+Revenue sources for the Life Science operating segment currently come from the
+manufacture, sale and distribution of bulk antigens and reagents used by
+researchers and other diagnostic companies. During fiscal 2003, 28% of
+third-party sales were to one customer, a substantial portion of which is under
+exclusive supply agreements that expire in fiscal 2007. 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.
+This customer is currently experiencing delays in taking delivery of certain
+bulk antigen from Meridian. These delays are not related to the quality of
+Meridian’s product. As a result of these delays, the Life Science operating
+segment may generate an operating loss for the first quarter of fiscal 2004
+that would be recouped during the second quarter, upon commencement of
+shipments to this customer. Although, there can be no assurances that
+shipments will commence during the second quarter. This matter is not expected
+to have a material adverse effect on Meridian’s consolidated results of
+operations for the fiscal year ended September 30, 2004.
+Growth Strategies 
+Growth strategies for the Life Science operating segment include (i) developing
+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 for biopharmaceutical
+and biotechnology companies engaged 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. This business will focus on contract manufacturing of
+materials that will be used in Phase I and II clinical trials. During March
+2003, Meridian opened its protein production laboratory for commercial
+business. During the first quarter of fiscal 2004, Meridian began work in
+manufacturing a recombinant protein that will be used by the
+- 8 - 
+Table of Contents 
+National Institutes of Health in the development of a vaccine for parvovirus.
+This contract is expected to be completed in the fourth quarter of fiscal 2004.
+The proteins that will be produced 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 right to each protein. Meridian may or may not be the applicant
+depending on specific circumstances with particular customers.
+The protein production laboratory will provide a new class of customers, and in
+some cases, have longer production cycles than historical bulk manufacturing of
+antigens and reagents. Longer production cycles can affect timing of revenue
+recognition, as revenue is recognized either upon shipment of product or final
+lot acceptance depending on contract terms.
+Meridian expects that its Life Science operating segment will serve as a key
+platform for sourcing biologicals and technologies, by acquisition or license,
+for development of new products for all of Meridian’s operating segments. One
+of Meridian’s specific strategies in this area is to target biologicals that
+have commercial product applications across multiple markets, such as human
+diagnostics, veterinary diagnostics and therapeutics. This strategy is
+expected to leverage research and development resources as products can be
+developed with all three markets in mind, rather than on a market-by-market
+basis.
+Markets 
+The Life Science operating segment has targeted three primary market segments
+for its products and services: bulk biomedical reagents, drug and vaccine
+discovery, and drug and vaccine development. The customer base for bulk
+biomedical reagents 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.
+Similarly for the protein production laboratory, scientific resources are
+dedicated to each potential customer.
+- 9 - 
+Table of Contents 
+Research and Development 
+The Life Science operating segment’s research and development organization
+consists of 5 research scientists. Research and development expenses for the
+Life Science operating segment for fiscal 2003, 2002 and 2001 were $1,348,000,
+$1,158,000 and $1,216,000, respectively. This research and development
+organization focuses its activities on the protein production laboratory,
+developing new biomedical reagents, and working with the US Diagnostics
+operating segment in the development of products that have commercial
+application across multiple markets, such as human diagnostics, veterinary
+diagnostics and therapeutics.
+Manufacturing and Government Regulation 
+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.
+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
+- 10 - 
+Table of Contents 
+more of its products are Abbott Laboratories Inc., Becton, Dickinson and
+Company, Diagnostic Products Corporation, Quidel Corporation and Inverness
+Medical.
+Life Science 
+The market for bulk biomedical reagents is highly competitive. Important
+competitive factors include product quality, price, customer service and
+reputation. Where sole-source supply arrangements do not exist, Meridian faces
+competitors, many of which have greater financial, research and development,
+sales and marketing, and manufacturing resources. 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 the
+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
+manufacturing bulk antigens and reagents using cell culture 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 that lead to new products. Recent examples of this include
+the acquisition of Gull Laboratories in fiscal 1999 and Viral Antigens in
+fiscal 2000. 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 subsidiary). The
+Viral Antigens acquisition, coupled with the opening of the protein production
+laboratory, solidified Meridian’s entry into the Life Science market. 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 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 $23,220,000 or 35% of total sales, $17,993,000 or 30% of total sales and
+$18,123,000 or 32% of total sales in fiscal 2003, 2002 and 2001, respectively.
+Domestic exports for the US Diagnostics and Life Science operating segments
+were $9,464,000, $6,073,000 and $5,702,000 in fiscal 2003, 2002 and 2001,
+respectively. Meridian expects to continue to look to international markets as
+a source of new revenues and growth in the future.
+- 11 - 
+Table of Contents 
+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.

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+Item 13
+Certain Relationships and Related Transactions 
+57

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+ITEM 9A.
+CONTROLS AND PROCEDURES
+As of September 30, 2003, 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 15(d)-15(b) promulgated under the Securities Exchange Act
+of 1934, as amended. Based on that
+-56- 
+Table of Contents 
+evaluation, Meridian’s management, including the CEO and CFO, concluded that
+Meridian’s disclosure controls and procedures were effective as of September
+30, 2003. There have been no changes in Meridian’s internal controls over
+financial reporting identified in connection with the evaluation of internal
+controls that occurred during the last fiscal quarter that has materially
+affected, or is reasonably likely to affect, Meridian’s internal controls over
+financial reporting, or in other factors that could significantly affect
+internal controls subsequent to September 30, 2003.
+PART III
+The information required by Items 10., 11., 12., and 13., of Part III are
+incorporated by reference from the Registrant’s Proxy Statement for its 2004
+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 of
+this Form 10-K. Because Meridian’s fiscal year ended prior to December 15,
+2003, no disclosure is being provided with respect to Item 14.
+-57- 
+Table of Contents 
+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 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 
+10.3 
+License Agreement dated October 6, 1983 with
+Marion Laboratories, Inc.
+B 
+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
+Filed herewith 
+10.12* 
+1986 Stock Option Plan
+I 
+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 
+-58- 
+Table of Contents 
+Exhibit Number 
+Description of Exhibit 
+Filing Status 
+10.18* 
+1999 Directors’ Stock Option Plan
+N 
+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 
+10.25* 
+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
+Filed herewith 
+10.28 
+Agreement Concerning Disability and Death dated
+September 10, 2003, between Meridian and
+William J. Motto
+Filed herewith 
+10.29 
+Professional Services Agreement dated October
+1, 2002 between Meridian and Antonio Interno
+Filed herewith 
+13 
+2003 Annual Report to Shareholders
+(1) 
+14 
+Code of Ethics
+Filed herewith 
+21 
+Subsidiaries of the Registrant
+Filed herewith 
+23 
+Consent of Independent Accountants
+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 2003 Annual Report to Shareholders specifically are
+incorporated by reference in this Form 10-K as filed herewith. A supplemental
+paper copy of the 2003 Annual Report to Shareholders has been provided to the
+Securities and Exchange Commission for informational purposes only.
+-59- 
+Table of Contents 
+*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. 
+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. 
+(b) 
+REPORTS ON FORM 8-K. 
+Report on Form 8-K dated September 25, 2003, Item 5, reports change in
+operating segments 
+• 
+Annual Report on Form 10-K for the year ended September
+30, 2002, Part II, Item 8, Financial Statements and Supplementary
+Data 
+• 
+Quarterly Report on Form 10-Q for the quarter ended
+December 31, 2002, Part I, Item 1, Financial Statements 
+-60- 
+Table of Contents 
+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 22, 2003 
+William J. Motto 
+Chairman of the Board 
+and Chief Executive Officer 
+-61- 
+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)
+December 22, 2003 
+/s/ John A. Kraeutler
+John A. Kraeutler 
+President and Chief Operating
+Officer, Director
+December 22, 2003 
+/s/ Melissa Lueke
+Melissa Lueke 
+Vice President and Chief Financial Officer
+December 22, 2003 
+/s/ James A. Buzard
+James A. Buzard 
+Director
+December 22, 2003 
+/s/ Gary P. Kreider
+Gary P. Kreider 
+Director
+December 22, 2003 
+/s/ David C. Phillips
+David C. Phillips 
+Director
+December 22, 2003 
+/s/ Robert J. Ready
+Robert J. Ready 
+Director
+December 22, 2003 
+-62- 
+Table of Contents 
+SCHEDULE II 
+Meridian Bioscience, Inc. 
+and Subsidiaries
+Valuation and Qualifying Accounts 
+(Amounts in Thousands) 
+Years Ended September 30, 2003, 2002 and 2001
+Charged 
+Balance at 
+to Costs 
+Charged 
+Balance 
+Beginning 
+and 
+to Other 
+at End of 
+Description 
+of Period 
+Expenses 
+Accounts 
+Deductions 
+Other (a) 
+Period 
+Year Ended September 30, 2003: 
+Allowance for doubtful accounts 
+$ 
+987 
+$ 
+(268 
+) 
+$ 
+— 
+$ 
+(360 
+) 
+$ 
+112 
+$ 
+471 
+Inventory realizability reserves 
+730 
+289 
+— 
+(439 
+) 
+5 
+585 
+European restructuring reserves 
+83 
+98 
+— 
+(94 
+) 
+16 
+103 
+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 
+800 
+1,321 
+— 
+(2,002 
+) 
+— 
+119 
+(a) 
+Balances reflect the effects of currency translation (fiscal years
+2001-2003) and acquired valuation accounts related to the Viral Antigens
+acquisition (fiscal year 2001). 
+-63-

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+0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2004-12-13,2004-09-30,2004-12-13T21:59:09.000Z,0000950152-04-008932,l10961ae10vk.htm,"MERIDIAN BIOSCIENCE, INC.",478593,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015204008932/l10961ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015204008932/,2004,2004,1

raw/filings/0000794172/2004/0000950152-04-008932/item1.txt

@@ -0,0 +1,438 @@
+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 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 
+As a result of changes that occurred in February 2003 in the organization and
+management of Meridian’s businesses, effective with the quarter beginning
+January 1, 2003, Meridian changed its reportable operating segments to US
+Diagnostics, European Diagnostics, and Life Science. While the scientific
+foundation of these three segments is essentially the same, the market
+dynamics, competitive trends, regulatory requirements, and sales and marketing
+approach vary substantially. The US Diagnostics operating segment consists of
+research and development and 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 research and development and manufacturing operations in Memphis,
+Tennessee and Saco, Maine, and the sale and distribution of bulk antigens,
+antibodies and bioresearch reagents domestically and abroad. Manufacturing
+operations for the Life Science operating segment include a protein production
+laboratory for the contract manufacture of proteins and other biologicals used
+by biopharmaceutical and biotechnology companies in research for new drugs and
+vaccines. Financial information for Meridian’s operating segments is included
+in Note 7 to the consolidated financial statements contained herein.
+Meridian’s primary source of domestic and international revenues continues to
+be its core diagnostic products. 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
+favorable demographic and disease profiles, (iii) are underserved by current
+diagnostic
+-2-
+Table of Contents 
+products and (iv) have difficult sample handling requirements. This approach
+has allowed Meridian to establish significant market share in its target
+disease states.
+Meridian expects that its Life Science operating segment will serve as a key
+platform for sourcing biologicals and technologies, by acquisition or license,
+for development of new products for all of Meridian’s operating segments. One
+of Meridian’s specific strategies in this area is to target biologicals that
+have commercial product applications across multiple markets, such as human
+diagnostics, veterinary diagnostics, and therapeutics. This strategy is
+expected to leverage research and development resources as products can be
+developed with all three markets in mind, rather than on a market-by-market
+basis.
+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 the Securities and Exchange Commission.
+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 $48,153,000,
+$39,906,000 and $34,171,000 for fiscal 2004, 2003 and 2002, respectively. As
+of September 30, 2004, the US Diagnostics operating segment had 246 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 stains. The enzyme
+immunoassay technology is used in multiple test formats; the Premier™ products
+for large volume users and the ImmunoCard® products for single test, low volume
+users.
+Meridian’s diagnostic products are used principally in the detection of
+respiratory diseases, such as pneumonia, valley fever, flu and 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
+-3-
+Table of Contents 
+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. 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.
+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, 21 technical
+sales representatives, two inside sales representatives, and six physician
+marketing representatives. Meridian utilizes two primary independent
+distributors in the US, who accounted for 42% of the US Diagnostics operating
+segment’s third-party sales in fiscal 2004. Meridian participates in the
+selling effort for key customers where these independent distributors are
+utilized. Therefore, Meridian believes that the loss of either of these
+independent distributors would not have a material adverse effect on the
+Company.
+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.
+-4-
+Table of Contents 
+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 over 200 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) — 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™
+product for large volume users, and in 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™, 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 Spin-CON.
+Research and Development 
+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 2004, 2003 and
+2002 were $3,131,000, $2,527,000 and $1,730,000, respectively. This research
+and development organization
+-5-
+Table of Contents 
+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 internally developed products
+are a key source for sustaining revenue growth. Meridian’s internally
+developed products include Premier™ Platinum HpSA and Premier™ Toxins A & B,
+which accounted for 27% of the US Diagnostics operating segment’s third-party
+sales during fiscal 2004.
+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™
+Platinum HpSA. 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. Meridian believes that its products and
+technologies do not infringe the proprietary rights of any third parties.
+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.
+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 in the US 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
+-6-
+Table of Contents 
+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 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.
+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, those manufactured by the US Diagnostics
+operating segment and others manufactured by third-party vendors.
+Approximately 71% of third-party sales for fiscal 2004 were products
+manufactured by the US Diagnostics operating segment. Third-party sales for
+this operating segment were $15,412,000, $13,756,000 and $11,920,000 for fiscal
+2004, 2003 and 2002, respectively. As of September 30, 2004, the European
+Diagnostics operating segment had 40 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 distribution centers in Nivelle, Belgium and Milan, Italy. The
+primary markets and customers for this operating segment are hospitals and
+reference laboratories. Sales to customers in Italy are mainly to hospitals
+and laboratories that are funded by the Italian government.
+During the last several years, competitive factors and government reimbursement
+policies have slowed growth in European markets. Based on operating results
+for fiscal 2003 and fiscal 2004, Meridian believes that sales levels in local
+currency have stabilized, and in fact, believes that market conditions have
+begun to improve and will yield modest growth. Sales in local currency, the
+Euro, increased 7% during the last six months of fiscal 2004 compared to fiscal
+2003.
+The European Diagnostics operating segment’s functional currency is the Euro.
+The translation of Euros into US dollars is subject to exchange rate changes.
+-7-
+Table of Contents 
+Life Science Operating Segment 
+Overview 
+The Life Science operating segment’s business focuses on the development,
+manufacture, sale and distribution of bulk antigens and reagents used by
+researchers and other diagnostic companies, as well as the contract
+manufacturing of proteins and other biologicals used by biopharmaceutical and
+biotechnology companies engaged in research for new drugs and vaccines.
+Third-party sales for this operating segment were $16,041,000, $12,202,000 and
+$13,013,000 for fiscal 2004, 2003 and 2002, respectively. The Life Science
+operating segment consists of Meridian’s Viral Antigens and BIODESIGN
+subsidiaries. As of September 30, 2004, the Life Science operating segment had
+77 employees.
+Most of the revenue for the Life Science operating segment currently comes from
+the manufacture, sale and distribution of bulk antigens and reagents used by
+researchers and other diagnostic companies. During fiscal 2004, 34% of
+third-party sales were to one customer, a substantial portion of which is under
+exclusive supply agreements that expire in fiscal 2007. 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.
+During fiscal 2004, Meridian completed its first contract manufacturing project
+in its protein production facility. Meridian delivered recombinant proteins to
+the National Institutes of Health to be used in a vaccine for parvovirus
+(“fifth disease”) in Phase I clinical trials. Revenue related to this project
+was $1,528,000. During fiscal 2005, Meridian expects to deliver additional
+material for Phase II clinical trials and begin contract manufacturing for
+other customers.
+Growth Strategies 
+Growth strategies for the Life Science operating segment include (i) developing
+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 for biopharmaceutical
+and biotechnology companies engaged 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. This business will focus on contract manufacturing of
+protein materials that will be used in Phase I and II clinical trials.
+-8-
+Table of Contents 
+The protein production laboratory provides a new class of customers that, in
+some cases, have longer production cycles than historical bulk manufacturing of
+antigens and reagents. Longer production cycles can affect timing of revenue
+recognition, as revenue may be recognized either upon shipment of product or
+final lot acceptance depending on contract terms.
+Meridian expects that its Life Science operating segment will serve as a key
+platform for sourcing biologicals and technologies, by acquisition or license,
+for development of new products for all of Meridian’s operating segments. One
+of Meridian’s specific strategies in this area is to target biologicals that
+have commercial product applications across multiple markets, such as human
+diagnostics, veterinary diagnostics, and therapeutics. This strategy is
+expected to leverage research and development resources as products can be
+developed with all three markets in mind, rather than on a market-by-market
+basis.
+Markets 
+The Life Science operating segment has targeted three primary market segments
+for its products and services: bulk biomedical reagents, drug and vaccine
+discovery, and drug and vaccine development. The customer base for bulk
+biomedical reagents 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.
+Similarly, for the protein production laboratory, scientific resources are
+dedicated to each potential customer.
+Research and Development 
+The Life Science operating segment’s research and development organization
+consists of six research scientists. Research and development expenses for the
+Life Science operating segment for fiscal 2004, 2003 and 2002 were $1,226,000,
+$1,348,000 and $1,158,000, respectively. This research and development
+organization focuses its activities on the protein production laboratory,
+developing new biomedical reagents, and working with the US Diagnostics
+operating segment in the development of products that have commercial
+application across multiple markets, such as human diagnostics, veterinary
+diagnostics, and therapeutics.
+-9-
+Table of Contents 
+Manufacturing and Government Regulation 
+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.
+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, Quidel Corporation, and Inverness Medical.
+Life Science 
+The market for bulk biomedical reagents is highly competitive. Important
+competitive factors include product quality, price, customer service, and
+reputation. Where sole-source supply arrangements do not exist, Meridian faces
+competitors, many of which have greater financial, research and development,
+sales and
+-10-
+Table of Contents 
+marketing, and manufacturing resources. 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 the
+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
+manufacturing bulk antigens and reagents using cell culture 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 that lead to new products.
+During November 2004, Meridian executed a letter of intent to purchase all the
+outstanding capital stock of OEM Concepts, a manufacturer and distributor of
+bulk antibodies to the diagnostic, pharmaceutical, and research markets. This
+pending acquisition, which is subject to due diligence review and execution of
+a definitive agreement, will add large-volume monoclonal antibody manufacturing
+capabilities to Meridian’s Life Science operating segment and will complement
+the Viral Antigens and BIODESIGN subsidiaries. It will also decrease
+Meridian’s reliance on third parties for monoclonal and polyclonal antibodies.
+Recent examples of completed acquisitions include Gull Laboratories in fiscal
+1999 and Viral Antigens in fiscal 2000. 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 subsidiary). The Viral Antigens acquisition, coupled with the
+opening of the protein production laboratory, solidified Meridian’s entry into
+the Life Science market.
+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 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 $24,916,000 or 31% of total sales, $23,220,000 or 35% of total sales and
+$17,993,000 or 30% of total sales in fiscal 2004, 2003 and 2002, respectively.
+Domestic exports for the US Diagnostics and Life Science operating segments
+were $9,504,000, $9,464,000 and $6,073,000 in fiscal
+-11-
+Table of Contents 
+2004, 2003 and 2002, 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.

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+Item 13
+Certain Relationships and Related Transactions
+54

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+ITEM 9A.
+CONTROLS AND PROCEDURES
+As of September 30, 2004, 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, 2004. There have been no changes
+in Meridian’s internal controls over financial reporting identified in
+connection with the evaluation of internal controls that occurred during the
+last fiscal quarter that has materially affected, or is reasonably likely to
+affect, Meridian’s internal controls over financial reporting, or in other
+factors that could significantly affect internal controls subsequent to
+September 30, 2004.

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+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. While the scientific foundation of these segments is essentially the same, the market
+dynamics, competitive trends, regulatory requirements, and sales and marketing approach vary
+substantially. The US Diagnostics operating segment consists of research and development and
+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. The Life Science operating segment consists of the Viral
+Antigens, BIODESIGN, and OEM Concepts businesses. Financial information for Meridian’s operating
+segments is included in Note 8 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 77% of consolidated net sales for fiscal 2005. 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 favorable demographic and disease profiles, (iii) are
+underserved by current diagnostic products, and (iv) have difficult sample handling
+-4-
+Table of Contents 
+requirements. This approach has allowed Meridian to establish significant market share in its
+target disease states.
+Meridian expects that its Life Science operating segment will serve as a key platform for sourcing
+biologicals and technologies, by acquisition or license, for development of new products for all of
+Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target
+biologicals that have commercial product applications across multiple markets, such as human
+diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage
+research and development resources as products can be developed with all three markets in mind,
+rather than on a market-by-market basis.
+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 $53,485,000, $48,153,000 and
+$39,906,000 for fiscal 2005, 2004 and 2003, respectively, reflecting a compound annual growth rate
+of 16%. As of September 30, 2005, the US Diagnostics operating segment had 245 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 stains. The enzyme immunoassay technology is
+used in multiple test formats; the Premier ä products for large volume users and the
+ImmunoCard â products for single test, low volume users.
+-5-
+Table of Contents 
+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. 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 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, 24 technical sales representatives, and three inside sales
+representatives. Meridian utilizes two primary independent distributors in the US, who accounted
+for 44% of the US Diagnostics operating segment’s third-party sales in fiscal 2005. Meridian
+participates in the selling effort for key customers where these independent distributors are
+utilized. Therefore, Meridian believes that the loss of either of these independent distributors
+would not have a material adverse effect on the Company.
+-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 over 200 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) - 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 Ô product for large volume users, and in 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 ® , 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 Spin-Con ® .
+Research and Development 
+-7-
+Table of Contents 
+The US Diagnostics operating segment’s research and development organization consists of 11
+research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology,
+and parasitology. Research and development expenses for the US Diagnostics operating segment for
+fiscal 2005, 2004 and 2003 were $2,998,000, $3,131,000 and $2,527,000, 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
+internally developed products are a key source for sustaining revenue growth. Meridian’s
+internally developed products include Premier ä Platinum HpSA, Premier ä Toxins A & B,
+and Immuno Card Ò C. difficile Toxins A & B, which together accounted for 30% of the US
+Diagnostics operating segment’s third-party sales during fiscal 2005.
+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. 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. Meridian believes that its products and technologies do not infringe the proprietary
+rights of any third parties.
+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
+-8-
+Table of Contents 
+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 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 in the US 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.
+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, those manufactured by the US Diagnostics operating segment and others
+manufactured by third-party vendors. Approximately 67% of third-party sales for fiscal 2005 were
+products purchased from the US Diagnostics operating segment. Third-party sales for this operating
+segment were $17,818,000, $15,412,000 and $13,756,000 for fiscal 2005, 2004 and 2003, respectively,
+reflecting a compound annual growth rate of 14%. As of September 30, 2005, the European
+Diagnostics operating segment had 37 employees, including 15 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.
+During the last two years, market conditions have begun to improve in European markets. Due to the
+introduction of new products and improvements in general market conditions, sales in local
+currency, the Euro, increased 11% in fiscal 2005, compared to fiscal 2004, and increased 7% during
+the last six months of fiscal 2004, compared to the last six months of fiscal 2003.
+-9-
+Table of Contents 
+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 the contract manufacturing of proteins and other biologicals used by
+biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
+Third-party sales for this operating segment were $21,662,000, $16,041,000 and $12,202,000 for
+fiscal 2005, 2004 and 2003, respectively, reflecting a compound annual growth rate of 19%,
+including the OEM Concepts acquisition discussed below. The Life Science operating segment
+consists of Meridian’s Viral Antigens, BIODESIGN and OEM Concepts businesses. As of September 30,
+2005, the Life Science operating segment had 108 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 2005, 23% of third-party sales for this segment were to one
+customer, a substantial portion of which is under exclusive supply agreements that expire in fiscal
+2007. 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.
+On January 31, 2005, Meridian completed its acquisition of OEM Concepts, Inc., a large-volume
+manufacturer of monoclonal antibodies that are critical components of commercial diagnostic
+products used in the diagnosis of infectious diseases and in the monitoring of human protein levels
+in metabolic disorders, pregnancy, and cardiac disease. OEM Concepts adds custom ascites
+manufacturing capabilities and also diversifies Meridian’s customer base of major diagnostic
+companies. OEM Concepts contributed revenues of $3,087,000 for eight months during fiscal 2005.
+Viral Antigens’ 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. Production cycles, in some cases, are longer than historical bulk
+manufacturing of antigens, antibodies, and reagents. See Note 1(i) to the Consolidated Financial
+Statements herein for revenue recognition policies. Meridian’s revenues for contract research and
+-10-
+Table of Contents 
+development services and contract manufacturing services increased to $3,053,000 in fiscal 2005
+from $1,528,000 in fiscal 2004.
+Growth Strategies 
+Growth strategies for the Life Science operating segment include (i) developing 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.
+Meridian expects that its Life Science operating segment will serve as a key platform for sourcing
+biologicals and technologies, by acquisition or license, for development of new products for all of
+Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target
+biologicals that have commercial product applications across multiple markets, such as human
+diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage
+research and development resources as products can be developed with all three markets in mind,
+rather than on a market-by-market basis.
+Markets 
+The Life Science operating segment has targeted three primary market segments for its products and
+services: bulk biomedical reagents, drug and vaccine discovery, and drug and vaccine development.
+The customer base for bulk biomedical reagents 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.
+-11-
+Table of Contents 
+Research and Development 
+The Life Science operating segment’s research and development organization consists of five
+research scientists. Research and development expenses for the Life Science operating segment for
+fiscal 2005, 2004 and 2003 were $823,000, $1,226,000 and $1,348,000, respectively. This research
+and development organization focuses its activities on the protein production laboratory,
+developing new biomedical reagents, and working with the US Diagnostics operating segment in the
+development of products that have commercial application across multiple markets, such as human
+diagnostics, veterinary diagnostics, and therapeutics.
+Manufacturing and Government Regulation 
+The proteins that are produced in Viral Antigens’ 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. Viral
+Antigens may or may not be the applicant depending on specific circumstances with particular
+customers.
+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
+-12-
+Table of Contents 
+more of its products are Abbott Laboratories Inc., Becton, Dickinson and Company, Diagnostic
+Products Corporation, Quidel Corporation, and Inverness Medical.
+Life Science 
+The market for bulk biomedical reagents is highly competitive. Important competitive factors
+include product quality, price, customer service, and reputation. Where sole-source supply
+arrangements do not exist, Meridian faces competitors, many of which have greater financial,
+research and development, sales and marketing, and manufacturing resources. 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 at its Viral Antigens facility 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 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.
+During September 2005, Meridian completed an offering of 1,800,000 common shares, raising net
+proceeds of $29,580,000. These proceeds are intended, in part, to fund future acquisitions.
+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.
+-13-
+Table of Contents 
+International Markets 
+International markets are an important source of revenue for Meridian’s operating segments. For
+all operating segments combined, international sales were $30,232,000 or 33% of total fiscal 2005
+sales, $24,916,000 or 31% of total fiscal 2004 sales and $23,220,000 or 35% of total fiscal 2003
+sales. Domestic exports for the US Diagnostics and Life Science operating segments were
+$12,414,000, $9,504,000 and $9,464,000 in fiscal 2005, 2004 and 2003, 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.

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+Item 13
+Certain Relationships and Related Transactions
+65

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+ITEM 9A.
+CONTROLS AND PROCEDURES 
+As of September 30, 2005, 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, 2005. 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, 2005.
+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”.

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+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.
+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
+-3- 
+Table of Contents 
+information for Meridian’s operating segments is included in Note 9 to the consolidated financial
+statements contained herein.
+Our primary source of domestic and international revenues continues to be core diagnostic products,
+which represented 80% of consolidated net sales for fiscal 2007. 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 .
+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 $74,845,000, $65,721,000 and
+$53,485,000 for fiscal 2007, 2006 and 2005, respectively, reflecting a three-year compound annual
+growth rate of 16%. As of September 30, 2007, our US Diagnostics operating segment had 250
+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.
+-4- 
+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 independent distributors in the US and abroad. The direct sales force consists
+of one senior director of sales, three regional sales managers, one director of corporate health
+systems, one manager of corporate health systems, one director of health plan and payer markets,
+one international distribution manager, 25 technical sales representatives, and three inside sales
+representatives. We utilize two primary independent distributors in the US, who accounted for 51%
+of the US Diagnostics operating segment’s third-party sales in fiscal 2007. 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
+-5- 
+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
+140 medical diagnostic products. Our products generally range in list price from $1 per test to
+$33 per test.
+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 2007, 2006 and 2005 were $4,571,000, $3,342,000 and $3,043,000, 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 39% of our US Diagnostics
+operating segment’s third-party sales during fiscal 2007.
+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
+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.
+Over the last 15 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
+-6- 
+Table of Contents 
+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.
+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. Meridian produces substantially all of its 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 25 products manufactured by our US
+Diagnostics operating segment, including Premier ä Platinum HpSA and Premier ä Platinum
+HpSA Plus. 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.
+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.
+-7- 
+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 US Diagnostics operating segment and by third-party
+vendors. Approximately 70% of third-party sales for fiscal 2007 for this operating segment were
+products purchased from our US Diagnostics operating segment. Third-party sales for this operating
+segment were $23,563,000, $19,828,000 and $17,818,000 for fiscal 2007, 2006 and 2005, respectively,
+reflecting a three-year compound annual growth rate of 15%. As of September 30, 2007, the European
+Diagnostics operating segment had 40 employees, including 17 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 $24,555,000, $22,864,000 and
+$21,662,000 for fiscal 2007, 2006 and 2005, respectively, reflecting a three-year compound annual
+growth rate of 15%. As of September 30, 2007, our Life Science operating segment had 106
+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 2007, 27% 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.
+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.
+-8- 
+Table of Contents 
+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(j) to the Consolidated Financial Statements
+herein for revenue recognition policies. Our revenues for contract services were $765,000,
+$2,537,000, and $3,053,000 in fiscal 2007, 2006, and 2005, respectively.
+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. Over the last 18 months,
+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 
+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) having a sales value of up to
+$12,200,000 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.
+-9- 
+Table of Contents 
+Research and Development 
+Our Life Science operating segment’s research and development organization consists of 5 research
+scientists. Research and development expenses for our Life Science operating segment for fiscal
+2007, 2006 and 2005 were $1,514,000, $1,457,000 and $823,000, respectively. This research and
+development organization has integrated its activities around the four product brands previously
+discussed.
+Manufacturing and Government Regulation 
+The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used
+as “injectables”. 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 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 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 Abbott
+Laboratories Inc., Becton, Dickinson and Company, Diagnostic Products Corporation (acquired by
+Siemens in 2006), Quidel Corporation, Inverness Medical, and Remel (owned by Thermo Fisher).
+-10- 
+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 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 $38,691,000
+or 31% of total fiscal 2007 sales, $34,557,000 or 32% of total fiscal 2006 sales and $30,232,000 or
+33% of total fiscal 2005 sales. Domestic exports for our US Diagnostics and Life Science operating
+segments were $15,128,000, $14,728,000 and $12,414,000 in fiscal 2007, 2006 and 2005, 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. All hazardous material is manifested and disposed of properly. 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.
+-11- 
+Table of Contents

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+Item 13 Certain Relationships and Related Transactions 
+73

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+ITEM 9A.
+CONTROLS AND PROCEDURES 
+As of September 30, 2007, 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, 2007. 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, 2007, other than we
+implemented, as planned, new enterprise resource planning and general ledger and financial
+reporting systems for our Life Science facilities during the first quarter of fiscal 2008. These
+new system implementations provide the appropriate foundation to support future growth in our Life
+Science operating segment.
+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”.
+-72- 
+Table of Contents

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+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.

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raw/filings/0000794172/2012/0001193125-12-485192/item1.txt

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+ITEM 1.
+BUSINESS 
+Overview 
+Meridian is a fully-integrated
+life science company with principal businesses in (i) the development, manufacture, sale and distribution of clinical 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 and should not be considered part of this Annual Report on Form 10-K. 
+- 3 -
+Table of Contents 
+Reportable Segments 
+Our reportable segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics 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 Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East.
+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. Financial information for Meridian’s segments is included in Note 8 to the consolidated financial statements. 
+Our primary source of revenues continues to be diagnostic products, with our Diagnostics segments providing 75% of consolidated net sales for fiscal 2012. 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 segment;
+revenues for our Life Science segment represented 25% of consolidated net sales for fiscal 2012. 
+Products and Markets 
+We have expertise in the development and manufacture of products based on multiple core diagnostic technologies. 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 clinical diagnostic products. 
+Sales within our focus product families – C. difficile, foodborne and H. pylori – accounted for 62%, 58% and 51% of our U.S.
+Diagnostics segment’s third-party sales during fiscal 2012, 2011 and 2010, respectively. These same product families accounted for 47%, 44% and 43% of consolidated net sales in fiscal 2012, 2011 and 2010, respectively. 
+- 4 -
+Table of Contents 
+U.S. Diagnostics Segment 
+Overview 
+Our U.S. Diagnostics 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 segment were $108,000, $97,000 and $92,000 for fiscal 2012, 2011 and 2010, respectively, reflecting a three-year compound annual growth rate of 3%.
+Excluding influenza-related sales, the three-year compound annual growth rate was 8%. The higher rate reflects the impact of influenza-related sales in 2009 in connection with the H1N1 influenza pandemic. As of September 30, 2012, our U.S.
+Diagnostics 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. During fiscal 2010 we commercialized our molecular amplification diagnostic testing platform, illumi gene ® , and introduced our first assay, C. difficile . The illumi gene ® C. difficile assay detects the presence of the toxin producing region from the C. difficile DNA, and
+provides highly accurate results in under an hour. Throughout fiscal 2011 and fiscal 2012, we continued with the development of additional tests for the illumi gene ® molecular platform, receiving FDA clearance for our second and third molecular tests for the platform – illumi gene ® Group B Streptococcus (Group B Strep or GBS) in December 2011 and illumi gene ® Group A Streptococcus (Group A Strep) in September 2012. A test for Mycoplasma pneumoniae (Walking
+Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis (Whooping Cough), which is expected to be available for sale
+in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for
+illumi gene ® also includes two sexually-transmitted disease assays, expected to be available
+for sale in the U.S. during the first half of fiscal 2014. 
+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); Streptococcus bacterial infections (both Group A and Group B Strep); 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. 
+- 5 -
+Table of Contents 
+In particular, the three tests we currently offer on our illumi gene ® platform – C. difficile , Group A Strep and Group B Strep – are expected to drive the majority
+of growth in fiscal 2013. 
+C. difficile 
+Clostridium difficile ( C. difficile ) is a bacteria found in the gut that can cause serious damage to the colon
+and even death, primarily in hospital patients using antibiotics. It is the most common infection acquired by patients while they are in the hospital. Annually in the U.S., an estimated 8 million C. difficile tests are performed. This
+hospital acquired infection occurs when antibiotics disrupt other bacteria that normally prevent the colonization of C. difficile . Rapid, accurate diagnosis, followed by appropriate treatment is essential to improving patient outcomes
+and reducing the overall cost of care. Our strong line of C. difficile tests, including our illumi gene ® C. difficile molecular test, provide the most comprehensive and accurate testing options for this serious and life threatening infection. 
+Group A Strep 
+Group A Streptococcus is the bacterium commonly found in the throat which causes strep throat (acute pharyngitis). Pharyngitis is diagnosed in approximately 11 million patients in the U.S.
+each year. Our illumi gene ® Group A Strep test, the only FDA-cleared molecular Strep A test
+in the U.S. market, provides results in less than one hour, detects more positives than culture methods and is ideal for early diagnosis and proper patient management of the common, sometimes serious disease. In addition to front line testing in
+hospital and clinical settings, rapid strep throat tests performed in physician offices in the U.S. that are negative are routinely sent on to hospital and reference labs for confirmation testing, usually by culture methods that take up to 48 hours
+to run. With results in less than one hour and a 53% increase in the detection of positives,
+illumi gene ® Group A Strep provides improved patient care over culture methods. 
+Group B Strep 
+Each year in the U.S. there are over 4 million babies born. Appropriately testing women in the late stages of pregnancy for the presence of Group B Streptococcus is critical to the health of
+the baby. Without proper treatment during labor, GBS infection can lead to sepsis, pneumonia and even meningitis, and lead to hearing and vision loss. Testing with our illumi gene ® GBS improves accuracy by up to 29% over traditional culture methods, increasing the likelihood of improved outcomes and a healthy baby. 
+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. 
+- 6 -
+Table of Contents 
+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 overall treatment expense. In addition, these pressures have led
+to a major consolidation among reference laboratories and the formation of multi-hospital group purchasing organizations and integrated delivery networks 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 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 2012, 2011 and 2010: Cardinal Healthcare Corporation and Fisher Scientific. Our sales to Cardinal were approximately $33,000, $30,000 and $34,000 during fiscal
+2012, 2011 and 2010, respectively. Our sales to Fisher were approximately $20,000, $18,000 and $18,000 during fiscal 2012, 2011 and 2010, respectively. 
+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, integrated delivery networks and major reference laboratories to stabilize pricing. 
+Clostridium difficile 
+C. difficile , a serious hospital
+acquired bacterial infection, is our largest product family, generating approximately $36,000 in global sales for fiscal 2012, or 21% growth from fiscal 2011. 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 two years. Sales of this product were approximately $22,000, $9,000 and $500 in fiscal 2012, 2011 and 2010, respectively. Approximately 950 clinical laboratories are
+current customers using our illumi gene ® platform, which now includes three tests (see below
+for a discussion of our second and third tests for Group B and Group A Strep). While the majority of these customers have adopted the C. difficile assay, a growing number of customers are purchasing multiple assays for the platform. Our
+illumi gene ® molecular C. difficile product has restored the C. difficile 
+product family to positive sales growth, 21% and 10% during each of the last two fiscal years. 
+- 7 -
+Table of Contents 
+Our major competitors in this product family are Cepheid and Becton Dickinson (molecular) and Alere
+(immunoassay). We believe that we have two principal advantages versus our competition. First, our molecular 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
+FDA clearance of our common antigen C. difficile products – Premier C. difficile GDH received FDA clearance in May 2011, and Immuno Card C. difficile GDH received FDA clearance in December 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. These advantages, along with the performance features of the products in our C. difficile portfolio, give us a compelling product offering for any hospital testing method preference. 
+During fiscal 2012, we received FDA clearance for our second and third molecular tests for the illumi gene ® molecular platform – illumi gene ® GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A Streptococcus ) in September 2012. As alluded to above, over 100 customers are now purchasing two assays for the
+illumi gene ® platform – the majority being C. difficile and GBS – with
+revenue generated by our GBS test approximating $1,100 during fiscal 2012. In addition, with the recent introduction of the Group A Strep test, there are a growing number of customers adopting all three of our molecular-platform assays. A test for
+Mycoplasma pneumoniae was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis , which is expected to be available for sale in the U.S. during the
+third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also
+includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. 
+In
+addition to Cepheid, Becton Dickinson and Alere, other competitors have begun to enter the C. difficile market. During fiscal 2012, Quest Diagnostics and Great Basin received FDA clearance for a molecular C. difficile test and Quidel
+received CE marking approval for a molecular C. difficile test for sale within the European Union. Although we believe that the breadth of our C. difficile product offerings and our low cost molecular platform provide key advantages to
+the offerings of our competitors, selling prices may come under pressure as more competitors enter the market. 
+- 8 -
+Table of Contents 
+Foodborne 
+Our foodborne product family achieved approximately $21,000 in global sales for fiscal 2012, or growth of 13%, 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 annual stool cultures that are tested 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. 
+While historically the primary competition for our
+foodborne products has been laboratory culture methods, one of our competitors, Alere, has recently cleared through the FDA a shiga toxin test that will compete with our EHEC test. 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 $24,000 in global sales for 2012, or 7% 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 are test-method alternatives, serology and urea breath, and the prescription of symptom-relieving medications. 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 people suffering from peptic
+ulcers and 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 3% sales growth for fiscal 2012 for our European Diagnostics segment, excluding the effect of currency translation. 
+- 9 -
+Table of Contents 
+Research and Development 
+Our U.S. Diagnostics 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 segment for fiscal 2012, 2011 and 2010 were approximately $8,000, $7,000 and $6,000, 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 diagnostic testing platform, illumi gene ® , introduced in markets around the world over two years 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. Our illumi gene ® C. difficile assay, the initial assay introduced for the illumi gene ® platform, 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, throughout fiscal 2011 and fiscal 2012, we continued
+with the development of additional tests for the illumi gene ® molecular platform, receiving
+FDA clearance for our second and third molecular tests for the platform – illumi gene ® 
+GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A
+Streptococcus ) in September 2012. A test for Mycoplasma pneumoniae (Walking Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal
+2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis
+(Whooping Cough), which is expected to be available for sale in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. 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 TM and TRU HSV 1 and 2 IgG TM the latest additions to the TRU line of products. Legionella was
+launched in foreign markets during the fourth quarter of fiscal 2011, and became available in the U.S. market during the second quarter of fiscal 2012, while TRU HSV 1 and 2 IgG TM were registered for sale in Europe during September 2012. 
+- 10 -
+Table of Contents 
+Manufacturing 
+Our immunodiagnostic 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 antibodies and polyclonal antibodies, plus 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 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 segment. Sales of these products are as
+follows: 
+Product/Technology Family 
+Number of 
+products 
+% of consolidated sales 
+2012 
+2011 
+illumigene ® 
+3 
+13 
+% 
+6 
+% 
+H. pylori 
+2 
+13 
+% 
+13 
+% 
+Respiratory 
+3 
+2 
+% 
+2 
+% 
+Other 
+6 
+1 
+% 
+1 
+% 
+Total patented products 
+14 
+29 
+% 
+22 
+% 
+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. 
+- 11 -
+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, 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 13485:2003. 
+Medical Device Tax 
+Included
+within the U.S. government’s comprehensive healthcare reform legislation, enacted during 2010, was the establishment of a 2.3% excise tax on the sales of medical devices beginning in calendar 2013. We currently anticipate that this legislation
+will result in an excise tax for our company of approximately $2,000 in fiscal 2013. At the present time it is believed that little, if any, of this cost can be passed on to customers. 
+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. 
+European Diagnostics Segment 
+Our
+European Diagnostics segment’s business focuses on the sale and distribution of diagnostic test kits, manufactured both by our U.S. Diagnostics segment and by third-party vendors. Approximately 85% of third-party sales for fiscal 2012 for this
+segment were products purchased from our U.S. Diagnostics segment. Third-party sales for this segment were approximately $23,000, $24,000 and $24,000 for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, the European
+Diagnostics segment had approximately 40 employees. Our European Diagnostics segment’s sales and distribution network consists of direct sales forces in Australia, Belgium, France, Holland and Italy, and independent distributors in other
+European countries, Africa and the Middle East. The European Diagnostics segment maintains a distribution center near Milan, Italy. The primary markets and customers for this segment are hospitals and reference laboratories. 
+- 12 -
+Table of Contents 
+The European Diagnostics segment’s functional currency is the Euro. The translation of Euros into U.S.
+dollars is subject to exchange rate fluctuations. 
+Life Science Segment 
+Overview 
+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 companies, as well as contract development and manufacturing services
+under clinical cGMP conditions. Third-party sales for this segment were approximately $43,000, $38,000 and $27,000 for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, our Life Science segment had approximately 180 employees.
+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 companies. During fiscal 2012, 19% 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. 
+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 approximately $17,000 and $15,000 in sales for fiscal 2012 and 2011,
+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. Revenues for our 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 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 $2,000, $3,000 and $2,000 in fiscal 2012, 2011 and 2010, respectively. 
+- 13 -
+Table of Contents 
+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 completed the consolidation of manufacturing operations into our Memphis, Tennessee facility during the third fiscal quarter of 2012. Total costs to complete the consolidation
+of facilities approximated $2,100, consisting of fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar items. During the fourth quarter of 2011, we recognized approximately $1,100 of these costs, and
+recognized the remaining $1,000 during the first three quarters of fiscal 2012. 
+Products, Markets and Growth Strategies
+Our Life Science 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. 
+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 segment for fiscal 2012, 2011 and 2010 were approximately $2,000, $3,000 and $2,000, respectively. This research and development organization is
+heavily involved in vaccine development and production activities for our cGMP facility and development of new molecular components. 
+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. 
+- 14 -
+Table of Contents 
+The Meridian Life Science facilities are ISO 9001:2000 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. 
+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. 
+- 15 -
+Table of Contents 
+International Markets 
+International markets are an important source of revenue and future growth opportunities for all of our segments. For all segments combined, international sales were approximately $54,000 or 31% of
+consolidated fiscal 2012 sales, $53,000 or 33% of consolidated fiscal 2011 sales and $43,000 or 30% of consolidated fiscal 2010 sales. We expect to continue to look to international markets as a source of new revenues and growth in the future. See
+Notes 6 and 8 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.

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+Item 13 Certain Relationships and Related Transactions, and Director Independence 
+75

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+ITEM 9A. 
+CONTROLS AND PROCEDURES 
+As of September 30, 2012, 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, 2012. 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, 2012. 
+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.”

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+TRANSACTIONS WITH RELATED PERSONS 
+During fiscal 2012, 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 2012 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.

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+0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2001-03-30,2000-12-31,2001-03-30T05:00:00.000Z,0000950148-01-000493,v71055e10-k.txt,FORM 10-K,210038,0,0,https://www.sec.gov/Archives/edgar/data/910521/000095014801000493/v71055e10-k.txt,https://www.sec.gov/Archives/edgar/data/910521/000095014801000493/,2000,2000,1

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+ITEM 1. BUSINESS
+GENERAL
+The Company builds niche products into global lifestyle brands by designing
+and marketing innovative, functional and fashion-oriented footwear, developed
+for both high performance outdoor activities and everyday casual lifestyle use.
+Currently, the Company offers three primary product lines under the following
+recognized brand names: Teva(R) -- high-performance sports sandals and rugged
+outdoor and casual footwear; Simple(R) -- innovative shoes that combine the
+comfort elements of athletic footwear with casual styling; and Ugg(R) --
+authentic sheepskin boots and other footwear. Teva is a registered trademark of
+Mark Thatcher, the inventor and licensor of Teva Sport Sandals. Simple and Ugg
+are registered trademarks of the Company and its subsidiaries. All of the
+Company's footwear possess the common features of high quality with a primary
+focus on functionality and comfort. In 2000, the Company sold approximately
+4,265,000 pairs of footwear. Revenues from sales (domestic and international) of
+Teva products have been $79,732,000, $80,963,000 and $68,870,000 during 2000,
+1999 and 1998, representing 70.1%, 72.9% and 66.5% of net sales, respectively.
+For financial information regarding the Company's industry segments, see note 9
+to the accompanying consolidated financial statements.
+MARKET OVERVIEW
+The casual, outdoor and athletic footwear market is comprised of footwear
+worn for casual everyday use and for outdoor and athletic activities such as
+hiking, boating, basketball, tennis, fitness and jogging. The market for such
+footwear has grown significantly during the last decade. The Company believes
+that the principal reasons for the growth in sales of such footwear have been
+the growing acceptance of athletic footwear as casual wear and the growing
+acceptance of casual wear, in general, including the increasing casualization of
+the workplace, increasingly active consumer lifestyles and the growing emphasis
+on comfort.
+Over the last few years the overall footwear market has seen significant
+growth of the outdoor segment as well as the growing emphasis on comfort.
+Outdoor footwear includes shoes, boots and sandals for outdoor recreational
+activities such as hiking, river rafting, camping and casual wear. Companies
+engaged in the outdoor footwear market include Nike, Adidas, Timberland,
+Columbia and Salomon. The Company believes that the growth in outdoor footwear
+is driven by several factors including a general shift in consumer preferences
+and lifestyles to include more outdoor, sports and recreational activities such
+as hiking and camping. In addition, the increasing popularity of extreme sports,
+including skateboarding, snowboarding, kayaking and river rafting, among others,
+has created an additional emphasis and awareness of outdoor activities and
+lifestyles. As consumers engage in outdoor activities, they typically desire
+footwear specifically designed for these purposes, yet they demand the same
+level of quality and high performance that they have come to expect from
+traditional athletic footwear. In addition, more consumers are turning to an
+emphasis on casual and comfortable footwear and apparel, including the trend
+toward casual workplaces. The Company believes that its products have benefited
+from this growing trend and that its footwear addresses consumers' demands for
+highly functional footwear that is durable as well as comfortable and
+fashionable.
+The casual, outdoor and athletic footwear markets are generally
+characterized by a high level of recognition of brand names, logos and
+trademarks. Unique and identifying features create brand awareness among
+consumers and allow a favorable reputation to be transferred to new products.
+The manufacture of casual, outdoor and athletic footwear is typically conducted
+overseas through independent manufacturers. Casual and athletic footwear is
+distributed through athletic footwear stores, department stores and specialty
+retailers. Outdoor footwear is generally distributed through these channels as
+well but is to a large extent distributed through outdoor specialty retailers.
+Retailers may purchase footwear on a "futures" basis (orders placed at a
+discount in advance of a season) or an "at once" basis (orders placed and filled
+immediately). Futures orders allow the Company to more accurately predict its
+manufacturing and sourcing needs. By placing futures orders, retailers are also
+able to reduce the risk that the Company will be unable to meet their
+3
+4
+delivery requirements. Retailers are generally encouraged to purchase goods on a
+futures basis by receiving discounts or special payment terms not otherwise
+available.
+RISK FACTORS
+This Annual Report on Form 10-K contains a variety of forward-looking
+statements within the meaning of the Private Securities Litigation Reform Act of
+1995 including forward-looking statements in this "Risk Factors" section, the
+"Outlook" section, the last paragraph under "Liquidity and Capital Resources",
+the discussion under "Seasonality" and other statements in this Annual Report.
+These forward-looking statements relate to expectations regarding sales and
+earnings per share, expectations regarding the Company's liquidity, the
+potential impact of a non-renewal of the Teva license due to the Company's
+potential failure to meet required sales minimums in 2004 or 2008, the potential
+impact of certain litigation, the potential impact of economic factors and
+conditions, the potential impact of the Company's dependence on foreign
+manufacturers, the potential impact of competition, the potential impact of the
+Company's dependence upon key personnel, the potential impact of weather
+conditions, the potential impact of the possible acquisition of Teva and the
+impact of seasonality on the Company's operations. These forward-looking
+statements are based on the Company's expectations as of March 2001. No one
+should assume that any forward-looking statement made by the Company will remain
+consistent with the Company's expectations after the date the forward-looking
+statement is made. The Company disclaims any obligation to update any such
+factors or to publicly announce the results of any revisions to any of the
+forward-looking statements contained in this Annual Report on Form 10-K. These
+forward-looking statements involve known and unknown risks, uncertainties and
+other factors which may cause the actual results, performance or achievement of
+the Company, or industry results, to differ materially from any future results,
+performance or achievements expressed or implied by such forward-looking
+statements. The factors listed below represent certain important factors the
+Company believes could cause such results to differ. These factors are not
+intended to represent a complete list of the general or specific risks that may
+affect the Company. Other risks may be significant, presently or in the future,
+and the risks set forth below may affect the Company to a greater extent than
+indicated.
+Teva License Agreement
+The Company has been selling its Teva line of sport sandals and other
+footwear since 1985 pursuant to various exclusive licensing arrangements with
+Mark Thatcher, the inventor of the Teva sport sandal and owner of the Teva
+patents and trademark. In June 1999, the Company signed a new exclusive footwear
+license agreement with Mr. Thatcher. The agreement became effective January 1,
+2000 and continues through December 31, 2004. If minimum annual sales levels are
+achieved in 2004, the license automatically renews for an additional four years,
+through December 31, 2008. If minimum annual sales levels are achieved in 2008,
+the license automatically renews again through December 31, 2011. However, if
+the minimum annual sales levels are not achieved in 2004 or 2008, the license
+expires and the Company will no longer be able to sell Teva footwear. These
+required minimum annual sales levels exceed the annual sales levels achieved by
+the Company to date. Also, Mr. Thatcher may terminate the licensing agreement if
+the Company breaches its obligations under the agreement. Sales of Teva footwear
+and apparel accounted for approximately 70.1%, 72.9% and 66.5% of the Company's
+net sales for fiscal years 2000, 1999 and 1998, respectively. The termination of
+the license would have a material adverse effect on the Company's results of
+operations.
+Brand Strength; Changes in Fashion Trends
+The Company's success is largely dependent on the continued strength of the
+Teva, Simple and Ugg brands (collectively, "Deckers Brands") and on its ability
+to anticipate the rapidly changing fashion tastes of footwear customers and to
+provide merchandise that appeals to their preferences in a timely manner. There
+can be no assurance that consumers will continue to prefer the Deckers Brands or
+that the Company will respond in a timely manner to changes in consumer
+preferences or that the Company will successfully introduce new models and
+styles of footwear. Achieving market acceptance for new products will also
+likely require substantial marketing and product development efforts and the
+expenditure of significant funds to
+4
+5
+create consumer demand. Decisions with respect to product designs often need to
+be made many months in advance of the time when consumer acceptance can be
+determined. As a result, the Company's failure to anticipate, identify or react
+appropriately to changes in styles and features could lead to, among other
+things, excess inventories and higher markdowns and lower gross margins due to
+the necessity of providing discounts to retailers. Conversely, failure by the
+Company to anticipate consumer demand could result in inventory shortages, which
+can adversely affect the timing of shipments to customers, negatively impacting
+retailer and distributor relationships and diminishing brand loyalty. The
+failure to introduce new products that gain market acceptance would have a
+material adverse effect on the Company's business, financial condition and
+results of operations, and could adversely affect the image of the Deckers
+Brands.
+Inventory Risk
+The footwear industry has relatively long lead times for design and
+production of product and, thus, the Company must commit to production tooling
+and to production in advance of orders. In addition, the industry is highly
+subject to fashion risks and changes in consumer preferences. If the Company
+fails to accurately forecast consumer demand, or if there are changes in
+consumer preference or market demand after the Company has made such production
+commitments, the Company may encounter difficulty in filling customer orders or
+in liquidating excess inventory, which may have an adverse effect on the
+Company's sales, margins and brand image.
+Quality and Performance
+In response to consumer demand, the Company also uses certain specialized
+materials in its footwear. The failure of products using such materials to
+perform to the Company's specifications or customer satisfaction could result in
+a higher rate of customer returns and could adversely affect the image of the
+Deckers Brands, which could have a material adverse effect on the Company's
+business, financial condition and results of operations.
+Economic Cyclicality and Footwear Retailing
+The footwear industry historically has been subject to cyclical variation
+and can be negatively impacted by decreased consumer spending or softness in the
+retail market. This cyclicality could adversely affect the Company's business.
+In addition, various retailers, including some of the Company's customers, have
+experienced financial difficulties during the past several years, thereby
+increasing the risk that such retailers may not pay for the Company's products
+in a timely manner. No assurance can be given that the Company's bad debt
+expense will not increase relative to net sales in the future. Any significant
+increase in the Company's bad debt expense relative to net sales would adversely
+impact the Company's net earnings and cash flow and could affect the Company's
+ability to pay its obligations as they become due.
+Dependence on Foreign Manufacturers
+Virtually all of the Deckers footwear products are manufactured by third
+party suppliers in the Far East, Australia and New Zealand, with the vast
+majority of production occurring in China. There can be no assurance that the
+Company will not experience difficulties with such manufacturers, including
+reduction in the availability of production capacity, errors in complying with
+product specifications, inability to obtain sufficient raw materials,
+insufficient quality control, failure to meet production and delivery deadlines
+or increases in manufacturing costs. In addition, if the Company's relationship
+with any of its manufacturers were to be interrupted or terminated, alternative
+manufacturing sources will have to be located. The establishment of new
+manufacturing relationships involves numerous uncertainties, and there can be no
+assurance that the Company would be able to obtain alternative manufacturing
+sources on terms satisfactory to it. If a change in its suppliers becomes
+necessary, the Company would likely experience increased costs, as well as
+substantial disruption and a resulting loss of sales.
+Foreign manufacturing is subject to a number of risks, including work
+stoppage, transportation delays and interruptions, political instability,
+foreign currency fluctuations, changing economic conditions, expropriation,
+5
+6
+nationalization, imposition of tariffs, import and export controls and other
+non-tariff barriers (including quotas), restrictions on the transfer of funds,
+environmental regulation and other changes in governmental policies. The Company
+may also experience general risks associated with managing operations
+effectively and efficiently from a far distance and understanding and complying
+with local laws, regulations and customs. There can be no assurance that such
+factors will not materially adversely affect the Company's business, financial
+condition and results of operations.
+Products manufactured overseas and imported into the United States and
+other countries are subject to duties collected by the Customs Service in the
+applicable country. Customs information submitted by the Company is subject to
+review by the Customs Service. The Company is unable to predict whether
+additional customs duties, quotas or restrictions may be imposed on the
+importation of its products in the future. The enactment of any such duties,
+quotas or restrictions could result in increases in the cost of such products
+generally and might adversely affect the sales or profitability of the Company.
+In 1997, the European Commission enacted anti-dumping duties of 49.2% on
+certain types of footwear imported into Europe from China and Indonesia. Dutch
+Customs has issued an opinion to the Company that certain popular Teva styles
+are covered by this anti-dumping duty legislation. The Company has been
+contesting the opinion and is working with Dutch Customs to resolve the
+situation. The Company has since obtained, and is using, alternative sourcing
+for the potentially impacted products from sources outside of China in an effort
+to reduce the potential risk in the future. In the event that Dutch Customs
+makes a final determination that the anti-dumping provisions are applicable, the
+Company would have an exposure for prior unpaid anti-dumping duties during 1997
+of approximately $400,000. Recently, the European Commission added an
+explanatory note to the anti-dumping legislation which effectively strengthened
+its position. As a result of this recent development, the Company recorded a
+$400,000 charge to selling, general and administration expenses to accrue for
+the potential loss on this matter during the year ended December 31, 2000.
+Competition and Infringing Products
+The outdoor and footwear industries are both highly competitive, and the
+recent growth in the markets for sports sandals and casual footwear has
+encouraged the entry of many new competitors into the marketplace as well as
+increased competition from established companies. Many of the Company's
+competitors have substantially greater financial, distribution and marketing
+resources, as well as greater brand awareness in the footwear market, than the
+Company. In addition, the general availability of offshore manufacturing
+capacity allows rapid expansion by competitors and new market entrants. The
+Company believes that it has been able to compete successfully because of the
+brand recognition, quality and selective distribution of its products. From time
+to time, the Company also discovers products in the marketplace that infringe
+upon patent and trademark rights held by or licensed to the Company. Under the
+Company's licensing arrangement with the licensor of the Teva products, Mark
+Thatcher, Mr. Thatcher initially may bring proceedings to halt infringement of
+the Teva patents and trademark. If Mr. Thatcher elects not to bring such
+proceedings, the Company may initiate such proceedings, with the prior written
+consent of Mr. Thatcher. To date, Mr. Thatcher has vigorously pursued
+infringements following discovery. To the extent permitted in its agreement with
+Mr. Thatcher, the Company will vigorously pursue infringements in the event Mr.
+Thatcher elects not to do so. However, if Mr. Thatcher or the Company is
+unsuccessful in challenging a third party's products on the basis of patent and
+trademark infringement, continued sales of such competing products by third
+parties could adversely impact the Company's business, financial condition and
+results of operations. See "Business -- Competition" and "Business -- Legal
+Proceedings."
+Dependence on Key Personnel
+The Company's continued success will depend upon its ability to retain
+Douglas B. Otto, its Chairman of the Board and Chief Executive Officer, Peter
+Benjamin, its President and Chief Operating Officer and a core group of key
+executive officers and employees. Mr. Otto and Mr. Benjamin have employment
+agreements with the Company through 2001 and 2002, respectively. Mr. Otto's
+agreement prohibits him from competing with the Company for one year following
+termination. However, none of the other executive officers is subject to
+6
+7
+agreements that restrict his or her ability to compete with the Company
+following termination of employment. The Company believes that its future
+success will depend in large part on its ability to attract and retain highly
+skilled personnel. Competition for such personnel is intense, and there can be
+no assurance that the Company will be successful in attracting and retaining
+such personnel. The loss of certain key employees or the Company's inability to
+attract and retain other qualified employees could have an adverse impact on the
+Company's business.
+Intellectual Property
+The Company believes that its trademarks, technologies and designs are of
+great value. From time to time, the Company may be the subject of litigation
+challenging its ownership of certain intellectual property. Loss of the
+Company's Simple or Ugg trademark rights or the ability to use the licensed Teva
+trademarks could have a serious impact on the Company's business. Because of the
+importance of such intellectual property rights, the Company's business is
+subject to the risk of counterfeiting, parallel trade or intellectual property
+infringement.
+Economic Factors
+The Company's business is subject to economic conditions in the Company's
+major markets, including, without limitation, recession, inflation, general
+weakness in retail markets and changes in consumer purchasing power and
+preferences. Adverse changes in such economic factors could have a negative
+effect on the Company's business.
+Weather Conditions
+Sales of the Company's products, particularly those under the Teva and Ugg
+lines, are very sensitive to weather conditions. Extended periods of unusually
+cold weather during the spring and summer could adversely impact demand for the
+Company's Teva line. Likewise, unseasonably warm weather during the fall and
+winter months could adversely impact demand for the Company's Ugg product line.
+Substantial Ownership of the Company
+At December 31, 2000, Douglas B. Otto and all executive officers and
+directors of the Company, as a group, owned approximately 35.9% and 46.7%,
+respectively, of the outstanding shares of the Company's Common Stock. Due to
+such ownership position, Mr. Otto, whether acting alone or together with one or
+more of the other executive officers of the Company, would likely be able to
+control the affairs and policies of the Company and would likely be able to
+elect a sufficient number of directors to control the Company's Board of
+Directors and to approve or disapprove any matter submitted to a vote of the
+stockholders. The ownership positions of Mr. Otto and the executive officers of
+the Company, as a group, together with the anti-takeover effects of certain
+provisions in the Delaware General Corporation Law (the "DGCL"), in the
+Company's Certificate of Incorporation and Bylaws, and in the Company's
+shareholder rights plan would likely have the effect of delaying, deferring or
+preventing a change in control of the Company. Such factors could have a
+negative effect on the market price of the Company's Common Stock.
+The Company adopted a shareholder rights plan in 1998 pursuant to a
+shareholder rights agreement (the Rights Agreement) to protect stockholders
+against unsolicited attempts to acquire control of the Company that do not offer
+what the Company believes to be an adequate price to all stockholders. As part
+of the plan, the Board of Directors of the Company declared a dividend of one
+preferred share purchase right (a Right) for each outstanding share of common
+stock of the Company (the Common Shares).
+The dividend was payable to stockholders of record on December 1, 1998 (the
+Record Date). In addition, one Right shall be issued with each Common Share that
+becomes outstanding (i) between the Record Date and the earliest of the
+Distribution Date, the Redemption Date and the Final Expiration Date (as such
+terms are defined in the Rights Agreement) or (ii) following the Distribution
+Date and prior to the Redemption Date or Final Expiration Date, pursuant to the
+exercise of stock options or under any employee plan or arrangement or upon the
+exercise, conversion or exchange of other securities of the Company, which
+options
+7
+8
+or securities were outstanding prior to the Distribution Date, in each case upon
+the issuance of the Company's common stock in connection with any of the
+foregoing. Each Right entitles the registered holder to purchase from the
+Company one one-hundredth of a share of Series B Junior Participating Preferred
+Stock, par value $0.01 per share (the Preferred Shares), of the Company, at a
+price of $50.00, subject to adjustment.
+The rights have no voting power and expire on November 11, 2008. The rights
+may be redeemed by the Company for $.01 per right until the right becomes
+exercisable.
+BUSINESS STRATEGY
+Management's mission is to build niche products into global brands and its
+business strategy is to offer diverse lines of footwear that emphasize
+functionality, quality, comfort and technical performance tailored to a variety
+of activities and demographic groups. Specifically, the Company's business
+strategy emphasizes the following elements:
+Introduce New Products under Existing Brands. The Company intends to
+leverage consumer recognition of its existing brands by developing and
+introducing additional innovative footwear products that satisfy the Company's
+high standards of practicality, comfort and quality. The Company believes the
+introduction of additional products at a variety of price points, such as the
+range of new models in its Teva, Simple and Ugg lines which were offered in the
+Company's 2000 product offerings, have broadened the Company's customer base,
+further diversified the Company's product lines, and helped reduce the effects
+of seasonality on the Company's sales. See "Management's Discussion and Analysis
+of Financial Condition and Results of Operations -- Seasonality." In Spring
+2000, the Company successfully launched the Trail Wraptor and Wraptor Technology
+into the running market and then in the fall of 2000 entered the hiking market
+with the Summit series consisting of the Challenger, North Rim, and Quest models
+which utilize the new Teva Wraptor Technology. The Quest quickly gained momentum
+in the hiking market at key retail points for the Company. Expanding on the
+acceptance of the Trail Wraptor running sandal and the Quest, the Company
+launched the Road Wraptor, Women's Wraptor (runner) and Women's Quest hiker in
+2001. The Company will also make a commitment to the women's market by expanding
+its line of women's fitness walking sandals with the Kinetic Circuit, the
+improved Pretty Rugged Nylon and expanded Leather Casual category. Also, the
+Company is expanding its offering of water sport specific products in the XPD
+Hydro category with the newly organized Team Teva, an elite squad of the world's
+best male and female whitewater athletes. The Company will use Team Teva's
+knowledge to expand its technical offerings in this category. As the Company
+moves to the future, the Company plans to strengthen existing categories and
+expand into new channels of distribution. The 2000 and 2001 Simple product lines
+target consumers in the sixteen to twenty-five year old youth market. The line
+focuses on lifestyle comfort based products such as clogs, sandals, casuals and
+non-performance sneakers that are priced affordably. In 2000, the Company
+expanded its Ugg product line beyond its heritage boots and slippers by adding a
+variety of new, more streetwise and fashion-oriented products including clogs,
+chukka boots, and apres ski boots, as well as cold weather-resistant boots with
+water resistant leathers.
+Pursue Additional Market Opportunities. Management intends to continue to
+consider new markets for its existing line of products. For the years ended
+December 31, 2000, 1999 and 1998 international net sales totaled $31,135,000,
+$28,859,000 and $24,254,000, representing 27.4%, 26.0% and 23.4% of net sales,
+respectively. Management believes that significant opportunities exist to market
+its products abroad and intends to selectively expand its distribution
+worldwide. To bolster these efforts, the Company has opened a Netherlands office
+to service the European market and an office in Japan to service the Asian
+market.
+Acquire or Develop New Brands. The Company intends to continue to focus on
+identifying and building new brands for growth. The Company has been successful
+in the past in taking the concepts of entrepreneurs for innovative, fashionable
+footwear targeted at niche markets and building the products into viable brands
+and intends to continue to identify concepts for potential future niche products
+which have the potential of developing into successful brands or product lines.
+8
+9
+PRODUCTS
+The Company currently offers three primary product lines: (1) Teva sport
+sandals and footwear; (2) Simple casual footwear; and (3) Ugg sheepskin
+footwear. Each of these lines, as well as individual models within these lines,
+is designed to appeal to various demographic groups. The Company's footwear
+products emphasize function, comfort and technical performance, and are suitable
+for a variety of demanding outdoor and athletic activities, as well as casual
+and everyday use. The Company's products are designed and marketed to promote a
+high level of brand name recognition and consumer appeal by combining functional
+and creative designs with quality materials and construction. The Teva footwear
+and the Simple footwear lines are generally previewed twice per year, once in
+the summer for deliveries that commence in the fall and once in the winter for
+the following back to school and fall season. The Ugg line of sheepskin footwear
+is generally previewed in the winter with most deliveries occurring in the
+following fall and winter. The following sets forth a summary description of
+each of the Company's primary product lines:
+Teva Sport Sandals and Footwear. The Teva sport sandal is one of the first
+sport sandals to be developed and is popular among outdoor enthusiasts and the
+general public. The Company licenses the Teva patents and trademark from Mark
+Thatcher, a professional river guide who invented the Teva sport sandal. The
+terms of such licenses run through 2011, subject to achieving certain minimum
+sales levels beginning in 2004. Certain styles of the Teva sport sandal
+incorporate a proprietary strapping configuration ideally suited for outdoor
+activities such as hiking, boating and river rafting. This strapping system
+consists of high-quality nylon webbing or leather, is fully adjustable, and
+holds the foot firmly to the sandal's durable, cellular rubber, molded EVA,
+polyurethane or leather footbed. Teva sport sandals are extremely durable and
+many of the styles are water resistant. The Spring 2001 line includes more than
+100 different models designed for a variety of uses. The Wilderness Series, a
+category of sandals built for high performance and rugged outdoor use, includes
+16 models of men's and women's sandals. The Utility Series which includes
+several of the most popular styles, has 11 styles that combine elements of sport
+performance with casual everyday comfort. The Surf Series includes 11 styles of
+slides and thongs offered in a variety of materials including leather, nylon,
+suede and airmesh. The Spring 2001 line includes an expanded variety of
+Precision sport sandals and footwear, including the newly-introduced Trail
+Wraptor and Road Wraptor performance running sandals, a collection of Circuit
+walking sandals, the Marine collection of boating and deck footwear, the Hydro
+collection of water shoes and booties, and the newly introduced Summit
+collection of hikers incorporating the Wraptor technology. Continuing on the
+success of recent years, the Spring 2001 line includes 25 styles of men's and
+women's leather casuals, including a variety of sandals, slides and clogs. The
+Spring 2001 Children's category has been expanded to include 15 different styles
+of nylon and leather sandals. The domestic manufacturer's suggested retail
+prices for adult sizes of Spring 2001 Teva footwear products range from $19.95
+to $129.95.
+Simple Casual Footwear. The Simple line consists of casual shoes that
+combine the comfort and function of athletic footwear construction with the
+simple, understated styling of "back-to-basics," casual lifestyle footwear. The
+Simple product line includes a variety of comfortable, fashionable, basic shoes
+for men and women including sneakers, sandals, slides, clogs and leather
+casuals. The Spring 2001 collection reflects the Company's emphasis on a younger
+target consumer in the sixteen to twenty-four year old age group. For Spring
+2001, Simple is offering a total of 69 models including 32 styles for men and 37
+for women. The Spring 2001 line includes 21 styles of sneakers with leather and
+suede uppers, 20 styles of sandals and thongs and 28 styles of leather casual
+and clogs in a variety of colors. The domestic manufacturer's suggested retail
+prices for adult sizes for the Spring 2001 line range from $29.99 to $99.99.
+Ugg Sheepskin Footwear. Ugg is a line of authentic sheepskin footwear,
+popularized in Australia in the 1960's and 1970's. These sheepskin boots,
+slippers and other footwear styles have high-grade fleece linings which act as a
+natural insulator, keeping feet warm and comfortable. The 2001 Ugg line offers a
+range of 52 models of casual, fashionable and streetwise styles in various
+colors, including several new styles of shoes and boots for men and women. The
+2001 line includes several styles with new innovative fashionable uppers and
+several styles with water resistant leather treatments to address more inclement
+and cold weather conditions. The 2001 line also includes products designed for
+more fashionable and functional everyday use in both warm and cold climates,
+including several new styles in its successful Ultra, Birch, Solvang,
+Adirondack,
+9
+10
+Fluff and Slipper collections. The domestic manufacturer's suggested retail
+prices for adult sizes for the Ugg line range from $50.00 to $275.00.
+MARKETING AND DISTRIBUTION
+The Company's products are currently distributed throughout the United
+States by a network of approximately 41 independent sales representatives,
+organized geographically, who make sales, visit retail stores to train personnel
+and review sales of the Company's footwear on a periodic basis. Beginning in
+2000, the Company added a separate dedicated independent sales force for the
+Simple and Ugg brands as these products are sold through different distribution
+channels and are targeted toward a different consumer than the Company's Teva
+brand. The Company's sales managers for each brand manage their networks of
+representatives, recruit experienced sales representatives in the industry and
+coordinate sales to national accounts. The Company currently sells its products
+internationally through independent distributors. The Company's goal is to
+promote retail sales of its products at attractive profit margins for its
+accounts through selective distribution and marketing, targeted toward distinct
+groups of consumers. As a result of this approach, the Company's accounts have a
+strong incentive to devote greater selling space to the Company's products, and
+the Company is better able to assess consumer preferences, the future ordering
+needs of its customers and inventory requirements.
+The Company's principal domestic customers include specialty retailers,
+upscale department stores, outdoor retailers and athletic footwear stores which
+market products consistent with the Company's standards and, in the case of
+Teva, have been approved by the Company's licensor. The Company's five largest
+customers accounted for approximately 20.4% of the Company's net sales for the
+year ended December 31, 2000, compared to 18.1% for the year ended December 31,
+1999. No single customer accounted for more than 10% of the Company's net sales
+for the years ended December 31, 2000 or 1999.
+In order to encourage accounts to place orders early in the season the
+Company has continued with a preseason discount program under which accounts are
+offered discounts on preseason orders placed. The Company's strategy is to
+emphasize this "futures" program, as compared to "at once" sales, in order to
+stabilize its supply arrangements, reduce the risk of customer cancellations and
+to benefit from the significant positive impact of the program on the Company's
+inventory costs, sourcing schedule and allocation of marketing resources.
+Consistent with prior years, the Company offered an early delivery program for
+the spring 2001 season to be delivered the fourth quarter of 2000. This early
+delivery program allows the Company to reduce the impact of peak warehouse
+inventory levels during the spring and provides retailers the opportunity to
+have earlier sell through, lengthening the retail selling season and increasing
+the potential for inventory turns at retail.
+Domestic deliveries generally originate from the Company's 126,000 square
+foot warehouse facility in Ventura County, California. European deliveries
+originate from a distribution center in the Netherlands, while all other
+international deliveries originate from offshore factories.
+ADVERTISING AND PROMOTION
+The Company attempts to maximize the impact of its advertising, public
+relations and promotional expenditures by utilizing media that provide high
+visibility within targeted market segments. The Company's brand names are
+generally advertised and promoted through a variety of consumer print
+advertising campaigns in addition to highly visible editorial coverage in both
+consumer and trade publications. Retail presence and "point of purchase"
+materials along with production packaging provide additional visible brand
+support. The Company's in-house marketing departments for each brand work
+closely with targeted accounts in many aspects of these activities.
+The Company continues to advertise its Teva brand through a national print
+advertising campaign targeted at various different demographic groups. For its
+core outdoor market, Teva advertises in several outdoor-related magazines,
+including Backpacker, Outside, Kayak, Elevation, Paddler, and Climbing, among
+others. In addition, to promote its newly introduced Wraptor running sandal,
+Teva is advertising in Runner's World, Sports Network, and Walking Magazine,
+among other publications. With the broadened appeal of the
+10
+11
+Teva offerings, including the leather casual models, the Company has also
+focused its print advertising toward more mainstream print publications,
+including Shape, Maxim and Sailing, among others.
+In order to maintain the Company's historically high visibility among core
+outdoor enthusiasts such as professional river rafters, kayakers, mountain
+bikers and rock climbers, Teva products are given or sold at professional
+discounts to members of this group. In order to further bolster the loyalty of
+these individuals, the Company offers a category called the "Wilderness Series,"
+incorporating the latest technological developments and highest quality
+materials. The Company actively sponsors several of the world's best male and
+female whitewater athletes. By outfitting and sponsoring these highly visible
+athletes, the Company creates awareness among targeted consumers at relatively
+low cost. In addition, the Company has traveling promotional and technical
+representatives who represent the Teva brand at a wide variety of festivals,
+outdoor sporting events and competitions. Teva is sponsoring over twenty events
+in 2001, including the Teva Whitewater Series, a series of whitewater rafting
+and kayaking events held between April and August at locations in California,
+Oregon, Washington and Colorado, as well as France and Switzerland. Teva
+sponsors and promotes these events in order to increase the Company's visibility
+for its core outdoor consumer, in addition to the significant marketing
+available to the more mainstream public with the increasing popularity of
+viewing these extreme sports. In addition to the Teva Whitewater Series, the
+Teva promotional team attends and sponsors other events including the Santa Cruz
+Surf Kayak Festival in Santa Cruz, California, Grandma's Marathon in Duluth,
+Minnesota, The Telluride Bluegrass Festival in Telluride, Colorado, and Reggae
+on the River in Garberville, California, among others.
+The Teva mobile promotions team attends the events in dedicated promotional
+vehicles where they showcase Teva products and provide consumers with the
+opportunity to see and try on the latest styles.
+With respect to the Simple product line, the Company has continued its
+national print advertising campaign. Simple print advertisements will appear in
+alternative and youth focused consumer magazines such as Jane, Nylon and Lucky.
+In addition, the marketing effort focuses around grass roots advertising
+including advertising on billboards, website advertising and "Go Cards". A
+rigorous public relations campaign will focus on obtaining magazine editorial
+placement in addition to newspaper and television coverage. Recent public
+relations coverage has appeared in Footwear News, Teen People, Nylon Magazine,
+YM Magazine, Footwear Plus, Shape Magazine, Code Magazine and Surfing Girl.
+These public relations efforts have also resulted in Simple products appearing
+on television shows such as Friends, Ally McBeal, Dawson's Creek, Tucker and
+MTV.
+Simple's marketing efforts are performed internally by an in-house Simple
+marketing team which works to promote the Simple brand positioning of being
+"simple" and "down to earth".
+In 2001, the Company plans to continue to build on the success of the Ugg
+1999 and 2000 national print advertising campaigns. The Company continues to
+target a luxury consumer who seeks high quality, luxurious and fashionable
+products for cold weather. The Company expects to advertise Fall 2001 Ugg
+products in upscale publications such as Vogue and O Magazine.
+In November 2000, Ugg's were featured on the Oprah Winfrey Show as her
+choice of one of ten gift-giving ideas for the holiday season and each member of
+the studio audience received a free pair of Ugg boots on the air. The show aired
+several times from the week before Thanksgiving through Christmas, providing the
+Ugg brand with nationwide exposure.
+In addition to this national advertising campaign, the Ugg brand is being
+supported by national public relations and product placement efforts. In-house
+marketing personnel work closely with a public relations firm and a product
+placement agency to gain brand visibility in popular magazines, television shows
+and feature films. Recent editorial coverage includes articles in magazines such
+as Harper's Bazaar, In Style, Cosmopolitan, Marie Claire, Maxim, Jane, YM
+Magazine, Shape, Self, O Magazine and Real Simple. Television coverage of Ugg
+product includes shows such as Dharma and Greg, Once and Again, Dawson's Creek,
+E.R., King of Queens, Will and Grace, Ally McBeal, 7th Heaven, Everybody Loves
+Raymond, Two Guys and a Girl and Providence. These public relations efforts have
+also resulted in Ugg product appearances in the following feature films: Hanging
+Up, starring Meg Ryan, Lisa Kudrow and Diane Keaton; The Kid,
+11
+12
+starring Bruce Willis and Lily Tomlin; Mission Impossible II, starring Tom
+Cruise and Thandie Newton; Panic, starring William H. Macy and Neve Campbell;
+Snow Day, starring Chevy Chase; and Dragonfly, starring Kevin Costner and Kathy
+Bates.
+In 2000, 1999 and 1998, the Company incurred $7,108,000, $5,602,000 and
+$5,847,000 respectively, for advertising, marketing and promotional expenses. In
+addition to these expenditures, the Company's 31 international distributors
+spend additional amounts for marketing the Company's brands within their
+respective territories. The Company is required under its Teva License Agreement
+to spend a minimum amount for advertising and promoting Teva products, based on
+a percentage of sales. In addition to the minimum contractual marketing
+expenditures, the Company and the licensor have agreed to each contribute
+annually a certain percentage of sales toward the promotion of the Teva brand
+and trademark, with or without particular reference to individual Teva styles.
+DESIGN AND PRODUCT DEVELOPMENT
+The design and product development staff for each of the Company's brands
+creates and introduces new innovative footwear products that are consistent with
+the Company's standards of high quality, combined with comfort and
+functionality. The Company was restructured in 1999 from a company organized by
+functions to a company aligned by brand, with each brand as a separate profit
+center. As part of this reorganization, the previously existing design
+department was disbanded and reassigned to the Company's various brands. In
+addition, much of the design is currently provided by independent design firms
+which perform the design function on an outsourced basis. In doing so, the
+Company was able to eliminate certain positions, obtain efficiencies and reduce
+design and development costs considerably. As a result, research and development
+costs aggregated $1,076,000, $1,607,000 and $2,393,000 in 2000, 1999 and 1998,
+respectively, reflecting the operational efficiencies gained under this new
+approach.
+With respect to Teva, in order to ensure that the Company's high
+performance technical products continue to satisfy the requirements of its
+historical customer base of performance-oriented "core enthusiasts," the
+Company's design staff solicits comments and feedback from its licensor and
+professional outdoorsmen, as well as several of its retailers, including REI and
+L.L. Bean. Certain models are modified and technical innovations are developed
+in response to such comments and feedback. The Company adds new innovations,
+components and styles to its product line continually. For example, the Company
+recently designed and introduced its new Wraptor technology, a two-part system
+with a continuous strap which travels under the arch and then crosses over the
+instep to provide a snug, solid fit. This technology has been incorporated in
+these Trail Wraptor and Road Wraptor running sandals, as well as the newly
+introduced line of hikers. In addition, for added traction and durability, the
+Company has incorporated Spider Rubber(TM) into several styles, including its
+high performance Wilderness Series.
+While Teva continues to develop high performance sport sandals by
+continually updating and designing new styles for this category, the Company
+also continues to increase its focus on the casual footwear market through its
+Teva, Simple and Ugg brands. The Company continues to introduce and offer new
+styles of leather and other casual footwear for men and women and has expanded
+its offerings under its collection of Teva children's sandals for Spring 2001.
+The Company has also added several new styles of clogs, sandals, sneakers and
+leather casuals to its offerings under the Simple line for 2001. By monitoring
+changes in consumer lifestyles and preferences and then focusing first on
+function and practicality, the Company develops footwear designed to appeal to
+quality-minded consumers seeking comfortable casual footwear.
+In recent years, the Company has taken steps to update the Ugg products in
+order to make them more functional for use in cold and wet climates. For
+example, the popular Ultra styles of men's and women's boots have been updated
+with new lug outsoles to improve traction. In addition, the 2001 Ugg line
+includes several styles of its rugged Adirondack collection of foul weather
+boots. New Ugg additions for 2001 include several new styles in its popular
+Ultra collection and high-end Fluff collection, as well as new slippers and
+shoes for everyday casual use. More fashionable and unique upper styles help to
+differentiate Ugg from the low cost imitation brands.
+12
+13
+Integral factors in the design and product development process include an
+evaluation of the availability and cost of raw materials, the capabilities of
+the factories that will manufacture products and the target retail cost of new
+models and lines. The design and development staff works closely with brand
+management to develop new styles of footwear and components for their various
+product lines. Drawings and prototypes are utilized to produce samples of
+proposed new concepts. Throughout the development process, members of the design
+staff coordinate closely with each other and with the Company's product
+development, manufacturing and sourcing personnel toward a common goal of
+developing and sourcing a high-quality product that will be delivered on a
+timely basis. The Company endeavors to minimize the risk of changing fashion
+trends by offering a diverse line of functional products and closely monitoring
+sales to its accounts after introduction.
+PRODUCT SOURCING
+The Company currently sources all of its Teva and Simple footwear and a
+portion of its Ugg footwear from independent contract manufacturers in the Far
+East. The Company imports the remainder of its Ugg footwear from independent
+contract manufacturers in Australia and New Zealand.
+In 1997 and 1998, the Company closed its California and Mexican
+manufacturing facilities. As a result of the closure of these facilities, the
+Company is no longer involved in the direct manufacture of footwear, but rather
+sources completed footwear entirely from independent contractors. As the Company
+continues to grow, it expects to continue to rely heavily on its independent
+contractors for its sourcing needs.
+The manufacturing of footwear by the Company's independent contractors is
+performed in accordance with detailed specifications provided by the Company and
+is subject to quality control standards. In efforts to ensure the production of
+high quality products, many of the materials and components used in production
+are purchased from independent suppliers designated by the Company. The Company
+believes that its completed footwear as well as the various raw materials and
+components used in the manufacture of the footwear, including rubber, leather,
+nylon webbing and sheepskin, are generally available from multiple sources at
+competitive prices.
+The Company generally does not have any long-term agreements with the
+manufacturers or suppliers of its products, but does business based on
+individual purchase orders.
+QUALITY CONTROL
+The Company has instituted inspections and other procedures to satisfy the
+high quality demanded by users of the Company's products. The Company's quality
+assurance program includes inspection procedures at the factory level as well as
+a final inspection upon arrival of product at the Company's distribution center.
+The Company uses on-site inspectors at its independent suppliers who oversee the
+production process and perform quality assurance inspections. In addition, the
+products undergo further inspection procedures prior to being accepted at the
+Company's distribution center.
+LICENSES
+Teva License. The Company has been selling its Teva line of sport sandals
+and other footwear since 1985 pursuant to various license arrangements with Mark
+Thatcher, the inventor of the Teva sport sandal and the owner of the Teva
+patents and trademark. Mr. Thatcher owns seven United States patents on designs
+used in Teva sport sandals and has a United States trademark registration for
+the Teva mark.
+On June 7, 1999, the Company signed a new license agreement (the "License
+Agreement") for Teva, which became effective January 1, 2000. Under the License
+Agreement, the Company has the exclusive worldwide rights for the manufacture
+and distribution of Teva footwear through 2004. Apparel and other non-footwear
+products are not covered by the License Agreement. The License Agreement is
+automatically renewable through 2008 and through 2011 under two renewal options,
+provided that minimum required sales levels are achieved. These minimum annual
+sales levels are established at amounts which are in excess of the annual sales
+levels which have been achieved to date.
+13
+14
+As with the previous arrangement, the License Agreement provides for a
+sliding scale of royalty rates, depending on sales levels, and includes
+guaranteed minimum annual royalty amounts. Additionally, the License Agreement
+provides for an increase in the required amount of marketing expenditures,
+depending on sales levels and varying by territory. In addition to the minimum
+contractual marketing expenditures, the Company and the licensor have agreed to
+each contribute annually a certain percentage of sales toward the promotion of
+the Teva brand and trademark, with or without particular reference to individual
+Teva styles.
+As additional consideration, the Company paid the licensor a licensing fee
+of $1,000,000 and issued the licensor 428,743 shares of its previously unissued
+common stock valued at $1,608,000. The Company has recorded the license as an
+intangible asset equal to the cash and market value of the stock issued on the
+date of the License Agreement. These shares are subject to various contractual
+and other holding period requirements. In addition, the Company has agreed to
+grant the licensor not less than 50,000 stock options on the Company's common
+stock annually, at the market value on the date of grant.
+The licensor retains the rights to approve the quality of the licensed
+products produced, all marketing, advertising and promotional plans and
+materials, and the distribution channels and customers to whom the Company can
+sell the licensed products. In addition, the License Agreement provides for
+minimum annual research and development spending levels for the Company with
+respect to the Teva products and restricts the volume of closeouts and seconds
+which the Company is able to sell each year.
+The License Agreement provides that the licensor, in his sole discretion,
+may take any action against parties believed to be infringing upon the
+licensor's trademark, patents and other intellectual property. The licensor is
+fully responsible for any legal and other costs incurred in such actions and is
+entitled to any recovery resulting from the actions. The Company may not
+participate in any such action or in any other action regarding the infringement
+of the Teva intellectual property without the licensor's prior written consent.
+In the event that the license term is automatically renewed beyond 2004,
+the Company must achieve minimum annual sales levels for the years 2005 through
+2011. These minimum annual sales levels are based upon certain percentages of
+net sales in the preceding calendar year. If the Company is not able to achieve
+the minimum annual sales levels for two years during a renewal term, the License
+Agreement can be terminated at the option of the licensor.
+During the term of the License Agreement, including the renewal terms, the
+Company is prohibited from manufacturing, marketing, selling and distributing
+any sandals other than Teva sandals. In addition, for the two years following
+the termination of the License Agreement, the Company is prohibited from
+manufacturing, marketing, selling and distributing sandals, in general. However,
+the Company may continue to manufacture, market, sell and distribute all styles
+and models of sandals offered under its Simple product line which existed as of
+the date of the License Agreement as well as all styles subsequently approved by
+the licensor.
+The License Agreement can be terminated under several circumstances, if
+they remain uncured for specific periods of time. These circumstances include
+the following, among others: if either party becomes insolvent or bankrupt; if
+the Company offers sandals which compete with the Teva products or otherwise
+engages in activities which compete with the Teva products; if the Company
+transfers substantially all of its property or stock to other parties; if the
+Company sells unapproved merchandise in violation of the License Agreement; or
+if the Company or the licensor otherwise violate or breach the terms of the
+License Agreement.
+In connection with the execution of the License Agreement in 1999, the
+Company received an option to buy Teva and virtually all of its assets,
+including all worldwide rights to all Teva products. The Company's original
+option was exercisable during the period from January 1, 2000 to December 31,
+2001 or during the period from January 1, 2006 to December 31, 2008. On January
+22, 2001, the option agreement was amended, extending the first option window
+for two additional years. As a result, the first option window is January 1,
+2000 through December 31, 2003. The Company paid Mr. Thatcher $1.6 million as
+consideration for this extension. The option price is based on formulas tied to
+net sales of Teva products and varies depending on when the option is exercised.
+For the first option period, the option price is for an amount equal to the
+greater of (i) $61.6 million or (ii) 75% of the largest calendar year revenues
+since January 1, 2000 for the Teva brand,
+14
+15
+plus $1.6 million. In addition, the Company would issue to Mr. Thatcher 100,000
+shares of common stock and options to purchase 100,000 shares of common stock.
+The purchase price for the second option period, January 1, 2006 to December 31,
+2008, is equal to 110% of the average of the aggregate sales for all Teva
+products for the two calendar years since January 1, 2000 with the highest
+aggregate net sales. If the Company does not exercise its option to acquire
+Teva, the licensor has the option to acquire the Teva distribution rights from
+the Company for the period from January 1, 2010 to December 31, 2011, the end of
+the license term, and the option price is based on a formula tied to the
+Company's earnings before interest, taxes, depreciation and amortization. The
+Company is currently evaluating the possibility of exercising the option in the
+January 1, 2000 to December 31, 2003 period. The payment of the purchase price
+must be completed within 90 days of the exercise of the purchase option. If the
+Company exercises its purchase option, but subsequently fails to complete the
+purchase within the 90 day payment period, the purchase option and the Option
+Agreement will automatically be terminated.
+HEIRLOOMS, INC. AGREEMENT
+Since 1993, the Company and Bob Eason, the designer and founder of Picante
+clothing, were parties to an agreement pursuant to which the Company owned 50%
+of Heirlooms, Inc. ("Heirlooms"), the manufacturer and distributor of Picante
+clothing. In January 2001, the Company sold its 50% interest in Heirlooms back
+to Mr. Eason for cash of approximately $1,200,000 and a note receivable of
+approximately $420,000, which is secured by a secondary security interest in the
+assets of Heirlooms. The selling price was for an amount that approximated the
+net carrying value of the underlying assets and, accordingly, the resulting gain
+on the sale is not expected to be significant.
+PATENTS AND TRADEMARKS
+Mr. Thatcher holds seven United States patents and one patent in each of
+Australia, New Zealand, Korea, Germany, France, China, Japan and the United
+Kingdom for Teva footwear. As a result of the expiration of the applicable
+period during which foreign patent applications were required to have been
+filed, Mr. Thatcher does not and cannot hold such patent rights in other
+countries. Mr. Thatcher also currently holds Teva trademark rights in the United
+States and in several other countries, including, among others, France, Germany,
+the United Kingdom, Japan and Australia. Mr. Thatcher's patent and trademark
+rights are licensed to the Company under the License Agreement discussed
+previously. Both the Company and Mr. Thatcher regard such proprietary rights as
+valuable assets, and the Company cooperates with Mr. Thatcher in vigorously
+protecting such rights against infringement by third parties. To date, Mr.
+Thatcher has successfully enforced his patent and trademark rights in all 20
+concluded lawsuits brought against such third parties. Under certain
+circumstances, if Mr. Thatcher declines to challenge a potential infringement,
+the Company may bring an infringement action at its own cost, with Mr.
+Thatcher's prior written consent. See "Licenses -- Teva License."
+The Company owns the Simple and Ugg trademarks and has applied for or
+received registrations for them in the United States and in many foreign
+countries. The Company has selectively registered style category names and
+marketing slogans. In addition, the Company holds two design patents for its
+footwear products.
+The Company has acquired the patent and trademarks for Alp(R)sport sandals
+and has registered the Deckers trademark.
+BACKLOG
+Historically, the Company has encouraged and has received a significant
+portion of its orders as preseason orders, which are generally placed by
+customers approximately four to eight months prior to shipment date. The Company
+has emphasized this "futures" business, as compared to "at once" sales, as it
+allows the Company to better forecast its inventory requirements and assists
+with the Company's sourcing schedule. As a result, the Company provides its
+customers with incentives to participate in such preseason programs. Unfilled
+customer orders ("backlog"), as of any date, represent orders scheduled to be
+shipped at a future date and do
+15
+16
+not represent firm sales. The mix of future and immediate delivery orders can
+vary significantly from quarter to quarter and year to year. The backlog as of a
+particular date is affected by a number of factors, including seasonality and
+the scheduling of manufacture and shipment of products as well as variations in
+the quarter to quarter and year to year preseason incentive programs. As a
+result, comparisons of backlog from period to period are not meaningful and the
+Company's backlog at any given time is generally not indicative of sales levels
+expected to be achieved in the future.
+COMPETITION
+The casual, outdoor and athletic footwear markets are highly competitive.
+The Company believes that currently its largest competitors of the Teva line are
+Nike, Adidas, Timberland, Columbia and Salomon. The principal competitors of
+Simple's casual line include Steve Madden, Nine West, Doc Marten, Camper, and
+Kenneth Cole and of Simple's sneaker/sandal line include Skechers, Diesel, Steve
+Madden and Guess. Ugg's competitors include Acorn, Aussie Dogs, LB Evans and
+Timberland, as well as retailers' private label footwear.
+Competition in the Company's footwear is primarily based on brand
+awareness, product quality, design, price points, fashion appeal, marketing,
+distribution, performance and brand positioning. The Company's Teva line of
+footwear competes primarily on the basis of its authenticity as a recognized
+brand in the outdoor market, its consumer brand recognition as one of the first
+sandals of its kind, as well as its high performance nature and its diversity of
+styles offered. In addition, several of the most popular styles employ a
+distinctive patented strapping system, which contributes to performance and the
+brand's consumer recognition. The Company competes through its Simple line as an
+alternative brand offering a diversity of simple, back-to-basics styles designed
+for a variety of recreational and leisure activities. Ugg competes primarily on
+the basis of its authenticity as well as its brand name recognition,
+identifiable with the United States sheepskin footwear market. The Company
+believes its business strategy has resulted in increased awareness for its
+brands. However, no assurance can be given that in the future the Company will
+be able to maintain or further increase its brand awareness, maintain or
+increase its market share or respond to changing consumer preferences.
+RISKS OF FOREIGN OPERATIONS/RESTRICTIONS ON IMPORTS
+The Company's operations are subject to the customary risks of doing
+business abroad, including, but not limited to, currency fluctuations, customs
+duties and related fees, various import controls and other non-tariff barriers
+(e.g., quotas), the cost of transportation, restrictions on the transfer of
+funds, labor unrest and strikes, and in certain parts of the world, political
+instability. Countries where the Company's products are manufactured and sold
+may, from time to time, seek to increase customs duties or impose other
+non-tariff barriers (e.g., quotas), all of which have the potential to affect
+the Company's operations and its ability to maintain or increase the current
+level of importation of the Company's products. The Company is unable to predict
+the likelihood or frequency of the occurrence of any of these events.
+The products imported by the Company into the United States are subject to
+various duty rates which are established by law. At the present time these
+duties range between 8.5% and 12.5% of the entered value of footwear with uppers
+made principally of leather or sheepskin, and 6.0% and 37.5%, plus $.90 per
+pair, of the entered value of footwear with uppers made principally of synthetic
+textiles or plastic. Certain products imported by the Company are exempt from
+duties pursuant to laws pertaining to products manufactured in certain
+beneficiary countries. "Entered value" means the value taken into account for
+purposes of determining the amount of any customs duties or any other duties
+which may be imposed on the importation of any property. In general, the entered
+value is normally based on the price paid or payable by the Company to the
+seller of the imported merchandise.
+From time to time, the Company may be subject to claims for additional
+duties arising as a result of the United States Customs Service, or similar
+agencies of foreign countries, disagreeing with the classification and/or
+valuation used by the Company to enter various styles of footwear.
+16
+17
+The United States Trade Representative ("USTR") is required by the Trade
+Act of 1974, as amended by the Trade and Tariff Act of 1984, the Omnibus Trade
+and Competitiveness Act of 1988 and the 1994 Uruguay Round Agreements Act to
+submit an annual National Trade Estimates Report on Foreign Trade Barriers (the
+"NTE Report") identifying significant restrictions or barriers on United States
+access to foreign markets. In January 1999, the President reinstated, by
+Executive Order, the "Super 301" Provisions of the Trade Act. Relying on the NTE
+Report, the USTR is required to report to Congress any trade barriers, trade
+distorting practices and particular countries identified as priorities for trade
+liberalization.
+On April 30, 1997, the USTR designated China for monitoring under Section
+306 of the 1974 Trade Act. This provision focuses on compliance with bilateral
+trade agreements and allows the U.S. government to impose a variety of sanctions
+if a party fails to comply with the terms of a bilateral agreement. On April 28,
+2000, USTR again designated Paraguay and China for "Section 306 monitoring" to
+ensure both countries comply with the commitments made to the United States
+under bilateral intellectual property agreements. This means that USTR will be
+in a position to move directly to trade sanctions if there is slippage in either
+country's enforcement of bilateral IPR agreements.
+In June 2000, President Clinton extended non-discriminating "normal trade
+relations" ("NTR," formerly "most favored nation") trading status with China
+through June 2001. While NTR status has been extended for another year, this
+topic has traditionally been the subject of vigorous debate, and the Company is
+unable to predict if the United States will revoke China's NTR status at some
+point in the future. If a revocation of NTR status were to occur, it would
+result in significantly higher duties on imports from China. It is noted that
+bilateral agreements negotiated with China concerning that country's accession
+to the World Trade Organization require that the United States grant permanent
+NTR to China and in its report of May 1, 2000, USTR announced that the granting
+of permanent NTR was its top trade expansion priority.
+On April 28, 2000, the USTR announced that 39 countries had been placed on
+the "special 301" watch list and 16 countries on the priority watch list because
+of intellectual property protection concerns. Watch list countries include among
+others: Australia, Canada, Denmark, Costa Rica, and Korea. The Company is unable
+to predict whether or not additional countries will be added to the priority
+watch list, or if any other actions will be imposed by the United States and if
+such actions were taken, whether such actions would include footwear imports or
+otherwise result in increased costs for the Company's products or restrict the
+supply of footwear, generally, or of the Company's footwear in particular.
+In 1997, the European Commission enacted anti-dumping duties of 49.2% on
+certain types of footwear imported into Europe from China and Indonesia. Dutch
+Customs has issued an opinion to the Company that certain popular Teva styles
+are covered by this anti-dumping duty legislation. The Company has been
+contesting the opinion and is working with Dutch Customs to resolve the
+situation. The Company has since obtained, and is using, alternative sourcing
+for the potentially impacted products from sources outside of China in an effort
+to reduce the potential risk in the future. In the event that Dutch Customs
+makes a final determination that the anti-dumping provisions are applicable, the
+Company would have an exposure for prior unpaid anti-dumping duties during 1997
+of approximately $400,000. Recently, the European Commission added an
+explanatory note to the anti-dumping legislation which effectively strengthened
+its position. As a result of this recent development, the Company recorded a
+$400,000 charge to selling, general and administration expenses during the year
+ended December 31, 2000 to accrue for the potential loss on this matter.
+The European communities also impose quantitative limits on imports from
+China of certain leather upper and textile upper footwear. The Company is unable
+to predict how long the anti-dumping duty and import quota restrictions will
+remain in effect or changes in the scope or severity of such restrictions.
+EMPLOYEES
+At December 31, 2000, the Company employed approximately 105 full-time
+employees in its U.S. facilities, 7 at its European subsidiary and 28 at its
+Hong Kong subsidiaries, none of whom is represented by a union. The Company
+believes its relationship with its employees is good.
+17
+18

raw/filings/0000910521/2000/0000950148-01-000493/item13.txt

@@ -0,0 +1,9 @@
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Information relating to Certain Relationships and Related Transactions is
+set forth in the Company's definitive proxy statement relating to the
+Registrant's 2001 annual meeting of shareholders, which will be filed pursuant
+to Regulation 14A within 120 days after the end of the Company's fiscal year
+ended December 31, 2000, and such information is incorporated herein by
+reference.
+48
+49

raw/filings/0000910521/2001/0000950148-02-000814/filing_metadata.csv

@@ -0,0 +1,2 @@
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+0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2002-03-29,2001-12-31,2002-03-29T05:00:00.000Z,0000950148-02-000814,v79832e10-k.htm,"DECKERS FORM 10-K FOR DECEMBER 31, 2001",840316,0,0,https://www.sec.gov/Archives/edgar/data/910521/000095014802000814/v79832e10-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000095014802000814/,2001,2001,1

raw/filings/0000910521/2001/0000950148-02-000814/item1.txt

@@ -0,0 +1,1371 @@
+Item 1. Business 
+General 
+The Company builds niche products into global
+lifestyle brands by designing and marketing innovative,
+functional and fashion-oriented footwear, developed for both
+high performance outdoor activities and everyday casual
+lifestyle use. Currently, the Company offers three primary
+product lines under the following recognized brand names:
+Teva® — high-performance sports sandals and
+rugged outdoor footwear; Simple® — innovative
+shoes that combine the comfort elements of athletic footwear
+with casual styling; and Ugg® — authentic
+sheepskin boots and other footwear. Teva is a registered
+trademark of Mark Thatcher, the inventor and licensor of Teva
+Sport Sandals. Simple and Ugg are registered trademarks of the
+Company and its subsidiaries. All of the Company’s footwear
+possess the common features of high quality with a primary focus
+on functionality and comfort. In 2001, the Company sold
+approximately 3,705,000 pairs of footwear. Revenues from sales
+(domestic and international) of Teva products have been
+$61,221,000, $79,732,000 and $80,963,000 during 2001, 2000 and
+1999, representing 66.9%, 70.1% and 72.9% of net sales,
+respectively. For financial information regarding the
+Company’s industry segments, see note 10 to the
+accompanying consolidated financial statements.
+Market Overview 
+The casual, outdoor and athletic footwear market
+is comprised of footwear worn for casual everyday use and for
+outdoor and athletic activities such as hiking, boating,
+basketball, tennis, fitness and jogging. The market for such
+footwear has grown significantly during the last decade. The
+Company believes that the principal reasons for the growth in
+sales of such footwear have been the growing acceptance of
+athletic footwear as casual wear and the growing acceptance of
+casual wear, in general, including the trend toward casual dress
+in the workplace, increasingly active consumer lifestyles and
+the growing emphasis on comfort.
+Over the last few years the overall footwear
+market has seen significant growth of the outdoor segment as
+well as the growing emphasis on comfort. Outdoor footwear
+includes shoes, boots and sandals for outdoor recreational
+activities such as hiking, river rafting, camping and casual
+wear. Companies engaged in the outdoor footwear market include
+Nike, Adidas, Timberland, Columbia and Salomon. The Company
+believes that the growth in outdoor footwear is driven by
+several factors including a general shift in consumer
+preferences and lifestyles to include more outdoor, sports and
+recreational activities such as hiking and camping. In addition,
+the increasing popularity of extreme sports, including
+skateboarding, snowboarding, kayaking and river rafting, among
+others, has created an additional emphasis and awareness of
+outdoor activities and lifestyles. As consumers engage in
+outdoor activities, they typically desire footwear specifically
+designed for these purposes, yet they demand the same level of
+quality and high performance that they have come to expect from
+traditional athletic footwear. In addition, more consumers are
+turning to an emphasis on casual and comfortable footwear and
+apparel, as evidenced by the trend toward casual workplaces in
+recent years. The Company believes that its products have
+benefited from this growing trend and that its footwear
+addresses consumers’ demands for highly functional footwear
+that is durable as well as comfortable and fashionable.
+The casual, outdoor and athletic footwear markets
+are generally characterized by a high level of recognition of
+brand names, logos and trademarks. Unique and identifying
+features create brand awareness among consumers and allow a
+favorable reputation to be transferred to new products. The
+manufacture of casual, outdoor and athletic footwear is
+typically conducted overseas through independent manufacturers.
+Casual and athletic footwear is distributed through athletic
+footwear stores, department stores and specialty retailers.
+Outdoor footwear is generally distributed through these channels
+as well but is to a large extent distributed through outdoor
+specialty retailers. Retailers may purchase footwear on a
+“futures” basis (orders placed at a discount in
+advance of a season) or an “at once” basis (orders
+placed and filled immediately). Futures orders allow the Company
+to more accurately predict its manufacturing and sourcing needs.
+By placing futures orders, retailers are also able to reduce the
+risk that the Company will be unable to meet their
+3
+Table of Contents 
+delivery requirements. Retailers are generally
+encouraged to purchase goods on a futures basis by receiving
+discounts or special payment terms not otherwise available.
+Risk Factors 
+This Annual Report on Form 10-K contains a
+variety of forward-looking statements within the meaning of the
+Private Securities Litigation Reform Act of 1995 including
+forward-looking statements in this “Risk Factors”
+section, the “Outlook” section, the last paragraph
+under “Liquidity and Capital Resources”, the
+discussion under “Seasonality” and other statements in
+this Annual Report. Forward-looking statements relating to
+sales, earnings per share, and the Company’s liquidity may
+be significantly impacted by future developments such as the
+possible non-renewal of the Teva license due to the
+Company’s potential failure to meet required sales minimums
+in 2004 or 2008, certain litigation, economic factors and world
+events, the Company’s dependence on foreign manufacturers,
+competition, the Company’s dependence upon key personnel,
+weather conditions, the possible acquisition of Teva and the
+impact of seasonality on the Company’s operations, among
+others. These forward-looking statements are based on the
+Company’s expectations as of March 2002. No one should
+assume that any forward-looking statement made by the Company
+will remain consistent with the Company’s expectations
+after the date the forward-looking statement is made. The
+Company disclaims any obligation to update any such factors or
+to publicly announce the results of any revisions to any of the
+forward-looking statements contained in this Annual Report on
+Form 10-K. These forward-looking statements involve known and
+unknown risks, uncertainties and other factors which may cause
+the actual results, performance or achievement of the Company,
+or industry results, to differ materially from any future
+results, performance or achievements expressed or implied by
+such forward-looking statements. The factors listed below
+represent certain important factors the Company believes could
+cause such results to differ. These factors are not intended to
+represent a complete list of the general or specific risks that
+may affect the Company. Other risks may be significant,
+presently or in the future, and the risks set forth below may
+affect the Company to a greater extent than indicated.
+Teva License Agreement 
+The Company has been selling its Teva line of
+sports sandals and other footwear since 1985 pursuant to various
+exclusive licensing arrangements with Mark Thatcher, the
+inventor of the Teva sport sandal and owner of the Teva patents
+and trademark. In June 1999, the Company signed a new exclusive
+footwear license agreement with Mr. Thatcher. The agreement
+became effective January 1, 2000 and continues through
+December 31, 2004. If minimum annual sales levels are
+achieved in 2004, the license automatically renews for an
+additional four years, through December 31, 2008. If
+minimum annual sales levels are achieved in 2008, the license
+automatically renews again through December 31, 2011.
+However, if the minimum annual sales levels are not achieved in
+2004 or 2008, the license expires and the Company will no longer
+be able to sell Teva footwear. These required minimum annual
+sales levels are $107.9 million in 2004 and
+$137.3 million in 2008, both of which are significantly
+greater than the annual sales of $61.2 million achieved by
+the Company in 2001. Also, Mr. Thatcher may terminate the
+licensing agreement if the Company breaches certain of its other
+obligations under the agreement. The Company believes it is
+unlikely to achieve the contractual minimum for 2004 and has
+begun discussions with the licensor to address this issue.
+However, the Company can provide no assurances that it will be
+successful in its efforts to reach an acceptable resolution.
+Sales of Teva footwear and apparel accounted for approximately
+66.9%, 70.1% and 72.9% of the Company’s net sales for
+fiscal years 2001, 2000 and 1999, respectively. The termination
+of the license would have a material adverse effect on the
+Company’s results of operations.
+Brand Strength; Changes in Fashion
+Trends 
+The Company’s success is largely dependent
+on the continued strength of the Teva, Simple and Ugg brands
+(collectively, “Deckers Brands”) and on its ability to
+anticipate the rapidly changing fashion tastes of footwear
+customers and to provide merchandise that appeals to their
+preferences in a timely manner. There can be no assurance that
+consumers will continue to prefer the Deckers Brands or that the
+Company will respond in a timely manner to changes in consumer
+preferences or that the Company will successfully
+4
+Table of Contents 
+introduce new models and styles of footwear.
+Achieving market acceptance for new products will also likely
+require substantial marketing and product development efforts
+and the expenditure of significant funds to create consumer
+demand. Decisions with respect to product designs often need to
+be made many months in advance of the time when consumer
+acceptance can be determined. As a result, the Company’s
+failure to anticipate, identify or react appropriately to
+changes in styles and features could lead to, among other
+things, excess inventories and higher markdowns and lower gross
+margins due to the necessity of providing discounts to
+retailers. Conversely, failure by the Company to anticipate
+consumer demand could result in inventory shortages, which can
+adversely affect the timing of shipments to customers,
+negatively impacting retailer and distributor relationships and
+diminishing brand loyalty. The failure to introduce new products
+that gain market acceptance would have a material adverse effect
+on the Company’s business, financial condition and results
+of operations, and could adversely affect the image of the
+Deckers Brands.
+Inventory Risk 
+The footwear industry has relatively long lead
+times for design and production of product and, thus, the
+Company must commit to production tooling and to production in
+advance of orders. In addition, the industry is highly subject
+to fashion risks and changes in consumer preferences. This risk
+is exacerbated by the large number of models, colors and sizes
+in the Company’s three product lines. If the Company fails
+to accurately forecast consumer demand, or if there are changes
+in consumer preference or market demand after the Company has
+made such production commitments, the Company may encounter
+difficulty in filling customer orders or in liquidating excess
+inventory, which may have an adverse effect on the
+Company’s sales, margins and brand image.
+Quality and Performance 
+In response to consumer demand, the Company also
+uses certain specialized materials in its footwear. The failure
+of products using such materials to perform to the
+Company’s specifications or customer satisfaction could
+result in a higher rate of customer returns and could adversely
+affect the image of the Deckers Brands, which could have a
+material adverse effect on the Company’s business,
+financial condition and results of operations.
+Economic Cyclicality and Footwear
+Retailing 
+The footwear industry historically has been
+subject to cyclical variation and can be negatively impacted by
+decreased consumer spending or softness in the retail market.
+This cyclicality could adversely affect the Company’s
+business. In addition, various retailers, including some of the
+Company’s customers, have experienced financial
+difficulties during the past several years, thereby increasing
+the risk that such retailers may not be able to pay for the
+Company’s products in a timely manner. No assurance can be
+given that the Company’s bad debt expense will not increase
+relative to net sales in the future. Any significant increase in
+the Company’s bad debt expense relative to net sales would
+adversely impact the Company’s net earnings and cash flow
+and could affect the Company’s ability to pay its
+obligations as they become due.
+Dependence on Foreign
+Manufacturers 
+Virtually all of the Deckers footwear products
+are manufactured by third party suppliers in the Far East,
+Australia and New Zealand, with the vast majority of production
+occurring in China. There can be no assurance that the Company
+will not experience difficulties with such manufacturers,
+including reduction in the availability of production capacity,
+errors in complying with product specifications, inability to
+obtain sufficient raw materials, insufficient quality control,
+failure to meet production and delivery deadlines or increases
+in manufacturing costs. In addition, if the Company’s
+relationship with any of its manufacturers were to be
+interrupted or terminated, alternative manufacturing sources
+will have to be located. The establishment of new manufacturing
+relationships involves numerous uncertainties, and there can be
+no assurance that the Company would be able to obtain
+alternative manufacturing sources on terms satisfactory to it.
+If a change in its suppliers becomes necessary, the Company
+would likely experience increased costs, as well as substantial
+disruption and a resulting loss of sales.
+5
+Table of Contents 
+Foreign manufacturing is subject to a number of
+risks, including work stoppage, transportation delays and
+interruptions, political instability, foreign currency
+fluctuations, changing economic conditions, expropriation,
+nationalization, imposition of tariffs, import and export
+controls and other non-tariff barriers (including quotas),
+restrictions on the transfer of funds, environmental regulation
+and other changes in governmental policies. The Company may also
+experience general risks associated with managing operations
+effectively and efficiently from a far distance and
+understanding and complying with local laws, regulations and
+customs. There can be no assurance that such factors will not
+materially adversely affect the Company’s business,
+financial condition and results of operations.
+Products manufactured overseas and imported into
+the United States and other countries are subject to duties
+collected by the Customs Service in the applicable country.
+Customs information submitted by the Company is subject to
+review by the Customs Service. The Company is unable to predict
+whether additional customs duties, quotas or restrictions may be
+imposed on the importation of its products in the future. The
+enactment of any such duties, quotas or restrictions could
+result in increases in the cost of such products generally and
+might adversely affect the sales or profitability of the Company.
+In 1997, the European Commission enacted
+anti-dumping duties of 49.2% on certain types of footwear
+imported into Europe from China and Indonesia. Dutch Customs has
+issued an opinion to the Company that certain popular Teva
+styles are covered by this anti-dumping duty legislation. The
+Company has been contesting the opinion and is working with
+Dutch Customs to resolve the situation. The Company has since
+obtained, and is using, alternative sourcing for the potentially
+impacted products from sources outside of China in an effort to
+reduce the potential risk in the future. In the event that Dutch
+Customs makes a final determination that the anti-dumping
+provisions are applicable, the Company would have an exposure
+for prior unpaid anti-dumping duties during 1997 of
+approximately $500,000, which has been fully accrued as of
+December 31, 2001.
+Competition and Infringing
+Products 
+The outdoor and footwear industries are both
+highly competitive, and the recent growth in the markets for
+sports sandals and casual footwear has encouraged the entry of
+many new competitors into the marketplace as well as increased
+competition from established companies. Many of the
+Company’s competitors have substantially greater financial,
+distribution and marketing resources, as well as greater brand
+awareness in the footwear market, than the Company. In addition,
+the general availability of offshore manufacturing capacity
+allows rapid expansion by competitors and new market entrants.
+The Company believes that it has been able to compete
+successfully because of the brand recognition, quality and
+selective distribution of its products. From time to time, the
+Company also discovers products in the marketplace that infringe
+upon patent and trademark rights held by or licensed to the
+Company. Under the Company’s licensing arrangement with the
+licensor of the Teva products, Mark Thatcher, Mr. Thatcher
+initially may bring proceedings to halt infringement of the Teva
+patents and trademark. If Mr. Thatcher elects not to bring
+such proceedings, the Company may initiate such proceedings,
+with the prior written consent of Mr. Thatcher. To date,
+Mr. Thatcher has vigorously pursued infringements following
+discovery. To the extent permitted in its agreement with
+Mr. Thatcher and to the extent considered necessary, the
+Company will vigorously pursue infringements in the event
+Mr. Thatcher elects not to do so. However, if
+Mr. Thatcher or the Company is unsuccessful in challenging
+a third party’s products on the basis of patent and
+trademark infringement, continued sales of such competing
+products by third parties could adversely impact the
+Company’s business, financial condition and results of
+operations. See “Business — Competition” and
+“Business — Legal Proceedings.”
+Dependence on Key
+Personnel 
+The Company’s continued success will depend
+substantially upon its ability to retain Douglas B. Otto, its
+Chairman of the Board and Chief Executive Officer, Peter
+Benjamin, its President and Chief Operating Officer and a core
+group of key executive officers and employees. The Company
+believes that its future success will depend in large part on
+its ability to attract and retain highly skilled personnel.
+Competition for such personnel is intense, and there can be no
+assurance that the Company will be successful in attracting and
+6
+Table of Contents 
+retaining such personnel. The loss of certain key
+employees or the Company’s inability to attract and retain
+other qualified employees could have an adverse impact on the
+Company’s business.
+Intellectual Property 
+The Company believes that its trademarks,
+technologies and designs are of great value. From time to time,
+the Company may be the subject of litigation challenging its
+ownership of certain intellectual property. Loss of the
+Company’s Simple or Ugg trademark rights or the ability to
+use the licensed Teva trademarks could have a serious impact on
+the Company’s business. Because of the importance of such
+intellectual property rights, the Company’s business is
+subject to the risk of counterfeiting, parallel trade or
+intellectual property infringement.
+Economic Factors and World
+Events 
+The Company’s business is subject to
+economic conditions in its major markets, including, without
+limitation, recession, inflation, general weakness in retail
+markets and changes in consumer purchasing power and
+preferences. Adverse changes in such economic factors could have
+a negative effect on the Company’s business.
+In addition, the Company’s results, and the
+domestic and international economies in general, may be further
+negatively impacted by the terrorist activities of
+September 11, 2001 and any subsequent terrorist acts, as
+well as the impact of the United States’ war efforts. The
+overall negative impact of these activities, including the
+effect on the economy and commerce in general, cannot currently
+be determined.
+Weather Conditions 
+Sales of the Company’s products,
+particularly those under the Teva and Ugg lines, are very
+sensitive to weather conditions. Extended periods of unusually
+cold weather during the spring and summer could adversely impact
+demand for the Company’s Teva line. Likewise, unseasonably
+warm weather during the fall and winter months could adversely
+impact demand for the Company’s Ugg product line.
+Substantial Ownership of the
+Company and Shareholder Rights Agreement 
+At December 31, 2001, Douglas B. Otto
+and all executive officers and directors of the Company, as a
+group, owned approximately 33.7% and 42.2%, respectively, of the
+outstanding shares of the Company’s Common Stock. Due to
+such ownership position, Mr. Otto, whether acting alone or
+together with one or more of the other executive officers of the
+Company, would likely be able to control the affairs and
+policies of the Company and would likely be able to elect a
+sufficient number of directors to control the Company’s
+Board of Directors and to approve or disapprove any matter
+submitted to a vote of the stockholders.
+The Company adopted a shareholder rights plan in
+1998 pursuant to a shareholder rights agreement (the
+“Rights Agreement”) to protect stockholders against
+unsolicited attempts to acquire control of the Company that do
+not offer what the Board of Directors of the Company believes to
+be an adequate price to all stockholders. As part of the plan,
+the Board of Directors of the Company declared a dividend so
+that one preferred share purchase right was and will be issued
+for each outstanding share of Common Stock of the Company until
+the expiration date of the Rights Agreement.
+The ownership positions of Mr. Otto and the
+executive officers of the Company, as a group, together with the
+anti-takeover effects of certain provisions in the Delaware
+General Corporation Law (the “DGCL”), in the
+Company’s Certificate of Incorporation and Bylaws and in
+the Company’s shareholder rights plan would likely have the
+effect of delaying, deferring or preventing a change in control
+of the Company and could have a negative effect on the market
+price of the Company’s Common Stock.
+Other Factors 
+The Company’s offices and distribution
+center are located in the state of California, which has
+experienced rolling electrical power outages in 2001. Depending
+on the occurrence, timing, length and
+7
+Table of Contents 
+frequency of the any future outages, the Company
+may be unable to ship products in a timely manner, which could
+negatively impact the Company’s net sales.
+Also, during the year ended December 31,
+2001, the Company implemented a new Enterprise Resource Planning
+(“ERP”) computer system to replace its legacy system.
+In connection with this conversion, the Company initially
+encountered various difficulties. The effectiveness of the
+system’s operation can impact the Company’s ability to
+receive and accept orders, monitor its inventory levels, and
+coordinate the shipment of products to customers, among other
+activities. In the event that significant difficulties are
+encountered in the future, the Company may experience lower
+sales and increased expenses, which would negatively impact the
+Company’s results of operations and cash flows.
+The Company’s results of operations,
+financial condition and cash flows are also subject to risks and
+uncertainties with respect to the Company’s ability to
+secure and maintain adequate financing, to forecast its future
+sales, inventory needs and cash flows and to subsequently
+achieve those forecasts.
+Business Strategy 
+Management’s mission is to build niche
+products into global brands and its business strategy is to
+offer diverse lines of footwear that emphasize functionality,
+quality, comfort and technical performance tailored to a variety
+of activities and demographic groups. Specifically, the
+Company’s business strategy emphasizes the following
+elements:
+Introduce New Categories and Styles under
+Existing Brands. The Company intends
+to leverage consumer recognition of its existing brands by
+developing and introducing additional innovative footwear
+products that satisfy the Company’s high standards of
+practicality, comfort and quality. The Company believes the
+introduction of additional products at a variety of price
+points, such as the range of new models in its Teva, Simple and
+Ugg lines being offered in the Company’s 2002 product
+offerings, have broadened the Company’s customer base,
+further diversified the Company’s product lines, and helped
+reduce the effects of seasonality on the Company’s sales.
+See “Management’s Discussion and Analysis of Financial
+Condition and Results of Operations —
+Seasonality.” Over the last several years, the Teva product
+offering has been greatly expanded to include a variety of new
+sport sandal styles at a variety of price points and
+incorporating a range of new uppers and technologies. In
+addition, the Company has begun to leverage the success of the
+Teva brand in the outdoor markets by launching into several new
+categories of footwear, including amphibious footwear, hikers,
+trailrunners, cold-weather boots, and other rugged outdoor
+footwear. The Spring 2002 and Fall 2002 Teva product lines
+include a significant redesign and the introduction of several
+new styles and categories. One of the features prevalent in the
+Spring 2002 line is the use of the Wraptor technology, a
+patent-pending 360 degree continuous strapping system that
+simultaneously secures the instep and arch shank to the foot.
+Following on the success of this feature in the Company’s
+running sandals, the Company has also designed a line of hikers
+around this technology and has added it to certain styles of the
+Company’s high performance Guide offering for professional
+paddlers and adventurers. In addition, the Company continues to
+expand into the hiking, trailrunning and rugged outdoor arenas,
+where the aggregate market size is considerably greater than the
+market for sport sandals, the area in which the Teva brand was
+initially founded. By launching into these new areas of closed
+footwear, the Company hopes to increase sales while at the same
+time reducing the impact of seasonality on the Company’s
+business. In addition to its historically strong outdoor
+orientation, the 2002 line also includes athletically inspired
+styles aimed directly at the athletic distribution channels,
+another significant area where the Company hopes to gain
+distribution. In addition to these new categories for the brand,
+Teva has also re-designed its core sport sandal offering by
+adding many new features and styles, incorporating the latest
+technologies and innovations. The Company continues to use the
+knowledge and experience of Team Teva, an elite group of the
+world’s best male and female whitewater athletes, to
+enhance the development of future technical offerings in this
+category. As the Company moves to the future, it plans to
+strengthen existing categories and further expand into new
+channels of distribution.
+The 2002 Simple product line includes a
+re-emphasis on the men’s footwear business, an area where
+the brand had been very successful several years ago, as well as
+a focus on athletically inspired designs. The 2002 Simple line
+also includes a collection of women’s casual styles
+featuring low profiles and sleek outsoles. The
+8
+Table of Contents 
+Simple line continues to target consumers in the
+sixteen to twenty-five year old youth market. The line focuses
+on lifestyle comfort based products such as clogs, sandals,
+casuals and non-performance sneakers that are priced affordably.
+In 2002, the Company’s Ugg product offering continued to
+include its heritage boots and slippers, as well as an improved
+women’s Town Collection of casual, fashionable boots and
+clogs and a new Aspen Collection of rugged cold-weather footwear
+featuring seam sealed lugged outsoles and waterproof leathers
+combined with sheepskin linings.
+Pursue Licensing of Brands.
+Given the strength of the
+Company’s brands, the Company is also pursuing the
+licensing of its brand names to other ancillary products, beyond
+the Company’s existing core footwear products. Through this
+type of brand extension, the Company hopes to generate
+additional revenues in the form of royalty income; to further
+increase awareness for the Company’s brands and their
+related products, and thereby increase sales of its footwear;
+and to build the long-term value of the brands. The
+Company’s business strategy currently includes the pursuit
+of brand extension through licensing for both the Ugg and Simple
+brands. The sublicensing of the Teva brand is not currently
+available under the existing Teva license agreement; however, in
+the event that the Company subsequently exercises its purchase
+option to acquire Teva, the licensing of the Teva trademarks to
+other products would be considered as part of the long-term
+strategy for the brand (See “Management’s Discussion
+and Analysis of Financial Condition and Results of
+Operations — Liquidity and Capital Resources”).
+As part of this approach, the Company has recently signed agency
+agreements with BHPC Marketing, Inc. to assist in
+identifying candidates and coordinating the efforts for the
+licensing of the Ugg and Simple trademarks on various products
+ranging from sportswear and outerwear to housewares and
+accessories. Because the Company is currently in the early
+stages of pursuing licensing opportunities for its brands it
+cannot yet provide any assurances regarding how successful its
+efforts will be or how significant the market size will be.
+Pursue Additional Market
+Opportunities. Management intends to
+continue to consider new markets for its existing line of
+products. For the years ended December 31, 2001, 2000 and
+1999 international net sales totaled $21,096,000, $31,135,000
+and $28,859,000, representing 23.1%, 27.4% and 26.0% of net
+sales, respectively. Management believes that significant
+opportunities exist to market its products abroad and intends to
+selectively expand its distribution worldwide. To bolster these
+efforts, the Company has entered into an agency arrangement,
+effective January 1, 2002, with a firm in the United
+Kingdom for the coordination of the sales, distribution,
+marketing and advertising efforts in the European markets. In
+addition, the Company has an office in Japan that facilitates
+the servicing of the Asian market.
+The Company believes significant opportunities
+exist to expand distribution domestically too. For example, the
+Company’s Teva brand has had its roots in the outdoor
+market where it has successfully distributed its products for
+many years. The Company sees the potential for expansion into
+the athletic retail distribution channel as a significant
+opportunity for the Teva brand in future years. The Company
+intends to pursue this channel of distribution going forward and
+has recently designed product targeted at this market and has
+added sales personnel with significant experience in this
+market. In addition, the Ugg brand has historically been popular
+in California for many years. The Company believes that
+significant opportunities exist to expand distribution for this
+brand throughout the United States, especially in light of its
+suitability to a variety of climates. In recent years, the
+Company has been successful in expanding outside of California
+and expects to continue to pursue this expansion in the future.
+Acquire or Develop New
+Brands. The Company intends to
+continue to focus on identifying and building new brands for
+growth. The Company has been successful in the past in taking
+the concepts of entrepreneurs for innovative, fashionable
+footwear targeted at niche markets and building the products
+into viable brands and intends to continue to identify concepts
+for potential future niche products which have the potential of
+developing into successful brands or product lines.
+Products 
+The Company currently offers three primary
+product lines: (1) Teva sport sandals and footwear;
+(2) Simple casual footwear; and (3) Ugg sheepskin
+footwear. Each of these lines, as well as individual models
+within these lines, is designed to appeal to various demographic
+groups. The Company’s footwear products
+9
+Table of Contents 
+emphasize function, comfort and technical
+performance and are suitable for a variety of demanding outdoor
+and athletic activities, as well as casual and everyday use. The
+Company’s products are designed and marketed to promote a
+high level of brand name recognition and consumer appeal by
+combining functional and creative designs with quality materials
+and construction. The Teva footwear and the Simple footwear
+lines are generally previewed twice per year, once in the summer
+for deliveries that commence in the fall and once in the winter
+for the following back to school and fall season. The Ugg line
+of sheepskin footwear is generally previewed in the winter with
+most deliveries occurring in the following fall and winter. The
+following sets forth a summary description of each of the
+Company’s primary product lines:
+Teva Sport Sandals and Footwear.
+The Teva sport sandal was one of the
+first sport sandals to be developed and remains popular among
+outdoor enthusiasts and the general public. The Company licenses
+the Teva patents and trademark from Mark Thatcher, a
+professional river guide who invented the Teva sport sandal. The
+terms of such licenses run through 2011, subject to achieving
+certain minimum sales levels beginning in 2004. Certain styles
+of the Teva sport sandal incorporate a variety of proprietary
+strapping configurations ideally suited for outdoor activities
+such as hiking, boating and river rafting. These strapping
+systems generally consist of high-quality nylon webbing or
+leather, are fully adjustable, and hold the foot firmly to the
+sandal’s durable, cellular rubber, molded EVA, polyurethane
+or leather footbed. Teva sport sandals are extremely durable,
+with many styles designed specifically for performance in and
+around the water. In addition, the Company has recently
+leveraged the brand’s success in the outdoor markets by
+launching into various natural progressions for the brand
+including hiking boots, trailrunning shoes, amphibious footwear
+and other rugged outdoor footwear styles. For Spring 2002, the
+Teva line has been redesigned to include numerous new styles,
+categories and features and now includes 86 different models
+spread across various categories and designed for a variety of
+uses. The Hydro Series, a category of sandals and other
+amphibious footwear built for high performance and rugged
+outdoor use, includes 14 models of men’s and
+women’s styles of sport sandals, neoprene and quick
+draining monofilament mesh watershoes and other outdoor footwear
+ideal for professional outdoorsmen and adventurers. The Terra
+Series, a line of 17 styles of sandals and hiking boots
+primarily designed for use on land, includes performance walking
+sandals and convertible sandals with removable heel straps that
+allow the sandal to be worn as a slide, as well as hiking boots
+and running sandals incorporating the patent-pending Wraptor
+technology, an upper which encircles the instep and continually
+adjusts to the movement of the foot to provide a consistently
+secure fit. The Originals Series has 16 styles of sandals
+and thongs that combine the elements of performance with casual
+everyday use and includes several of the most popular styles as
+well as new models with retro-1970’s inspired colors and
+stylings. Continuing on the success of recent years, the Spring
+2002 line includes 15 styles of men’s and women’s
+leather casuals under the Nomad Series, including a variety of
+sandals, slides and clogs. The Sun and Moon Series includes
+11 styles of slides and thongs offered in a variety of
+materials including waterproof leather, nylon, suede and
+airmesh. The Spring 2002 Children’s category is a
+collection of 13 styles at various price points and
+includes an assortment of sandals incorporating a variety of
+materials including leather, waterproof suede, nylon, neoprene
+and mesh as well as slip-on watershoes, hikers and other styles
+of amphibious footwear. In addition, for the Fall 2002
+season, the Company has significantly expanded its Fall product
+offering with a variety of different types of closed footwear,
+including hiking boots, cold weather boots, trailrunners and an
+assortment of other rugged outdoor styles. The domestic
+manufacturer’s suggested retail prices for adult sizes of
+Spring 2002 Teva footwear products range from $20.00
+to $130.00.
+Simple Casual
+Footwear. The Simple line consists of
+casual shoes that combine the comfort and function of athletic
+footwear construction with the simple, understated styling of
+“back-to-basics,” casual lifestyle footwear. The
+Simple product line includes a variety of comfortable,
+fashionable, basic shoes for men and women including sneakers,
+sandals, slides, clogs and leather casuals. The Spring 2002
+collection reflects the Company’s emphasis on a target
+consumer in the sixteen to twenty-five year old age group. For
+the 2002 line, the Company has added several new styles of
+clogs, sandals, sneakers and leather casuals to its offerings
+including several athletically inspired styles for men and women
+as well as a re-emphasis on the men’s footwear business, an
+area where the Company had considerable success in the past. The
+2002 Simple line also includes a series of new, innovative
+styles of women’s footwear featuring models with low
+profiles and sleek lines. For Spring 2002, Simple is
+offering a total of 86 models including 46 styles for men
+and 40 for women. The Spring 2002 line includes
+32 styles of sneakers with leather and suede uppers,
+29 styles of sandals
+10
+Table of Contents 
+and thongs and 25 styles of leather casuals
+and clogs in a variety of colors. The domestic
+manufacturer’s suggested retail prices for adult sizes for
+the Spring 2002 line range from $40.00 to $95.00.
+Ugg Sheepskin
+Footwear. Ugg is a line of authentic
+sheepskin footwear, popularized in Australia in the 1960’s
+and 1970’s. These sheepskin boots, slippers and other
+footwear styles have high-grade fleece linings which act as a
+natural insulator, keeping feet warm and comfortable. The
+2002 Ugg line offers a range of 52 models of casual,
+fashionable and streetwise styles in various colors, including
+several new styles of shoes and boots for men and women. The
+2002 line includes several styles with new innovative
+fashionable uppers and several styles with water resistant
+leather treatments to address more inclement and cold weather
+conditions. The 2002 line continues the tradition of the
+highly successful Classic and Ultra boots, as well as the Home/
+Spa Collection of slippers and other comfort footwear. In
+addition, for 2002, the line includes an expanded Town
+collection of men’s and women’s casual footwear,
+including the men’s Birch styles, the women’s Solvang
+styles, and the women’s Brooks styles featuring lug bottoms
+for traction combined with sleek profiles. The 2002 line
+also includes a new Aspen Collection of rugged cold-weather
+footwear featuring seam sealed lugged outsoles and waterproof
+leathers combined with sheepskin linings to prevent water from
+coming in and to prevent warmth from escaping. The domestic
+manufacturer’s suggested retail prices for adult sizes for
+the Ugg line range from $50.00 to $275.00.
+Marketing and Distribution 
+The Company’s products are currently
+distributed throughout the United States by a network of
+approximately 32 independent sales representatives,
+organized geographically, who make sales, visit retail stores to
+train personnel and review sales of the Company’s footwear
+on a periodic basis. Beginning in 2000, the Company added a
+separate dedicated independent sales force for the Simple and
+Ugg brands as these products are sold through different
+distribution channels and are targeted toward a different
+consumer than the Company’s Teva brand. The Company’s
+sales managers for each brand manage their networks of
+representatives, recruit experienced sales representatives in
+the industry and coordinate sales to national accounts. The
+Company currently sells its products internationally through
+independent distributors. The Company’s goal is to promote
+retail sales of its products at attractive profit margins for
+its accounts through selective distribution and marketing,
+targeted toward distinct groups of consumers. As a result of
+this approach, the Company’s accounts have a strong
+incentive to devote greater selling space to the Company’s
+products, and the Company is better able to assess consumer
+preferences, the future ordering needs of its customers and
+inventory requirements.
+The Company’s principal domestic customers
+include specialty retailers, upscale department stores, outdoor
+retailers and athletic footwear stores which market products
+consistent with the Company’s standards and, in the case of
+Teva, have been approved by the Company’s licensor. The
+Company’s five largest customers accounted for
+approximately 20.6% of the Company’s net sales for the year
+ended December 31, 2001, compared to 20.4% for the year
+ended December 31, 2000. No single customer accounted for
+more than 10% of the Company’s net sales for the years
+ended December 31, 2001 or 2000.
+In order to encourage accounts to place orders
+early in the season the Company has continued with a preseason
+discount program under which accounts are offered discounts on
+preseason orders placed. The Company’s strategy is to
+emphasize this “futures” program, as compared to
+“at once” sales, in order to stabilize its supply
+arrangements, reduce the risk of customer cancellations and to
+benefit from the significant positive impact of the program on
+the Company’s inventory costs, sourcing schedule and
+allocation of marketing resources. Consistent with prior years,
+the Company offered an early delivery program for the
+spring 2002 season which was delivered the fourth quarter
+of 2001. This early delivery program allows the Company to
+reduce the impact of peak warehouse inventory levels during the
+spring and provides retailers the opportunity to have earlier
+sell through, lengthening the retail selling season and
+increasing the potential for inventory turns at retail.
+Domestic deliveries generally originate from the
+Company’s 126,000 square foot warehouse facility in
+Ventura County, California. European deliveries originate from a
+distribution center in the Netherlands, while all other
+international deliveries originate from offshore factories.
+11
+Table of Contents 
+Advertising and Promotion 
+The Company attempts to maximize the impact of
+its advertising, public relations and promotional expenditures
+by utilizing media that provide high visibility within targeted
+market segments. The Company’s brand names are generally
+advertised and promoted through a variety of consumer print
+advertising campaigns in addition to highly visible editorial
+coverage in both consumer and trade publications. Retail
+presence and “point of purchase” materials along with
+production packaging provide additional visible brand support.
+The Company’s in-house marketing departments for each brand
+work closely with targeted accounts in many aspects of these
+activities.
+The Company continues to advertise its Teva brand
+through a national print advertising campaign targeted at
+various different demographic groups. For its core outdoor
+market, Teva advertises in several outdoor-related magazines,
+including Backpacker, Outside, National Geographic
+Adventurer, Paddler, and Sports Illustrated Women, 
+among others. In addition, to promote its newly introduced Elden
+Trail trailrunner, Teva is advertising in Trail Runner 
+and The Running Network, among other publications. With
+the broadened appeal of the Teva offerings, including the
+leather casual models, the Company has also focused its print
+advertising toward more mainstream print publications, including
+Shape and National Geographic Traveler. Teva will
+also target the alternative, youth market with advertisements in
+Stuff and Adrenaline. In addition, with the
+introduction of Teva’s first full Fall line in 2002, Teva
+will increase its advertising in the fall and winter months.
+In order to maintain the Company’s
+historically high visibility among core outdoor enthusiasts such
+as professional river rafters, kayakers, mountain bikers and
+rock climbers, Teva products are given or sold at professional
+discounts to members of this group. In order to further bolster
+the loyalty of these individuals, the Company offers categories
+called “Hydro” and “Terra,” incorporating
+the latest technological developments and highest quality
+materials. The Company actively sponsors a group of the
+world’s best male and female whitewater athletes called
+Team Teva. Teva also sponsors teams from other outdoor
+disciplines including the Teva US Mountain Running Team and
+the SOBE Headshok Mountain Bike Team. By outfitting and
+sponsoring these highly visible athletes and teams, the Company
+creates awareness among targeted consumers at relatively low
+cost. In addition, the Company has traveling promotional and
+technical representatives who represent the Teva brand at a wide
+variety of festivals, outdoor sporting events and competitions.
+Teva is sponsoring over fifty events in 2002, including the Teva
+Tour, a series of whitewater rafting and kayaking events held
+between April and October at fourteen rivers across America.
+Internationally, the Company is also the title sponsor for
+events in Japan, Canada, Switzerland and Italy. Teva sponsors
+and promotes these events in order to increase the
+Company’s visibility for its core outdoor consumer, in
+addition to the significant marketing available to the more
+mainstream public with the increasing popularity of viewing
+these extreme sports. In addition to the Teva Tour, the Teva
+promotional team attends and sponsors other events including the
+Teva Mountain Games at Vail, Teva Mountain Running Series, Teva
+Liquid Lifestyles Film US Tour, Santa Cruz Surf Kayak
+Festival in Santa Cruz, California, Grandma’s Marathon in
+Duluth, Minnesota, The Telluride Bluegrass Festival in
+Telluride, Colorado, and Reggae on the River in Garberville,
+California, among others.
+The Teva mobile promotions team attends the
+events in dedicated state of the art promotional vehicles where
+they showcase Teva products and provide consumers with the
+opportunity to see and try on the latest styles. The Teva brand
+has also recently initiated a partnership with Land Rover. Land
+Rover is now the official vehicle of Team Teva, outfitting the
+Team Teva athletes and the Teva Technical Representatives in
+Teva branded Land Rovers throughout the United States.
+With respect to the Simple product line, the
+Company has continued its national print advertising campaign.
+Simple print advertisements will appear in niche art, music and
+style-related youth-focused consumer magazines such as Paper,
+URB, Surfer and FHM . In addition, the marketing
+effort focuses around grass roots advertising including wild
+postering, flyering, and “Go Cards.” As an extension
+of its grass roots efforts, Simple will launch a national road
+tour in March 2002 as part of its grass roots marketing
+campaign, The Stream of Consciousness. A Simple journalist will
+drive an Airstream trailer across America, visit and sponsor
+art-related events at universities and create a film documentary
+of his experiences on the road. A
+12
+Table of Contents 
+rigorous public relations campaign will focus on
+obtaining magazine editorial placement in addition to newspaper
+and television coverage. Recent public relations coverage has
+appeared in Footwear News, Teen People, Nylon, YM, Footwear
+Plus, W Magazine, Lucky, Shuz, Shape, and Surfing
+Girl. These public relations efforts have also resulted in
+Simple products appearing on television shows such as
+Friends, Ally McBeal, Dawson’s Creek, and MTV. 
+Simple’s marketing efforts are performed
+internally by an in-house Simple marketing team which works to
+promote the Simple brand positioning of being “simple”
+and “down to earth”.
+In 2002, the Company plans to continue to build
+on the success of the Ugg 2000 and 2001 national print
+advertising campaigns. The Company continues to target its Ugg
+products toward luxury consumers who seek high quality,
+luxurious and fashionable products for cold weather. The Company
+expects to advertise Fall 2002 Ugg products in upscale
+publications such as Vogue, In Style and
+O Magazine. In February 2002, Ugg’s were
+featured in the Opening and Closing Ceremonies of the 2002
+Winter Olympic Games. 1,000 Ugg boots were used to outfit
+both the children in the Children of Light performances and the
+individuals presenting medals to athletes at all the events.
+Both the children and adults were outfitted in Ultra Short Ugg
+boots. Ugg also received Olympic exposure on the Today Show with
+Katie Couric the day after the opening ceremonies.
+In addition to this national advertising
+campaign, the Ugg brand is being supported by national public
+relations and product placement efforts. In-house marketing
+personnel work closely with a public relations firm and a
+product placement agency to gain brand visibility in popular
+magazines, television shows and feature films. Recent editorial
+coverage includes articles in magazines such as Glamour, In
+Style, Cosmopolitan, Marie Claire, Maxim, Shape, Self,
+O Magazine and Real Simple. Television coverage
+of Ugg product includes shows such as Friends, Once and
+Again, Dawson’s Creek, E.R., Will and Grace, Ally McBeal,
+My Wife and Kids, Judging Amy, Alias, 7th Heaven and
+Everybody Loves Raymond. These public relations efforts
+have also resulted in Ugg product appearances in the following
+recent feature films: America’s Sweethearts, 
+starring Julia Roberts, Snow Dogs, starring Cuba Gooding
+Jr., American Pie II, starring Sean William
+Scott, Dinner with Friends, starring Andie McDowell,
+Josie and the Pussycats, starring Tara Reid and Life
+as a House, starring Kevin Kline.
+In 2001, 2000 and 1999, the Company incurred
+$6,087,000, $7,108,000 and $5,602,000 respectively, for
+advertising, marketing and promotional expenses. In addition to
+these expenditures, the Company’s 29 international
+distributors spend additional amounts for marketing the
+Company’s brands within their respective territories. The
+Company is required under its Teva License Agreement to spend a
+minimum amount for advertising and promoting Teva products,
+based on a percentage of sales. In addition to the minimum
+contractual marketing expenditures, the Company and the licensor
+have agreed to each contribute annually a certain percentage of
+sales toward the promotion of the Teva brand and trademark, with
+or without particular reference to individual Teva styles.
+Design and Product Development 
+The design and product development staff for each
+of the Company’s brands creates and introduces new
+innovative footwear products that are consistent with the
+Company’s standards of high quality, combined with comfort
+and functionality. In addition to its internal design and
+development staff, the Company has begun to rely more heavily in
+recent years on outside design firms for a significant portion
+of the design function. By transitioning much of the design
+function to independent design firms, the Company has been able
+to eliminate certain positions, obtain efficiencies and reduce
+design and development costs considerably in recent years. As a
+result, research and development costs aggregated $1,034,000,
+$1,076,000 and $1,607,000 in 2001, 2000 and 1999, respectively,
+reflecting the operational efficiencies gained under this new
+approach.
+With respect to Teva, in order to ensure that the
+Company’s high performance technical products continue to
+satisfy the requirements of its historical customer base of
+performance-oriented “core enthusiasts,” the
+Company’s design staff solicits comments and feedback from
+its licensor, its Team Teva whitewater athletes and other
+professional outdoorsmen, as well as several of its retailers,
+including REI, EMS, Galyans and L.L. Bean. Certain models
+are modified and technical innovations are developed in response
+to such comments and feedback. The Company adds new innovations,
+components and styles to its product line
+13
+Table of Contents 
+continually. For example, the Company recently
+designed and introduced a new line of trailrunners incorporating
+the patented Liquid Frame technology and has incorporated its
+newly developed Wraptor technology into performance running
+sandals, an assortment of hikers and certain styles of its high
+performance Guide sport sandals specifically targeted at
+professional outdoorsmen and adventurers. In addition, for added
+traction and durability, the Company has recently incorporated
+various materials in its sandals, including Spider
+Rubber®— a sticky, non-slip rubber outsole material
+for use across wet and dry terrain, Traction
+Rubber TM — a highly durable and abrasion
+resistant material designed specifically for the extra rigors of
+land use, and River Rubber® — a non-slip material
+designed to offer superior grip on smooth wet surfaces such as
+rocks, fiberglass and raft rubber.
+While Teva continues to develop high performance
+sport sandals and other rugged outdoor footwear by continually
+updating and designing new styles for these categories, the
+Company also continues to increase its focus on the casual
+footwear market through its Teva, Simple and Ugg brands. The
+Company continues to introduce and offer new styles of leather
+and other casual footwear for men and women and has added
+several new styles of hikers, sport sandals, slip-ons and other
+shoes to its Teva children’s offering for Spring 2002. The
+Company has also added several new styles of clogs, sandals,
+sneakers and leather casuals to its offerings under the Simple
+line for 2002 including several athletically inspired styles for
+men and women as well as a re-emphasis on the men’s
+footwear business, an area where the Company had considerable
+success in the past. The 2002 Simple line also includes a series
+of new, innovative styles of womens’ footwear featuring
+models with low profiles and sleek lines. By monitoring changes
+in consumer lifestyles and preferences and then focusing first
+on function and practicality, the Company develops footwear
+designed to appeal to quality-minded consumers seeking
+comfortable casual footwear.
+In recent years, the Company has taken steps to
+take Ugg’s longtime success in the Southern California
+market and duplicate that success across the United States. In
+support of this effort, the Company has taken steps in recent
+years to update the Ugg products in order to make them more
+functional for use in cold and wet climates. For example, the
+2002 line includes a new Aspen Collection of cold weather
+boots, shoes and clogs featuring seam sealed lugged outsoles and
+waterproof leathers combined with sheepskin linings for high
+functionality and comfort. In addition, the Company has added a
+new Brooks Series to its women’s Town Collection, featuring
+styles with a new lugged outsole, contemporary styling and wool
+fleece linings which are designed to keep feet dry and
+comfortable in both warm and cold climates. The Ugg brand
+continues to design and offer more fashionable and unique upper
+styles to help differentiate Ugg from the low cost imitation
+brands.
+Integral factors in the design and product
+development process include an evaluation of the availability
+and cost of raw materials, the capabilities of the factories
+that will manufacture products and the target retail price of
+new models and lines. The design and development staff works
+closely with brand management to develop new styles of footwear
+and components for their various product lines. Drawings and
+prototypes are utilized to produce samples of proposed new
+concepts. Throughout the development process, members of the
+design staff coordinate closely with each other and with the
+Company’s product development, manufacturing and sourcing
+personnel toward a common goal of developing and sourcing a
+high-quality product that will be delivered on a timely basis.
+The Company endeavors to minimize the risk of changing fashion
+trends by offering a diverse line of functional products and
+closely monitoring sales to its accounts after introduction.
+Product Sourcing 
+The Company currently sources all of its Teva and
+Simple footwear and a portion of its Ugg footwear from
+independent contract manufacturers in the Far East. The Company
+imports the remainder of its Ugg footwear from independent
+contract manufacturers in Australia and New Zealand. The Company
+is not involved in the direct manufacture of footwear, but
+rather sources completed footwear, produced to required
+specifications, directly from these independent contractors. As
+the Company continues to grow, it expects to continue to rely
+heavily on its independent contractors for its sourcing needs.
+The manufacturing of footwear by the
+Company’s independent contractors is performed in
+accordance with detailed specifications provided by the Company
+and is subject to quality control standards. In efforts to
+14
+Table of Contents 
+ensure the production of high quality products,
+many of the materials and components used in production are
+purchased from independent suppliers designated by the Company.
+The Company believes that its completed footwear as well as the
+various raw materials and components used in the manufacture of
+the footwear, including rubber, leather, nylon webbing and
+sheepskin, are generally available from multiple sources at
+competitive prices.
+The Company generally does not have any long-term
+agreements with the manufacturers or suppliers of its products,
+but does business based on individual purchase orders.
+Quality Control 
+The Company has instituted inspections and other
+procedures to satisfy the high quality demanded by users of the
+Company’s products. The Company’s quality assurance
+program includes inspection procedures at the factory level as
+well as a final inspection upon arrival of product at the
+Company’s distribution center. The Company uses on-site
+inspectors at its independent suppliers who oversee the
+production process and perform quality assurance inspections. In
+addition, the products undergo further inspection procedures
+prior to being accepted at the Company’s domestic
+distribution center.
+Licenses 
+Teva License. The
+Company has been selling its Teva line of sport sandals and
+other footwear since 1985 pursuant to various license
+arrangements with Mark Thatcher, the inventor of the Teva sport
+sandal and the owner of the Teva patents and trademark.
+Mr. Thatcher owns seven United States patents on designs
+used in Teva footwear and has a United States trademark
+registration for the Teva mark.
+On June 7, 1999, the Company signed a new
+license agreement (the “License Agreement”) for Teva,
+which became effective January 1, 2000. Under the License
+Agreement, the Company has the exclusive worldwide rights for
+the manufacture and distribution of Teva footwear through 2004.
+Apparel and other non-footwear products are not covered by the
+License Agreement. The License Agreement is automatically
+renewable through 2008 and through 2011 under two renewal
+options, provided that minimum required sales levels are
+achieved. These required minimum annual sales levels are
+$107.9 million in 2004 and $137.3 million in 2008,
+both of which are significantly greater than the annual sales of
+$61.2 million achieved by the Company in 2001. The Company
+believes it is unlikely to achieve the contractual minimum for
+2004 and has begun discussions with the licensor to address this
+issue. However, the Company can provide no assurances that it
+will be successful in its efforts to reach an acceptable
+resolution.
+As with the previous arrangement, the License
+Agreement provides for a sliding scale of royalty rates,
+depending on sales levels, and includes guaranteed minimum
+annual royalty amounts. Additionally, the License Agreement
+provides for an increase in the required amount of marketing
+expenditures, depending on sales levels and varying by
+territory. In addition to the minimum contractual marketing
+expenditures, the Company and the licensor have agreed to each
+contribute annually a certain percentage of sales toward the
+promotion of the Teva brand and trademark, with or without
+particular reference to individual Teva styles.
+As additional consideration, the Company paid the
+licensor a licensing fee of $1,000,000 in 1999 and issued the
+licensor 428,743 shares of its previously unissued common stock
+valued at $1,608,000. The Company has recorded the license as an
+intangible asset equal to the cash and market value of the stock
+issued on the date of the License Agreement. These shares are
+subject to various contractual and other holding period
+requirements. In addition, the Company has agreed to grant the
+licensor not less than 50,000 stock options on the
+Company’s common stock annually, at an exercise price equal
+to the market value on the date of grant.
+The licensor retains the rights to approve the
+quality of the licensed products produced, all marketing,
+advertising and promotional plans and materials, and the
+distribution channels and customers to whom the Company can sell
+the licensed products. In addition, the License Agreement
+provides for minimum annual research and development spending
+levels for the Company with respect to the Teva products and
+restricts the volume of closeouts and seconds which the Company
+is able to sell each year.
+15
+Table of Contents 
+The License Agreement provides that the licensor,
+in his sole discretion, may take any action against parties
+believed to be infringing upon the licensor’s trademark,
+patents and other intellectual property. The licensor is fully
+responsible for any legal and other costs incurred in such
+actions and is entitled to any recovery resulting from the
+actions. The Company may not participate in any such action or
+in any other action regarding the infringement of the Teva
+intellectual property without the licensor’s prior written
+consent.
+In the event that the license term is
+automatically renewed beyond 2004, the Company must achieve
+minimum annual sales levels for the years 2005 through 2011.
+These minimum annual sales levels are based upon certain
+percentages of net sales in the preceding calendar year. If the
+Company is not able to achieve the minimum annual sales levels
+for two years during a renewal term, the License Agreement can
+be terminated at the option of the licensor. Currently, annual
+sales of Teva products are substantially below the required
+minimums.
+During the term of the License Agreement,
+including the renewal terms, the Company is prohibited from
+manufacturing, marketing, selling and distributing any sandals
+other than Teva sandals. In addition, for the two years
+following the termination of the License Agreement, the Company
+is prohibited from manufacturing, marketing, selling and
+distributing sandals, in general. However, the Company may
+continue to manufacture, market, sell and distribute all styles
+and models of sandals offered under its Simple product line
+which existed as of the date of the License Agreement as well as
+all styles subsequently approved by the licensor.
+The License Agreement can be terminated under
+several circumstances, if they remain uncured for specific
+periods of time. These circumstances include the following,
+among others: if either party becomes insolvent or bankrupt; if
+the Company offers sandals which compete with the Teva products
+or otherwise engages in activities which compete with the Teva
+products; if the Company transfers substantially all of its
+property or stock to other parties; if the Company sells
+unapproved merchandise in violation of the License Agreement; or
+if the Company or the licensor otherwise violate or breach the
+terms of the License Agreement.
+In connection with the execution of the most
+recent license agreement with Mark Thatcher, the Company
+received an option to buy Teva and virtually all of its assets,
+including all worldwide rights to Teva. The option price is
+based on formulas tied to net sales of Teva products and varies
+depending on when the option is exercised. For the first option
+period, January 1, 2000 through December 31, 2003, the
+option price is for an amount equal to the greater of
+(i) $61.6 million or (ii) 75% of the largest
+calendar year revenues since January 1, 2000 for the Teva
+brand, plus $1.6 million. In addition, the Company would
+issue to Mr. Thatcher 100,000 shares of common stock and
+options to purchase 100,000 shares of common stock. The purchase
+price for the second option period, January 1, 2006 to
+December 31, 2008, is equal to 110% of the average of the
+aggregate sales for all Teva products for the two calendar years
+since January 1, 2000 with the highest aggregate net sales.
+If the Company does not exercise its option to acquire Teva, the
+licensor has the option to acquire the Teva distribution rights
+from the Company for the period from January 1, 2010 to
+December 31, 2011, the end of the license term, and the
+option price is based on a formula tied to the Company’s
+earnings before interest, taxes, depreciation and amortization.
+The Company is currently evaluating the possibility of
+exercising the option in the January 1, 2000 to
+December 31, 2003 option period. The payment of the
+purchase price must be completed within 90 days of the
+exercise of the purchase option. If the Company exercises its
+purchase option, but subsequently fails to complete the purchase
+within the 90 day payment period, the purchase option and the
+Option Agreement will automatically be terminated.
+Sale of Heirlooms, Inc. 
+The Company and Bob Eason, the designer and
+founder of Picante clothing, were parties to an agreement
+pursuant to which the Company owned 50% of Heirlooms, Inc.
+(“Heirlooms”), the manufacturer and distributor of
+Picante clothing. In January 2001, the Company sold its 50%
+interest in Heirlooms back to Mr. Eason for cash of
+approximately $1,200,000 and a note receivable of approximately
+$420,000, which was secured by a secondary security interest in
+the assets of Heirlooms. The selling price was for an amount
+that approximated the net carrying value of the underlying
+assets and, accordingly, the resulting gain on the sale was not
+significant.
+16
+Table of Contents 
+Patents and Trademarks 
+Mr. Thatcher holds seven United States
+patents and one patent in each of Australia, New Zealand, Korea,
+Germany, France, China, Japan and the United Kingdom for Teva
+footwear. As a result of the expiration of the applicable period
+during which foreign patent applications were required to have
+been filed, Mr. Thatcher does not and cannot hold such
+patent rights in other countries. Mr. Thatcher also
+currently holds Teva trademark rights in the United States and
+in several other countries, including, among others, France,
+Germany, the United Kingdom, Japan and Australia.
+Mr. Thatcher’s patent and trademark rights are
+licensed to the Company under the License Agreement discussed
+previously. Both the Company and Mr. Thatcher regard such
+proprietary rights as valuable assets, and the Company
+cooperates with Mr. Thatcher in vigorously protecting such
+rights against infringement by third parties. To date,
+Mr. Thatcher has successfully enforced his patent and
+trademark rights in all 20 concluded lawsuits brought
+against such third parties. Under certain circumstances, if
+Mr. Thatcher declines to challenge a potential
+infringement, the Company may bring an infringement action at
+its own cost, with Mr. Thatcher’s prior written
+consent. See “Licenses — Teva License.”
+The Company owns the Simple and Ugg trademarks
+and has applied for or received registrations for them in the
+United States and in many foreign countries. The Company has
+selectively registered style category names and marketing
+slogans. In addition, the Company holds two design patents for
+its footwear products.
+The Company has acquired the patent and
+trademarks for Alp®sport sandals and has registered the
+Deckers trademark.
+Backlog 
+Historically, the Company has encouraged and has
+received a significant portion of its orders as preseason
+orders, which are generally placed by customers approximately
+four to eight months prior to shipment date. As discussed above,
+the Company has emphasized this “futures” business, as
+compared to “at once” sales, as it allows the Company
+to better forecast its inventory requirements and assists with
+the Company’s sourcing schedule. As a result, the Company
+provides its customers with incentives to participate in such
+preseason programs. Unfilled customer orders
+(“backlog”), as of any date, represent orders
+scheduled to be shipped at a future date and do not represent
+firm sales. The mix of future and immediate delivery orders can
+vary significantly from quarter to quarter and year to year. The
+backlog as of a particular date is affected by a number of
+factors, including seasonality and the scheduling of manufacture
+and shipment of products as well as variations in the quarter to
+quarter and year to year preseason incentive programs. As a
+result, comparisons of backlog from period to period are not
+meaningful and the Company’s backlog at any given time is
+generally not indicative of sales levels expected to be achieved
+in the future.
+Competition 
+The casual, outdoor and athletic footwear markets
+are highly competitive. The Company believes that currently its
+largest competitors of the Teva line are Nike, Adidas,
+Timberland, Merrell, Columbia and Salomon. The principal
+competitors of Simple’s casual line include Steve Madden,
+Dr. Marten, Camper, and Kenneth Cole and of Simple’s
+sneaker/sandal line include Skechers, Diesel, Steve Madden,
+Puma, NM70 and Guess. Ugg’s competitors include Merrell,
+Rocket Dog, Acorn, Aussie Dogs, LB Evans and Timberland, as well
+as retailers’ private label footwear.
+Competition in the Company’s footwear is
+primarily based on brand awareness, product quality, design,
+price points, fashion appeal, marketing, distribution,
+performance and brand positioning. The Company’s Teva line
+of footwear competes primarily on the basis of its authenticity
+as a recognized brand in the outdoor market, its consumer brand
+recognition as one of the first sandals of its kind, as well as
+its high performance nature and its diversity of styles offered.
+In addition, several of the most popular styles employ a
+distinctive patented strapping system, which contributes to
+performance and the brand’s consumer recognition. The
+Company competes through its Simple line as an alternative brand
+offering a diversity of simple, back-to-basics styles designed
+for a variety of recreational and leisure activities. Ugg
+competes primarily on the basis of
+17
+Table of Contents 
+its authenticity as well as its brand name
+recognition as a high quality premium luxury brand, identifiable
+with the United States sheepskin footwear market. The Company
+believes its business strategy has resulted in increased
+awareness for its brands. However, no assurance can be given
+that in the future the Company will be able to maintain or
+further increase its brand awareness, maintain or increase its
+market share or respond to changing consumer preferences.
+Risks of Foreign Operations/ Restrictions on
+Imports 
+The Company’s operations are subject to the
+customary risks of doing business abroad, including, but not
+limited to, currency fluctuations, customs duties and related
+fees, various import controls and other non-tariff barriers
+(e.g., quotas), the cost of transportation, restrictions on the
+transfer of funds, labor unrest and strikes, and in certain
+parts of the world, political instability. Countries where the
+Company’s products are manufactured and sold may, from time
+to time, seek to increase customs duties or impose quotas, all
+of which have the potential to affect the Company’s
+operations and its ability to maintain or increase the current
+level of importation of the Company’s products. The Company
+is unable to predict the likelihood or frequency of the
+occurrence of any of these events.
+The products imported by the Company into the
+United States are subject to various duty rates which are
+established by law. At the present time these duties range
+between 8.5% and 12.5% of the entered value of footwear with
+uppers made principally of leather or sheepskin, and 6.0% and
+37.5%, plus $.90 per pair, of the entered value of footwear with
+uppers made principally of synthetic textiles or plastic.
+Certain products imported by the Company are exempt from duties
+pursuant to laws pertaining to products manufactured in certain
+beneficiary countries. “Entered value” means the value
+taken into account for purposes of determining the amount of any
+customs duties or any other duties which may be imposed on the
+importation of any property. In general, the entered value is
+normally based on the price paid or payable by the Company to
+the seller of the imported merchandise.
+From time to time, the Company may be subject to
+claims for additional duties arising as a result of the United
+States Customs Service, or similar agencies of foreign
+countries, disagreeing with the classification and/or valuation
+used by the Company to enter various styles of footwear.
+In 1997, the European Commission enacted
+anti-dumping duties of 49.2% on certain types of footwear
+imported into Europe from China and Indonesia. Dutch Customs has
+issued an opinion to the Company that certain popular Teva
+styles are covered by this anti-dumping duty legislation. The
+Company has been contesting the opinion and is working with
+Dutch Customs to resolve the situation. The Company has since
+obtained, and is using, alternative sourcing for the potentially
+impacted products from sources outside of China in an effort to
+reduce the potential risk in the future. In the event that Dutch
+Customs makes a final determination that the anti-dumping
+provisions are applicable, the Company would have an exposure
+for prior unpaid anti-dumping duties during 1997 of
+approximately $500,000, which has been fully accrued as of
+December 31, 2001.
+The European communities also impose quantitative
+limits on imports from China of certain leather upper and
+textile upper footwear. The Company is unable to predict how
+long the anti-dumping duty and import quota restrictions will
+remain in effect or changes in the scope or severity of such
+restrictions.
+Employees 
+At December 31, 2001, the Company employed
+approximately 98 full-time employees in its U.S.
+facilities, 4 at its European subsidiary and 28 at its Hong Kong
+subsidiaries, none of whom is represented by a union. The
+Company believes its relationship with its employees is good.

raw/filings/0000910521/2001/0000950148-02-000814/item13.txt

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+Item 13. Certain Relationships and
+Related Transactions 
+Information relating to Certain Relationships and
+Related Transactions is set forth in the Company’s
+definitive proxy statement relating to the Registrant’s
+2002 annual meeting of shareholders, which will be filed
+pursuant to Regulation 14A within 120 days after the
+end of the Company’s fiscal year ended December 31,
+2001, and such information is incorporated herein by reference.
+53
+Table of Contents