<PAGE> 1
.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MAY 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-14203
MERIDIAN NATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-1470518
(State of Incorporation) (I.R.S. Employer
Identification Number)
805 CHICAGO STREET, TOLEDO, OH 43611
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (419) 729-3918
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of July 7, 1995, 2,548,689 shares of Meridian National Corporation common
stock were outstanding.
<PAGE> 2
MERIDIAN NATIONAL CORPORATION
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
The accompanying condensed consolidated financial statements of
Meridian National Corporation are unaudited but, in the opinion of management,
reflect all adjustments (including only normal recurring accruals) necessary to
present fairly such information for the periods and at the dates indicated.
The results of operations for the three months ended May 31, 1995 may not be
indicative of the results of operations for the year ending February 29, 1996.
Since the accompanying condensed consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X, they do not contain
all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
consolidated financial statements and notes thereto appearing in the Company's
Annual Report on Form 10-K for fiscal year ended February 28, 1995.
2
<PAGE> 3
MERIDIAN NATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, February 28,
1995 1995
ASSETS ------------ ------------
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 502,756 $ 655,373
Accounts receivable - net 8,376,108 9,103,949
Inventories 10,333,682 9,308,691
Other current assets 311,390 191,876
----------- -----------
Total current assets 19,523,936 19,259,889
Property and equipment, at cost 9,914,227 9,642,984
Less accumulated depreciation and amortization 4,905,732 4,772,164
----------- ----------
5,008,495 4,870,820
Other assets 824,542 929,271
----------- -----------
$25,356,973 $25,059,980
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $10,668,966 $ 9,525,341
Accounts payable and accrued liabilities 7,056,352 7,590,476
Long-term debt due within one year:
Related parties 327,929 349,325
Other 539,021 540,104
----------- -----------
Total current liabilities 18,592,268 18,005,246
Long-term debt due after one year:
Related parties 671,425 895,233
Other 3,895,696 4,034,059
Stockholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized:
$100 Series A, 5,000 shares authorized,
4,000 shares outstanding 400,000 400,000
$3.75 Series B, 1,375,000 shares authorized,
206,752 shares outstanding 775,320 775,320
Common stock, $.01 par value, 20,000,000
shares authorized,
2,548,689 shares outstanding
(2,534,639 at February 28, 1995) 25,487 25,346
Capital in excess of stated value 9,822,897 9,785,677
Deficit (8,826,120) (8,860,901)
----------- -----------
Total stockholders' equity 2,197,584 2,125,442
----------- -----------
$25,356,973 $25,059,980
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MERIDIAN NATIONAL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales $15,336,240 $12,531,894
Costs of sales 13,551,473 10,452,893
----------- -----------
Gross margin 1,784,767 2,079,001
Other costs and expenses:
Selling, general and administrative 1,548,782 1,359,654
Interest expense 368,622 230,709
Miscellaneous - net (27,214) (17,571)
----------- -----------
1,890,190 1,572,792
----------- -----------
Income (loss) before income taxes and
extraordinary gain (105,423) 506,209
Provision for federal income taxes - current - 15,000
----------- -----------
Income (loss) before extraordinary gain (105,423) 491,209
Extraordinary gain - extinguishment of debt 149,206 -
----------- -----------
Net income $ 43,783 $ 491,209
=========== ===========
Earnings applicable to common stock $ 9,585 $ 459,711
=========== ===========
Earnings (loss) per common share -
primary and fully diluted:
Income (loss) before extraordinary gain ($0.06) $0.19
Extraordinary gain 0.06 -
----------- -----------
Net Income $0.00 $0.19
=========== ===========
Weighted average common
shares outstanding 2,543,929 2,411,372
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
MERIDIAN NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 43,783 $ 491,209
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary gain on extinguishment of debt (149,206) -
Depreciation and amortization 138,093 179,268
Amortization of intangible assets 1,536 120,339
Changes in operating assets and liabilities:
Accounts receivable 727,841 173,822
Inventories (1,024,991) (741,367)
Other current assets (119,514) (64,212)
Accounts payable and accrued liabilities (534,124) 488,408
----------- -----------
Net cash provided by (used in) operating
activities (916,582) 647,467
INVESTING ACTIVITIES
Additions to property and equipment (271,242) (140,639)
Changes in other assets 98,667 (10,828)
Proceeds from disposal of assets - 10,000
----------- -----------
Net cash used in investing activities (172,575) (141,467)
FINANCING ACTIVITIES
Changes in notes payable 1,143,625 (466,827)
Payments on long-term debt (235,444) (201,339)
Cash dividends paid (9,000) (6,300)
Net proceeds from exchange of warrants 37,359 -
---------- ----------
Net cash provided by (used in) financing
activities 936,540 (674,466)
----------- -----------
Decrease in cash and cash equivalents (152,617) (168,466)
Cash and cash equivalents at beginning of period 655,373 307,077
----------- -----------
Cash and cash equivalents at end of period $ 502,756 $ 138,611
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
MERIDIAN NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. EXTINGUISHMENT OF DEBT
In March 1995, the Company negotiated an agreement with a stockholder
who holds less than 5% of the outstanding voting stock, whereby a convertible
note payable in an amount of $596,822 was settled, subject to certain
conditions, for $447,600 payable in 18 monthly payments commencing in March
1995, without interest. The early retirement of this obligation resulted in the
recording of an extraordinary gain of $149,000 or $.06 per share in the three
months ended May 31, 1995.
2. CAPITAL STOCK
The Company issued 1,265,000 common stock purchase warrants in 1989
(the "Original Warrants"). Each Original Warrant entitled the holder to
purchase one-tenth share of common stock at a per share exercise price of
$17.50, subject to adjustment under certain circumstances. The terms of the
Original Warrants have been modified by the Company during a special exercise
period which commenced January 20, 1995 and extends through July 31, 1995, at
which time the Original Warrants expire. During this period holders of the
Original Warrants may purchase, at a purchase price of $2.75, a unit consisting
of one share of common stock and one common stock purchase warrant ("1998
Warrant"). The 1998 Warrants entitle the holder to purchase one share of
common stock at any time commencing on May 1, 1996 and ending May 31, 1998, at
a per share exercise price of $2.75. During the quarter ended May 31, 1995,
14,050 Original Warrants were exercised and 1,166,950 remain outstanding at May
31, 1995.
3. RELATED PARTY TRANSACTIONS
The Company leases property and equipment from affiliates of certain
officers and directors of the Company. Lease payments to these affiliates
during the three month periods ended May 31, 1995 and 1994 amounted to $63,000
each period. The Company's management believes the terms of the leases are at
least as favorable as those that could have been obtained from unrelated
parties. One of these leases is a capital lease and is included in property
and equipment at $373,000 (net of accumulated depreciation of $179,000) at May
31, 1995.
6
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4. BUSINESS COMBINATIONS
In fiscal 1986, the Company acquired all of the common stock of
certain subsidiaries for $4,600,000 (exclusive of acquisition costs of
$215,000), made up of $2,000,000 in cash and $2,600,000 in promissory notes.
The controlling interests in the subsidiaries were purchased from certain
present and former members of management who were also principal stockholders
of the Company. The acquisitions have been accounted for as purchases. The
SEC staff questioned the Company's accounting for the acquisitions and
indicated that the accounting differs from the staff's position on accounting
for similar transactions. Under the staff position, the transfer of assets and
liabilities to the Company would have been accounted for at historical cost,
i.e., at the carryover basis of the acquired companies. In the fourth quarter
of fiscal 1995, the Company wrote off, as part of a $2,286,000 pretax charge,
the majority of the goodwill and increased bases in other assets which had been
recorded under the purchase accounting method. As a result of the write-off,
for periods subsequent to February 28, 1995, the effect on net income due to
the difference in methods of accounting for the acquisitions is immaterial. If
the Company had applied the SEC staff's preferred accounting prior to March 1,
1995, the accompanying condensed consolidated statements of operations for the
first quarter of the prior fiscal year would reflect a reduction of costs of
sales and other costs and expenses aggregating $106,000. This reduction
reflects the elimination of charges to amortize the goodwill and increased
bases in other assets which would not have been recorded under the staff
position. As a result, net income for the three months ended May 31, 1994
would increase to $ 597,000 or $.23 per share.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
FIRST QUARTER ENDED MAY 31, 1995
COMPARED TO
FIRST QUARTER ENDED MAY 31, 1994
Record first quarter sales of $15.3 million were achieved in the first quarter
of fiscal 1996. This sales volume represented the second highest quarterly
sales of any quarter in the Company's history. The Company's acquisition of
the assets of the Detroit, Michigan steel service center and the development of
this operation in fiscal 1995, principally contributed to the overall sales
increase.
In the first quarter of fiscal 1996, the Company reported net income of $44,000
compared to net income of $491,000 in the comparable period last year. Net
income for the current quarter includes $149,000 attributable to an
extraordinary gain resulting from the early retirement of debt obligations at a
discount. The Company's earnings decline in the first quarter of fiscal 1996
results from a number of factors, including the shutdown of the automotive
bumper stock pickling business in March 1995, a 60% increase in interest
expense, a decrease in Steel Segment gross margins as a percentage of net sales
and a small decline in Waste Management Segment sales. These factors are
further discussed below.
STEEL DISTRIBUTION AND PROCESSING SEGMENT The Company's steel distribution
and processing operations reported net sales of $14.1 million for the first
quarter of fiscal 1996, an increase of $2.9 million or 26% over the first
quarter of the prior year. The development of the Company's steel service
center previously described largely contributed to this sales increase.
Operating profits for this segment amounted to $537,000, a decrease of $256,000
from the first quarter of the prior year. This decline in operating profits is
attributable to the shutdown of the bumper stock pickling business in March
1995 and a decrease in gross margins as a percentage of net sales. The Company
is converting the bumper stock pickling operation to bar coil pickling. This
new capability should be fully operational by the end of the second quarter of
fiscal 1996. Excluding the effects of the shutdown of the bumper stock
pickling business, steel segment gross margin (net sales less costs of
operations) as a percentage of net sales was 10% in the first quarter of fiscal
1996 compared to 12% in the comparable quarter of the prior year. This gross
margin decrease is attributable to an increase in the availability of the
supply of steel coupled with a decreasing demand for steel products. As the
economy gradually softens, market selling prices of steel products become
highly competitive causing pressure on gross margins in our industry sector.
8
<PAGE> 9
WASTE MANAGEMENT SEGMENT Net sales for this segment decreased to $1.3 million
in the first quarter of fiscal 1996 from $1.4 million in the first quarter of
the prior year. The segment's paint waste recycling operation reported a
$100,000 net sales increase for the first quarter of fiscal 1996; however, this
increase was offset by a $200,000 net sales decrease reported by the segment's
waste acid recycling and disposal operations. The paint waste recycling net
sales increase is directly attributable to an 11% volume increase as selling
prices remained relatively constant compared to the first quarter of the prior
year. This operation continues to increase its level of business by
identifying additional generators of processable paint wastes as well as
developing operating relationships with other waste management companies and
brokers. The waste acid recycling and disposal operations net sales decreased
due to declining sales to a nearby primary steel producer which comprises about
70% of this operation's sales volume or 27% of the segment's sales. Recent
discussions with this customer have revealed that it is considering developing
its own acid waste recycling and disposal operation, the details of which are
unknown to the Company at this time. The Company believes it may not be
successful in replacing all of this customer's business should such plans
materialize. However, the Company believes that it could successfully replace
a portion of this customer's business and therefore, the loss of this
customer's business would not have a material adverse effect on the Company's
consolidated operations. No substantial write-off of any assets would result
from a loss of this customer's business.
This segment reported a $9,000 operating profit in the first quarter of fiscal
1996 compared to $172,000 in the first quarter of the prior year. This decline
in operating profits is attributable to the segment's net sales decrease as
well as higher operating costs and expenses incurred in the first quarter of
fiscal 1996 compared to fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The $189,000 increase in
selling, general and administrative expenses is principally attributable to the
development of the Company's Detroit, Michigan steel service center in fiscal
1995 previously described.
INTEREST EXPENSE Interest expense increased $138,000 (or 60%) in the first
quarter of fiscal 1996 due to the dramatic rise in interest rates during 1995.
In addition, the Company's average outstanding borrowings rose as a result of
the increase in working capital requirements associated with the expansion and
growth of the business in fiscal 1995 and the first quarter of fiscal 1996.
INCOME TAXES The Company has, as of February 28, 1995, net operating loss,
business credit and alternative minimum tax credit carryforwards for federal
tax purposes of approximately $3,863,000, $26,000 and $18,000, respectively,
available for the reduction of future federal income tax. Net operating loss
9
<PAGE> 10
carryforwards begin expiring in fiscal 2005. As a result of taxable losses and
valuation allowances, no provision for income taxes has been made in the
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Working capital as of May 31, 1995 amounted to $932,000. The $323,000 decrease
in the Company's working capital position from February 28, 1995 is primarily a
result of capital expenditures and payment of long-term debt during the period.
Certain components of working capital, including accounts receivable,
inventories, notes payable and accounts payable, historically may fluctuate
significantly based upon market conditions, sales volume and steel purchasing
strategies of the Company's steel operations.
The Company's primary sources of liquidity are its cash balances and a $12.0
million revolving credit line with a bank. The revolving credit line was
increased in May 1995 from $10.75 million to $12.0 million. Borrowing
availability under the revolving credit line is determined using a formula
based upon eligible accounts receivable and inventories. As of May 31, 1995,
the outstanding balance of the revolving credit line amounted to $10,669,000
and unused availability amounted to $758,000.
The revolving credit line agreement prohibits the payment of cash dividends on
the Company's common stock and allows the payment of cash dividends on the
Company's preferred stock issues only if the Company is not in default of any
provisions in the loan agreement and payment of such dividend would not result
in any defaults.
In March 1995, the Company negotiated an agreement with a stockholder whereby a
convertible note payable in an amount of $597,000 was settled, subject to
certain conditions, for $448,000 payable in eighteen monthly payments
commencing in March 1995, without interest. The early retirement of this
obligation resulted in the recording of an extraordinary gain of $149,000 in
the first quarter of fiscal 1996.
As a result of federal environmental regulations issued in 1991, EPI is
required to and has submitted to the U.S. EPA an operating permit application
under the Resources Conservation Recovery Act of 1980. The final approval for
such a permit may take several years and require additional outlays of funds.
During the application and review process, EPI's operations continue on interim
status and are unaffected. EPI may be required to make modifications to its
operating procedures or equipment in the future, although EPI's management
believes its operations meet the requirements without modification.
10
<PAGE> 11
The former partner of EPI retained the right to receive 10% of the proceeds by
the Company from any sale, refinancing or similar transactions relative to the
Company's interests in EPI. The agreement specifically permits, without
payments to the former partner, the repayment of certain loans or distributions
of profits to the Company from the ordinary business operations of EPI. The
Company believes the likelihood of any such distribution to the former partner
is remote. Accordingly, the Company has not recorded any liability for the
contingent interest of the former partner in the Company's balance sheet.
EPI and the Company have a financing arrangement, similar to the Company's
revolving credit line with a bank, whereby operating funds are made available
to EPI through the sale to the Company of EPI's trade receivables. Funds are
advanced to EPI as required, subject to limitation based on 80% of EPI's
eligible trade receivables.
The Company does not have any material capital expenditure commitments at this
time. Capital expenditures are limited to $500,000 annually under its loan
agreement with the bank.
Historically, the Company's operations have been funded with cash generated
from operations and bank financing. The Company has also raised funds through
sale of equity securities and has used the proceeds to fund its investments in
EPI, among other items. Management believes its existing resources, including
available cash, cash provided by operating activities and the Company's credit
facilities will be sufficient to satisfy its working capital and other capital
requirements for fiscal 1996.
11
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MERIDIAN NATIONAL CORPORATION
PART II
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended May 31, 1995.
A March 14, 1995 report was filed to disclose under Section 5., Other
Events, the extension of the special offer relating to the Company's
Redeemable Common Stock Purchase Warrants. The report dated April 4, 1995
was filed to disclose under Item 5. Other Events, a pretax charge relating
to the write-off of certain assets approximating $2.2 million.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheets of Meridian National
Corporation as of May 31, 1995 and the related unaudited condensed consolidated
statements of operations for the three months ended May 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> MAY-31-1995
<CASH> 502,756
<SECURITIES> 0
<RECEIVABLES> 8,376,108
<ALLOWANCES> 0
<INVENTORY> 10,333,682
<CURRENT-ASSETS> 19,523,936
<PP&E> 9,914,227
<DEPRECIATION> 4,905,732
<TOTAL-ASSETS> 25,356,973
<CURRENT-LIABILITIES> 18,592,268
<BONDS> 3,895,696
<COMMON> 25,487
0
1,175,320
<OTHER-SE> 996,777
<TOTAL-LIABILITY-AND-EQUITY> 25,356,973
<SALES> 15,336,240
<TOTAL-REVENUES> 15,336,240
<CGS> 13,551,473
<TOTAL-COSTS> 13,551,473
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368,622
<INCOME-PRETAX> (105,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (105,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 149,206
<CHANGES> 0
<NET-INCOME> 43,783
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
