<PAGE>
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, 1999
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 June 30,1999, 3,717,552 shares of Meridian National Corporation common
stock were outstanding.
<PAGE>
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, 1999 may not be
indicative of the results of operations for the year ending February 29, 2000.
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, 1999.
2
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Meridian National Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS May 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,567 $ 825,437
Accounts receivable 7,468,638 8,021,764
Inventories 6,648,912 8,281,272
Other current assets 758,946 723,356
------------ ------------
Total current assets 14,899,063 17,851,829
Property and equipment, at cost 7,188,151 7,094,339
Less accumulated depreciation and amortization 3,649,416 3,514,601
------------ ------------
3,538,735 3,579,738
Other assets 594,565 691,059
------------ ------------
Total assets $ 19,032,363 $ 22,122,626
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term bank borrowings $ 10,004,569 $ 11,811,627
Accounts payable and accrued liabilities 11,555,959 12,528,463
Current portion of long-term debt:
Affiliate 580,006 607,811
Other 2,977,435 3,045,046
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Total current liabilities 25,117,969 27,992,947
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Long-term debt due after one year:
Affiliate 275,232 275,232
Other 636,147 894,473
------------ ------------
911,379 1,169,705
------------ ------------
Total liabilities 26,029,348 29,162,652
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Stockholders' deficit:
Preferred stock, $.001 par value, authorized 5,000,000 shares:
$100 Series A, 5,000 shares authorized,
4,000 shares issued and outstanding 400,000 400,000
$3.75 Series B, 1,375,000 shares authorized,
206,752 shares issued and outstanding 775,320 775,320
Common stock, $.01 par value, authorized 20,000,000 shares,
3,717,552 shares outstanding 37,176 37,176
Additional paid in capital 10,998,866 10,998,866
Accumulated Deficit (19,208,347) (19,251,388)
------------ ------------
Total stockholders' deficit (6,996,985) (7,040,026)
------------ ------------
$ 19,032,363 $ 22,122,626
============ ============
</TABLE>
See accompanying notes.
3
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Meridian National Corporation
Condensed Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
----------------------------
1999 1998
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<S> <C> <C>
Net sales $ 10,863,631 $ 15,829,978
Costs of sales 9,186,452 14,339,204
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Gross margin 1,677,179 1,490,774
Other costs and expenses (income):
Selling, general and administrative 1,294,517 1,474,279
Interest 370,362 480,576
Miscellaneous - net (975) (68,216)
------------ ------------
Total other costs and expenses 1,663,904 1,886,639
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Net income (loss) $ 13,275 $ (395,865)
============ ============
Loss applicable to common stock $ (15,108) $ (424,247)
============ ============
Loss per common share -
basic and fully diluted: $ 0.00 $ (0.12)
============ ============
Weighted average common
shares outstanding 3,717,552 3,488,278
============ ============
</TABLE>
See accompanying notes.
4
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Meridian National Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Operating activities
Net income (loss) $ 13,275 $ (395,865)
Adjustments to reconcile income (loss) to net cash
used in continuing operating activities:
Depreciation and amortization 155,140 256,775
Changes in operating assets and liabilities:
Accounts receivable 553,126 2,057,287
Inventories 1,632,360 1,101,566
Other current assets (35,590) (16,239)
Accounts payable and accrued liabilities (933,738) (2,063,330)
----------- -----------
Net cash provided by operating activities 1,384,573 940,194
Investing activities
Additions to property and equipment (97,129) (241,500)
Changes in other assets (13,639) (8,924)
----------- -----------
Net cash (used in) investing activities (110,768) (250,424)
Financing activities
Payments on notes payable (1,807,058) (419,661)
Payments on long-term debt (260,617) (257,343)
Cash dividends paid (9,000) (9,000)
----------- -----------
Net cash (used in) financing activities (2,076,675) (686,004)
----------- -----------
Increase in cash and cash equivalents (802,870) 3,766
Cash at beginning of period 825,437 21,260
----------- -----------
Cash at end of period $ 22,567 $ 25,026
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
MERIDIAN NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. 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
each of the three months ended May 31, 1999 and 1998 approximated $64,000. 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.
2. Subsequent Events
On June 25, 1999 the Company entered into an agreement with a private
investor group to sell 4.2 million shares of previously unissued shares of
common stock of the Company for $294,000. The shares, upon issuance, will
represent 53.05% of the issued and outstanding shares of the Company's common
stock. The private investor group is affiliated with MNP Corporation ("MNP"), a
privately held company which currently holds approximately 280,000 shares of the
Company's common stock and whose majority owner is a director of the Company.
The agreement obligates MNP to enter into a loan and security agreement with the
Company in the amount of $3.2 million. MNP is obligated to advance $1,206,000
under the agreement no later than the closing date. Additional advances may be
made in MNP's sole discretion. Borrowings would be due on demand and bear
interest at prime plus 1%. The loans would be secured by substantially all
assets of the Company, however, all such security interests and liens would be
junior and subordinate to the secured positions of the bank and other secured
lenders. The closing, expected to occur no later than September 1, 1999, is
subject to certain conditions being fulfilled to the buyers' satisfaction,
including due diligence investigations and re-negotiation of certain of the
Company's loan agreements.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
First Quarter Ended May 31, 1999
Compared to
First Quarter Ended May 31, 1998
Steel Distribution and Processing Segment The Company's steel distribution and
processing operations reported net sales of $10.0 million for the first quarter,
a decrease of $4.9 million or 33% compared to the first quarter of the prior
year. A reduction in the availability of steel products from the Company's
suppliers due to credit constraints imposed on the Company has been a factor in
the reduced sales volume for the steel distribution and processing business.
Additionally, the steel processing operations at the Gary, Indiana facility were
significantly reduced in the fourth quarter of the prior fiscal year, resulting
in a $2.4 million decrease in sales for the first quarter compared to the prior
year. Also, market prices for steel products are lower than in the prior year
period.
Operating income for this segment amounted to $597,000 for the first quarter, an
increase of $285,000 from the prior year quarter. Gross margin (net sales less
cost of sales) as a percentage of net sales was 14.7% in the first quarter
compared to 8.9% in the first quarter of the prior year. The improved margins
reflect the utilization of lower cost steel for the automotive base of the steel
processing business at the Detroit, Michigan service center.
Waste Management Segment This segment reflects the results of the operations of
the Company's paint waste recycling operation. Net sales for this segment
decreased slightly to $887,000 in the first quarter from $965,000 in the first
quarter of the prior year. For the past several years, this operation has
operated at or near its processing capacity.
This segment reported a $28,000 operating loss for the first quarter, an
improvement of $97,000 or 77% from the first quarter of the prior year. The
improvement is due primarily to decreased depreciation expense for this segment
related to an equipment write-off that was recorded at February 28, 1999.
Selling, General and Administrative Expenses The $180,000 decrease in selling,
general and administrative expenses in the first quarter is primarily
attributable to lower personnel and administration costs for the Gary, Indiana
steel operation when compared to the same quarter of fiscal 1999.
7
<PAGE>
Interest Expense Interest expense decreased $110,000 or 23% in the first quarter
compared to the prior year. Average outstanding borrowings fell due to a
decrease in steel purchases. Also interest rates were lower during the first
quarter of the current fiscal year.
Liquidity and Capital Resources
The Company's primary source of liquidity is a $13.5 million revolving
credit line with a bank. Borrowing availability under the revolving credit line
is determined using a formula based upon eligible accounts receivable and
inventories. As of May 31, 1999, the bank had permitted the Company to exceed
the eligible borrowing amount based on the lending formula by $1,550,000 (the
"overadvance"). The outstanding balance of the revolving credit line at May 31,
1999 amounted to $10,005,000, the maximum the Company could borrow at such date.
In addition to the revolving credit line facility, the bank has
previously provided financing which primarily funded the purchase and
installation of certain equipment for the Company's paint waste recycling
business. This financing was intended to be interim financing until the Company
was able to provide permanent funding anticipated to be raised through an
initial public offering of the Company's paint waste business. The Company was
unable to complete the public offering and therefore was unable to make the
final scheduled payment due to the bank in March 1998 of $2,035,000. The bank
has allowed the Company to continue to make monthly principal payments on the
debt of $21,000 plus interest. The outstanding obligation under this financing
amounted to $1,720,000 at May 31, 1999.
As a result of the Company's inability to make payment of sums due the
bank and maintain the terms and covenants of the original loan agreements, the
Company, in May 1999, entered into a forbearance agreement with the bank. During
the forbearance period the bank has agreed not to exercise its right to demand
immediate payment of obligations due, and the right to foreclose, take
possession of, and liquidate all collateral. The bank also will not enforce the
default interest rate during the forbearance period. Under the terms of the
forbearance agreement, the bank required the Company to reduce the permitted
overadvance, in an original amount of $2,350,000, by applying approximately
$800,000 the Company held in a certificate of deposit, which represented a
portion of the proceeds from the sale of a building in August 1998. Also, on
June 15, 1999, the allowed overadvance was reduced an additional $50,000,
bringing the amount of allowed overadvance to $1,500,000. The forbearance
agreement was scheduled to expire on June 30, 1999. In anticipation of the
completion of the transaction as discussed in the following paragraph, the bank
has agreed to extend the forbearance agreement through September 1, 1999.
8
<PAGE>
On June 25, 1999 the Company entered into an agreement with a private
investor group to sell 4.2 million shares of previously unissued shares of
common stock of the Company for $294,000. The shares, upon issuance, will
represent 53.05% of the issued and outstanding shares of the Company's common
stock. The private investor group is affiliated with MNP Corporation ("MNP"), a
privately held company which currently holds approximately 280,000 shares of the
Company's common stock and whose majority owner is a director of the Company.
The agreement obligates MNP to enter into a loan and security agreement with the
Company in the amount of $3.2 million. MNP is obligated to advance $1,206,000
under the agreement no later than the closing date. Additional advances may be
made in MNP's sole discretion. Borrowings would be due on demand and bear
interest at prime plus 1%. The loans would be secured by substantially all
assets of the Company, however, all such security interests and liens would be
junior and subordinate to the secured positions of the bank and other secured
lenders. The closing, expected to occur no later than September 1, 1999, is
subject to certain conditions being fulfilled to the buyers' satisfaction,
including due diligence investigations and re-negotiation of certain of the
Company's loan agreements.
As a result of losses incurred, requirements for servicing the
Company's debt and a working capital deficiency of $10,219,000 as of May 31,
1999, the Company's cash flow generated from operations and availability under
the revolving credit line with the bank has been inadequate to timely meet the
Company's obligations to its suppliers. In recent months, the availability of
steel product from suppliers has been reduced, impacting the Company's ability
to obtain sufficient inventory and resulting in lower sales volume for the
Company's steel operations.
The Company has taken the following actions to improve operating
results and cashflow.
- At February 28, 1999 a $2.7 million restructuring charge was recorded
to write down certain assets, mainly impaired equipment, and accrue
certain liabilities related to the Polymeric Recovery System of the
paint waste recycling business. In July 1999, the Company has
discontinued processing of paint waste using this system. Operating and
administrative costs at the paint waste recycling operation have been
significantly reduced which is expected to significantly reduce the
losses experienced by this business.
- The Company is continuing to focus on its core steel processing and
distribution business and is placing additional emphasis on purchasing
and inventory management to enhance cash generated from operations.
9
<PAGE>
The ability of the Company to continue as a going concern is dependent
upon the Company having sufficient funds available to meet its financing
requirements and to purchase inventory in order to generate sufficient revenues
to sustain operations and operate at a profitable level. If the Company is not
able to successfully close on the sale of common stock to the investor group and
arrange for adequate credit facilities on reasonable terms, the Company would
not have adequate resources to satisfy its working capital needs and may be
unable to continue as a going concern.
Year 2000
The Company uses computer hardware and financial and manufacturing
software that it has purchased from third party suppliers. Such suppliers have
confirmed to the Company that such products are Year 2000 compliant or will be
in the near future. Consequently, the Company does not expect to incur any
significant costs to become Year 2000 compliant. The Company has no information
concerning the Year 2000 compliance status of its suppliers or customers. If any
of the Company's significant suppliers or customers does not successfully and
timely become Year 2000 compliant, the Company's business or operations could be
adversely affected. The Company has not generated any disaster contingency plans
related to the Year 2000 compliance issue, because operations are not heavily
dependent on computer software, and management believes that alternative means
of operating can be utilized in the event a Year 2000 problem occurs.
Forward-Looking Statements
This Form 10-Q, other SEC filings, and other pronouncements made from
time to time by the Company may include a number of forward-looking statements,
including, but not limited to, statements with respect to the Company's future
financial performance, operating results, plans and objectives. Such statements
are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based upon
the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
may differ materially from those anticipated by such statements, as a result of
a variety of factors, including among others, regulatory or economic influences.
In light of these risks and uncertainties, there can be no assurance that any
forward-looking information contained herein will in fact transpire or prove to
be accurate. The Company undertakes no responsibility to update any
forward-looking statement that may be made to reflect events or circumstances
occurring after the dates the statements were made or to reflect the occurrence
of unanticipated events.
10
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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
No reports on Form 8-K were filed during the quarter ended May 31, 1999.
11
<PAGE>
SIGNATURES
Pursuant to the requirements 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 NATIONAL CORPORATION
(Registrant)
Date: July 15, 1999 By /s/ William D. Feniger
--------------------------------------
William D. Feniger
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: July 15, 1999 By /s/ James L. Rosino
--------------------------------------
James L. Rosino
Vice President - Finance and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET OF MERIDIAN NATIONAL CORPORATION AS OF MAY
31, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
<CASH> 22,567
<SECURITIES> 0
<RECEIVABLES> 7,468,638
<ALLOWANCES> 451,400
<INVENTORY> 6,648,912
<CURRENT-ASSETS> 14,899,063
<PP&E> 7,188,151
<DEPRECIATION> 3,649,416
<TOTAL-ASSETS> 19,032,363
<CURRENT-LIABILITIES> 25,117,969
<BONDS> 4,468,820
0
1,175,320
<COMMON> 37,176
<OTHER-SE> (8,209,481)
<TOTAL-LIABILITY-AND-EQUITY> 19,032,363
<SALES> 10,863,631
<TOTAL-REVENUES> 10,863,631
<CGS> 9,186,452
<TOTAL-COSTS> 9,186,452
<OTHER-EXPENSES> (975)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370,362
<INCOME-PRETAX> 13,275
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,275
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
