<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 November 30, 1998
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 No X
--- ---
As of December 31, 1998, 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 and nine months ended November 30,
1998 may not be indicative of the results of operations for the year ending
February 28, 1999. 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, 1998.
2
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Meridian National Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS November 30, February 29,
1998 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash $ 810,894 $ 21,260
Accounts receivable 7,513,031 11,219,600
Inventories 9,688,179 11,928,955
Other current assets 727,645 691,626
------------ ------------
Total current assets 18,739,749 23,861,441
Property and equipment, at cost 10,861,787 12,637,771
Less accumulated depreciation and amortization 4,016,526 4,946,160
------------ ------------
6,845,261 7,691,611
Other assets 1,039,464 1,371,494
------------ ------------
Total assets $ 26,624,474 $ 32,924,546
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term bank borrowings $ 12,062,033 $ 13,153,473
Accounts payable and accrued liabilities 11,219,402 14,024,728
Current portion of long-term debt 3,731,040 4,194,241
------------ ------------
Total current liabilities 27,012,475 31,372,442
------------ ------------
Long-term debt due after one year:
Related parties 275,232 275,232
Other 1,791,433 2,708,143
------------ ------------
2,066,665 2,983,375
------------ ------------
Total liabilities 29,079,140 34,355,817
------------ ------------
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 36,252
Additional paid in capital 10,998,866 10,950,845
Accumulated Deficit (14,666,028) (13,593,688)
------------ ------------
Total stockholders' deficit (2,454,666) (1,431,271)
------------ ------------
$ 26,624,474 $ 32,924,546
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
Meridian National Corporation
Condensed Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 11,456,921 $ 16,895,054 $ 38,329,172 $ 53,038,939
Costs of sales 10,318,880 15,456,438 34,993,265 47,652,542
------------ ------------ ------------ ------------
Gross margin 1,138,041 1,438,616 3,335,907 5,386,397
Other costs and expenses (income):
Selling, general and administrative 1,283,253 1,704,996 4,156,430 5,295,998
Interest expense 416,790 512,588 1,350,261 1,428,930
(Gain) loss on disposal of assets 18,450 -- (944,809) --
Minority interests -- -- -- (96,600)
Miscellaneous - net 690 (84,604) (229,586) (275,479)
------------ ------------ ------------ ------------
Total other costs and expenses 1,719,183 2,132,980 4,332,296 6,352,849
------------ ------------ ------------ ------------
Net loss $ (581,142) $ (694,364) $ (996,389) $ (966,452)
============ ============ ============ ============
Loss applicable to common stock $ (615,340) $ (728,562) $ (1,098,983) $ (1,071,363)
============ ============ ============ ============
Loss per common share -
basic and fully diluted: ($ 0.17) ($ 0.20) ($ 0.30) ($ 0.30)
============ ============ ============ ============
Weighted average common
shares outstanding 3,717,552 3,555,708 3,695,042 3,517,929
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
Meridian National Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net loss $ (996,389) $ (966,452)
Adjustments to reconcile loss to net cash
used in continuing operating activities:
Depreciation and amortization 746,648 718,372
Gain on asset disposal (944,809) --
Minority interests -- (96,600)
Changes in operating assets and liabilities:
Accounts receivable 3,706,569 680,944
Inventories 2,240,776 (659,214)
Other current assets (36,019) (70,510)
Accounts payable and accrued liabilities (2,805,326) (338,453)
----------- -----------
Net cash provided by (used in) operating activities 1,911,450 (731,913)
Investing activities
Additions to property and equipment (365,598) (410,210)
Changes in other assets 21,038 (404,995)
Proceeds from disposals 1,464,226 --
----------- -----------
Net cash provided by (used in) investing activities 1,119,666 (815,205)
Financing activities
(Payments) borrowings on notes payable (1,091,440) 2,144,857
Payments on long-term debt (1,123,036) (841,696)
Proceeds from bridge note and bridge warrants -- 275,000
Cash dividends paid (27,006) (27,008)
----------- -----------
Net cash (used in) provided by financing activities (2,241,482) 1,551,153
----------- -----------
Increase in cash and cash equivalents 789,634 4,035
Cash at beginning of period 21,260 16,778
----------- -----------
Cash at end of period $ 810,894 $ 20,813
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
MERIDIAN NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. Sale of Property
In August 1998, the Company sold property and equipment located in
Detroit, Michigan for $1,500,000 in cash, which resulted in a gain of
approximately $960,000. The proceeds were used to pay off existing debt on the
building and also to make payments against the Company's bank borrowings. The
property and equipment sold were previously leased to the purchaser of the
property. The purchaser is a company which is a stockholder in the Company and
one of its subsidiaries.
One of the Company's directors has a majority ownership position in the
purchaser.
2. 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 months and nine months ended November 30, 1998 approximated $64,000
and $192,000 respectively. Lease payments to these affiliates during the three
months and nine months ended November 30, 1997 amounted to $64,000 and $192,000
respectively. 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.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-K, 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.
Results of Operations
Third Quarter Ended November 30, 1998
Compared to
Third Quarter Ended November 30, 1997
Third quarter sales of $11.5 million represented a 32% decrease from sales of
$16.9 million reported in the same quarter of the prior year. The Company
reported a net loss of $581,000 in the third quarter compared to net loss of
$694,000 in the same quarter last year. The Company's sales decline in the third
quarter of fiscal 1999 results mainly from a general softening of market prices
and demand in the steel industry
Steel Distribution and Processing Segment The Company's steel distribution and
processing operations reported net sales of $10.3 million for the third quarter
of fiscal 1999, a decrease of $5.6 million or 35% compared to the third quarter
of the prior year. Due to the pervasive effects of a major automotive strike on
the steel industry and many of the Company's customers and to the general
decline in demand for steel products, the sales decrease was spread among all of
the Company's steel distribution and processing operations.
Operating income for this segment amounted to $69,000 for the third quarter of
fiscal 1999, a decrease of $64,000 from the prior year. Gross margin (net sales
7
<PAGE>
less cost of sales) as a percentage of net sales was 8.8% in the third quarter
of fiscal 1999 compared to 7.9% in the prior year. The market for steel products
softened further during the second quarter of fiscal 1999 as demand for steel
products declined and supply of foreign steel increased. Gross margin
percentages have recovered slightly as the Company's Chicago operation, which
generated gross margin losses, was scaled back through the second quarter. Steel
prices have fallen from the prior year, and the Company has not been able to
fully pass along the costs of inventory to its customers.
Waste Management Segment This segment reflects the results of the operations
of the Company's paint waste recycling operation. Net sales for this segment
increased slightly to $1,119,000 in the third quarter of fiscal 1999 from
$992,000 in the third quarter of the prior year. For the past several years,
this operation has operated at or near its processing capacity.
This segment reported a $55,000 operating loss for the third quarter of fiscal
1999, an improvement of $100,000 or 64% from the third quarter of the prior
year. The improvement is due to increased sales, as the operating expenses for
this segment tend to remain relatively constant as processing volume varies.
Selling, General and Administrative Expenses The $422,000 decrease in selling,
general and administrative expenses in the second quarter is primarily
attributable to lower corporate personnel and administration costs in fiscal
1999 when compared to the same quarter of fiscal 1998.
Interest Expense Interest expense decreased $96,000 (or 19%) in the third
quarter of fiscal 1999. The Company's average outstanding borrowings fell due to
a decrease in steel purchases, and interest rates declined as well during the
third quarter of fiscal 1999.
Nine Months Ended November 30, 1998
Compared to
Nine Months Ended November 30, 1997
Sales of $38.3 million for the nine months ended November 30, 1998 represented a
28% decrease from sales of $53.0 million reported in the same period of the
prior year. The Company reported a net loss of $996,000 (net of a gain on sale
of property of $945,000) in the first nine months compared to net loss of
$966,000 in the same period last year. The Company's sales and earnings decline
in the first half of fiscal 1999 results from a number of factors, including a
major automotive strike, a significant softening of steel market prices and
margins in the steel industry, and continued development costs for the
8
<PAGE>
company's paint waste recycling subsidiary. These factors are further discussed
below.
Steel Distribution and Processing Segment The Company's steel distribution and
processing operations reported net sales of $35.2 million for the first three
quarters of fiscal 1999, a decrease of $15.0 million or 30% compared to the
first three quarters of the prior year. Due to the general decline in demand and
pricing for steel products, and the effects of a major automotive strike in the
summer, the sales decrease was spread among all of the Company's steel
distribution and processing operations.
Operating income for this segment amounted to $1,000 for the first three
quarters of fiscal 1999, a decrease of $1,254,000 from the prior year. Gross
margin (net sales less cost of sales) as a percentage of net sales was 7.9% in
the first three quarters of fiscal 1999 compared to 9.3% in same period of the
prior year. The market for steel products softened further during the third
quarter of fiscal 1999 as demand for steel products declined and supply of
foreign steel increased. Gross margin percentages have decreased as steel costs
have fallen from the prior year, and the Company has not been able to fully pass
along the costs of inventory to its customers.
Waste Management Segment This segment reflects the results of the operations
of the Company's paint waste recycling operation. Net sales for this segment
increased slightly to $3,100,000 in the first three quarters of 1999 from
$2,800,000 in the same period of the prior year. For the past several years,
this operation has operated at or near its processing capacity.
This segment reported a $296,000 operating loss for the first three quarters of
fiscal 1999, an improvement of $108,000 or 27% from the same period of the prior
year. This improvement is due primarily to the increase in sales as the cost of
operating the equipment is relatively flat with processing volume variations
while the plant continues to operate at or near capacity.
Selling, General and Administrative Expenses The $1,139,000 decrease in
selling, general and administrative expenses in the first three quarters is
primarily attributable to lower corporate personnel and administration costs in
fiscal 1999 when compared to the same period of fiscal 1998.
Interest Expense Interest expense decreased $79,000 (or 5%) in the first three
quarters of fiscal 1999. The Company's average outstanding borrowings fell with
decreases in steel pricing and purchases.
9
<PAGE>
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. The bank has permitted the Company to exceed the eligible borrowing
amount based on the lending formula by $2,350,000 (the "overadvance"). As of
November 30, 1998, the outstanding balance of the revolving credit line amounted
to $12,062,000 and unused availability, after considering the allowed
overadvance, amounted to $562,000.
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.
EPI Technologies has recently installed the Polymeric Recovery System, a process
which incorporates a new paint waste recycling technology. During the prior
fiscal year, EPI Technologies completed financing totaling $2,350,000 with the
lender that provides the Company's revolving credit line. The proceeds were used
primarily to finance the construction of the Polymeric Recovery System. The debt
requires monthly principal payments of $21,000. A final payment of $2,305,000
was due in March 1998. The Company has been unable to make the scheduled final
payment, however, the bank has allowed the Company to continue the monthly
installments of $21,000 plus interest. The Company is co-signer on the debt and
an officer and stockholder of the Company has personally guaranteed the
Company's entire borrowings from this lender.
The paint waste recycling technology incorporated in the Polymeric Recovery
System is licensed from Aster, Inc. The license agreement grants an exclusive,
worldwide (except Mexico) perpetual license for the use of the Aster technology.
The license agreement requires payment of royalty fees to Aster based on pounds
of paint waste processed with the new technology and pounds of the recycled
product ("EPI-MER(TM)") sold. Technical and manufacturing services provided by
Aster are paid for based on an hourly rate. Minimum monthly payments required
under the agreement are $20,000. In March 1998 the Company reduced the amount of
funding of the minimum monthly payments to approximately $10,000, with the
balance of the minimum monthly payment to be satisfied by future deliveries of
EPI-MER(TM).
The Company's current steel operations have historically operated profitably.
However, the paint waste recycling business has generated increasing operating
10
<PAGE>
losses during fiscal 1998 and 1999. The increasing losses of the paint waste
recycling business are largely due to the increased costs associated with the
licensing of the technology and other costs related to the implementation of the
Polymeric Recovery system. Management believes the future profitability of the
paint waste recycling business is substantially dependent on the sale of
EPI-MER(TM). To date, only nominal revenues have been generated from the
Polymeric Recovery System and no EPI-MER(TM) has been sold. EPI is currently
marketing EPI-MER(TM) to potential customers in the sealant, coating and
adhesive industries. EPI's business strategy is to grow the business by
developing a market for and selling EPI-MER(TM) for use as a lower cost
replacement for traditional, virgin materials used in formulated products.
The Company has sustained losses in recent years, has a working capital
deficiency and total liabilities exceed total assets. Additionally, the Company
has been unable to maintain certain financial ratios and covenants required
under lending arrangements with a bank. Management has implemented or will
pursue various steps directed toward improving the Company's operating
performance and liquidity. The benefits of these actions described below are
expected to result in improved operating performance and liquidity in future
periods.
- Management focus on its core steel processing and distribution
business.
- Closing or sale of operations which are unprofitable or do not fit
the Company's strategic plans.
- Reduce certain operating costs and administrative costs.
- Renegotiate or refinance certain of its financial obligations.
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 1999. To meet the financing needs for the business
strategy of EPI Technologies discussed in the preceding discussion, the Company
is actively pursuing investment partners to fund the future financial needs of
the paint waste recycling business.
11
<PAGE>
Year 2000
The Company uses computer hardware and financial and manufacturing software that
it 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.
12
<PAGE>
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 August 31,
1998.
13
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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: June 18, 1999 By /s/ William D. Feniger
---------------------------------------
William D. Feniger
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: June 18, 1999 By /s/ James L. Rosino
---------------------------------------
James L. Rosino
Vice President - Finance and
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET OF MERIDIAN NATIONAL CORPORATION AS OF NOVEMBER 30,
1998 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 810,894
<SECURITIES> 0
<RECEIVABLES> 7,513,031
<ALLOWANCES> 200,198
<INVENTORY> 9,688,179
<CURRENT-ASSETS> 18,739,749
<PP&E> 10,861,787
<DEPRECIATION> 4,016,526
<TOTAL-ASSETS> 26,624,474
<CURRENT-LIABILITIES> 27,012,475
<BONDS> 5,797,705
0
1,175,320
<COMMON> 37,176
<OTHER-SE> (3,667,162)
<TOTAL-LIABILITY-AND-EQUITY> 26,624,474
<SALES> 38,329,172
<TOTAL-REVENUES> 38,329,172
<CGS> 34,993,265
<TOTAL-COSTS> 34,993,265
<OTHER-EXPENSES> (229,586)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,350,261
<INCOME-PRETAX> (996,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (996,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (996,389)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
