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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended FEBRUARY 29, 2000
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 or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
805 Chicago Street, Toledo, Ohio 43611
(Address of principal executive offices) (Zip Code)
(419) 729-3918
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
Series B Convertible Voting Preferred Stock, $.001 par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 31, 2000, 7,917,552 shares of Meridian National Corporation
common stock were outstanding, and the aggregate market value of voting stock
(based upon the average bid and ask price on the OTC Bulletin Board) held by
non-affiliates was approximately $599,000 for common stock and $117,000 for
Series B convertible voting preferred stock.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the Annual
Meeting of Shareholders, which the registrant intends to file within 120 days
after the close of its fiscal year ended February 29, 2000, are incorporated by
reference into Part III of this report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Meridian National Corporation ("Meridian National" or the "Company",
which, unless otherwise indicated, refers to Meridian National and its
subsidiaries) is engaged in the steel distribution and processing business
through its subsidiary, Ottawa River Steel Company ("Ottawa River Steel") and in
the waste management business through its subsidiary, Environmental Purification
Industries Company ("EPI").
GENERAL DEVELOPMENT OF BUSINESS
Meridian National was incorporated as a Delaware corporation in 1985.
Shortly thereafter, the Company acquired from certain present and former members
of management, who were also principal stockholders of the Company, all of the
outstanding capital stock of Ottawa River Steel, and three other companies whose
operations were either later combined with Ottawa River Steel or discontinued.
The operations of these acquired companies formed the foundation of its current
steel distribution and processing business.
In January 1994, the Company acquired real property and equipment
located in Detroit, Michigan which was previously operated by the seller as a
steel service center. The acquisition expanded the Company's steel processing
services to the end-user market, primarily serving customers that supply the
automotive industry.
In November 1995, the Company acquired the business and assets
of a steel service center located in Gary, Indiana. This facility supplied steel
products to primarily non-automotive markets. In the fourth quarter of fiscal
year ended February 28, 1999, the Company significantly reduced its operations
at this location due to continuing losses resulting from the inability to
generate sufficient sales volume in this competitive market. The Company has
sublet the facility to an unrelated company and either sold, or transferred to
the Company's location in Toledo, Ohio, the steel service center equipment. In
December 1999 the Company closed the sales office it had maintained in the
Chicago market.
In 1989 the Company formed National Purification, Inc. ("National
Purification"), a wholly owned subsidiary, and entered into a general
partnership with Haden Purification, Inc. ("Haden Purification"). The
partnership, EPI, was formed to own and operate one or more facilities for the
recycling of paint waste using a proprietary paint waste drying system
(DryPureTM) developed by Haden Environmental Corporation ("Haden
Environmental"), an affiliate of Haden Purification, and for the marketing of
the reclaimed solids. EPI's first paint waste recycling facility started
commercial operations in March 1991. National Purification and Haden
Purification were equal partners in EPI and were otherwise unaffiliated. In 1992
Haden Purification terminated and abandoned its interest in EPI, and EPI became
wholly owned by the Company through its subsidiaries, National Purification and
MEPI Corp. ("MEPI"), which was formed in 1992. The Company completed a building
and equipment expansion of its Toledo, Ohio facility in April 1997 that utilized
the Polymeric Recovery System (the "PRS system"), a new paint waste recycling
process. In the fourth quarter of fiscal 1999, the Company recorded
restructuring charges of $2,703,000 to write down certain assets and accrue
certain liabilities related to the PRS system. The Company had intended to use
this system to produce a product using recycled paint waste, which would be
marketed as a lower cost replacement for traditional, virgin materials used in
formulated products in the sealant, coating and adhesive industries. The Company
has been unable to market this product in a commercially viable manner and
therefore has discontinued processing of paint waste through the PRS system. The
Company continues to recycle paint waste using the DryPure(TM) system.
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In February 1996, Meridian National formed EPI Technologies, Inc.,
("EPI Technologies"), as a wholly owned subsidiary. In November 1996, the
Company transferred all of its shares in National Purification and MEPI to EPI
Technologies. After the transfer, EPI Technologies indirectly owned 100% of EPI,
the general partnership that operates the paint waste recycling facility.
Concurrent with the transfers, EPI Technologies issued shares of its common
stock representing a 20% ownership interest, equally to three investors, for
$600,000, reducing the Company's ownership interest in its paint waste recycling
operation to 80%.
The Company's principal executive offices are located at 805 Chicago
Street, Toledo, Ohio 43611 and its telephone number is (419) 729-3918.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's operations are classified within two separate industry
segments. The steel distribution and processing segment handles flat rolled
steel products primarily for the automotive, truck and appliance industries. The
waste management segment recycles paint wastes for companies in the automotive
and waste management industries, as well as arranging for disposal of paint
wastes at third-party disposal sites.
For financial information about the Company's industry segments, see
Note 11 to the consolidated financial statements of the Company, which are
included elsewhere in this report as listed in PART IV, ITEM 14.
NARRATIVE DESCRIPTION OF BUSINESS
STEEL DISTRIBUTION AND PROCESSING SEGMENT
Steel service centers and steel distributors represent a major market
for primary steel producers ("steel mills"), serving as a source of supply for
smaller manufacturers whose product requirements make purchasing directly from
the steel mills unfeasible or for companies whose production processes require
steel to be pre-processed before being placed into production. Companies
operating in this industry generally are classified as steel service centers
when they operate facilities that process steel products. Companies that acquire
steel products for warehousing and/or direct redistribution to other steel
consumers are generally classified as distributors. Steel service centers and
distributors acquire steel products from steel mills and from other
distributors. It is not uncommon for steel products to pass through the hands of
one or more steel distributors and/or steel service centers before reaching an
end user. Steel service centers and distributors normally specialize in
particular grades of steel products. The majority of the companies operating in
this industry are small to medium in size with no single company or group of
companies exercising control over the industry. The products handled by the
Company's steel distribution and processing business are carbon steel coils,
sheets and bars.
STEEL DISTRIBUTION During fiscal years ended February 29, 2000 and
February 28, 1999 and 1998, 40%, 36% and 35%, respectively, of the Company's net
sales were generated through its steel distribution operations. The Company's
steel distribution operations involve purchasing, storing and reselling steel
products in their original form. The Company acquires steel from domestic steel
mills under various steel purchase programs. Some of these programs involve the
purchase of steel that did not meet order specifications of customers of the
steel mills for whom the steel was originally intended. The Company also
acquires steel products from steel mills under excess steel purchase programs.
In times of low steel consumption, steel mills will make offerings of steel to
distributors to maintain higher production rates at the steel mills. Ottawa
River Steel is among the oldest companies operating as a steel distributor and
has attained a good reputation and name identification in its industry.
Historically, Ottawa River Steel has maintained strong relationships with a
number of steel mills. These relationships and a broad base of steel suppliers
have historically allowed Ottawa River Steel access to steel supplies when steel
availability within the industry has been limited due to high demand.
STEEL PROCESSING During fiscal years ended February 29, 2000 and
February 28, 1999 and 1998, 52%, 56% and 60%, respectively, of the Company's net
sales were generated by processed steel products and processing services. The
Company provides slitting, cut-to-length, and batch pickling for steel products.
These services are provided to customers as a value-added process to the
Company's inventory for sale to end-user customers or to customers for
customer-owned material (toll processing).
* Slitting and Cut-to-length Flat rolled steel products are generally
manufactured by the steel mills in wide coil form. Consumers of these flat
rolled products may require the steel to be cut into several coils of narrower
widths. The steel slitting process involves the passing of the coil through
roller knives which cut the steel into the desired widths. Additionally, other
users may require coils to be cut-to-length into sheets prior to taking
delivery.
* Pickling When steel is produced at the steel mills, it is rolled at
high temperatures which creates a scaly surface on the steel. This scale must be
removed for surface sensitive steel applications that require polishing, plating
or other finished surfaces. The pickling process removes this scale by the
immersion of the steel in acid. This process can be performed while the steel is
in coil form through a
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continuous pickling process or when the steel is in either the coil or sheet
form through a batch pickling process. Generally, hydrochloric acid is used in
the continuous pickling process and sulfuric acid is used in the batch pickling
process. After pickling, the steel is rinsed in baths of neutralizer and water
and then is coated with oil to prevent rust.
CUSTOMERS The Company's steel distribution and processing services are
marketed to the automotive, truck, building, appliance, furniture and
agriculture industries and to companies servicing these industries in the upper
midwest, as well as other areas east of the Mississippi River. The majority of
North American car and truck final assembly plants and primary metal industries
are located within a 500-mile radius of the Company's facilities. Sales to a
steel stamping customer, Production Stamping, Inc., accounted for 17%, 12% and
14% of the Company's net sales in fiscal 2000, 1999 and 1998, respectively.
COMPETITION In the steel distribution and processing business,
competitive factors include quality of service, timeliness and cost. The
Company's success in this business depends on its ability to continue to provide
quality products and services on a timely basis at a competitive cost.
The steel service center industry is highly fragmented and intensely
competitive within localized areas or regions. Accordingly, the Company faces
substantial competition in the steel distribution and processing business from
other independent steel distributors and processors as well as from steel mills
and customers that perform these functions internally. Among the Company's
competitors and potential competitors are numerous companies that have
substantially greater financial and other resources than the Company.
RAW MATERIALS The raw materials required for the Company's steel
processing operations are acids, oils and banding supplies. All materials are
readily available from a number of suppliers.
WASTE MANAGEMENT SEGMENT
Paint wastes, because of their stickiness and leaching characteristics,
are one of the most difficult wastes to legally dispose of and therefore pose a
significant disposal problem for their generators. Approximately 40% to 60% of
the paint used in industrial spray painting processes becomes waste that
requires disposal or recycling. Currently, the only legal disposal methods
available for paint wastes are landfill and incineration. While the short-term
costs associated with landfilling (currently the most widely-used disposal
method) are less than the short-term costs of incineration, generators using
this method of paint waste disposal could be "potentially responsible parties"
for liabilities associated with remediation of landfills where their paint waste
has been disposed. Additionally, there continues to be a trend in the regulatory
environment toward greater restrictions and liabilities associated with
landfilling, including the disposal of paint wastes. As a result, many
generators are electing to use incineration, which is a more expensive disposal
process than direct disposal into landfills. Incineration involves either (i)
fuel blending, which is the commingling of various waste streams into a fuel
supplement for use as an alternative fuel in the manufacture of cement,
reducing, in the process, but not eliminating the generator's liability, or (ii)
direct thermal destruction of waste streams which results in the generation of
an ash residue which may contain heavy metals or other hazardous constituents.
Ash residue containing hazardous constituents must be disposed in a fully
permitted hazardous waste landfill thereby continuing the generator's potential
long-term liability connected with the disposal of hazardous wastes.
Recycling of waste materials is considered by the U.S. EPA to be a
desirable means of reducing waste. According to the U.S. EPA's definition,
recycle is a broad term that includes "to use, reuse, or reclaim." A material is
reclaimed if it is processed to recover a useful product or if it is
regenerated. When customers send paint waste to the Company's facility, the
Company reclaims the paint waste by processing it to recover a useful product.
The U.S. EPA encourages this type of waste management because it preserves
limited landfill space. Avoiding the need to place hazardous paint waste in
landfills also allows generators to significantly reduce the threat of incurring
liability under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), also known as Superfund liability.
PAINT WASTE RECYCLING In early 1989, the Company became aware of the
magnitude of the disposal problems facing generators of paint wastes and learned
of a then potentially unique process for the handling of these wastes. The
process, known as DryPureTM and developed by Haden Environmental, heats the
paint wastes, driving off liquids and volatile organic compounds, resulting in a
dry inert powder that
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represents a reduction in volume of paint waste by up to 90%. Originally
DryPureTM systems were sold directly to automobile manufacturers that disposed
of the resultant dry powder from the process in landfills. The Company
recognized that small and mid-size paint waste generators presented a market for
the DryPureTM system. In addition, the Company began exploring the possibility
of marketing the resultant dry powder, EPI-PURETM, and was successful in finding
commercial applications for it. In 1989, Haden Purification and the Company
formed EPI as a general partnership for the purpose of constructing and
operating commercial facilities to recycle paint wastes. EPI commenced
commercial operations at its newly constructed paint waste recycling facility in
Toledo, Ohio in March 1991. In 1992, Haden Purification terminated its 50%
partnership interest in EPI and National Purification and MEPI, wholly owned
subsidiaries of the Company, became sole general partners of EPI.
EPI completed a building and equipment expansion of its Toledo, Ohio
facility in April 1997 to commercialize the PRS system. The Company had intended
to use this system to produce a product using recycled paint waste, which would
be marketed as a lower cost replacement for traditional, virgin materials used
in formulated products in the sealant, coating and adhesive industries. The
Company has been unable to market this product in a commercially viable manner
and therefore discontinued processing of paint waste through the PRS system in
July 1999. In the fourth quarter of fiscal 1999, the Company recorded
restructuring charges of $2,703,000 to write down certain assets and accrue
certain liabilities related to the PRS system. The Company continues to recycle
paint waste using the DryPure(TM) system.
The paint waste recycling business generated 8% of the Company's net
sales in each of the fiscal years ended February 29, 2000 and February 28, 1999
and 5% in the fiscal year ended February 28, 1998.
CUSTOMERS The Company markets its paint waste recycling services to
businesses that have spray-painting operations. The Company's marketing
activities are concentrated in the midwest region of the United States where
over 80% of its revenues are generated, with the majority of annual revenues
derived from customers in the automotive assembly business. The Company's
customers generally are environmentally conscientious and demand that the
Company maintain stringent quality controls. The Company has built its
reputation in the industry through consistent customer service by addressing
these customer needs. Since one of the primary benefits of using the Company's
services is the elimination of the potential long-term liability associated with
landfill disposal of paint waste, many customers conduct thorough reviews and
audits of the Company's operations, including the Company's compliance with
environmental laws and regulations.
COMPETITION Presently, approximately 99% of paint waste nationally is
disposed of through landfills or by incineration, and approximately 1% is
processed and recycled by methods utilized by the Company and its other
competitors. The Company is aware of only three other companies that compete
directly with the Company by providing processing and recycling services to
generators of paint waste. These competitors utilize similar methods of thermal
drying to those of the Company; however, over the years the Company believes it
has developed the capability to process a broader range of paint waste than its
competitors.
Competitive factors in paint waste processing or disposal include
price, service and the elimination of the potential long-term liability
associated with paint waste generation and disposal. While paint wastes
generally can be landfilled or incinerated at a lower initial cost than
recycling, these disposal methods expose the generators to potential long-term
liability under stringent federal and state regulations. On the other hand,
although the costs of the Company initially are greater than landfill or
incineration, the Company's recycling process substantially eliminates
continuing generator liability. Landfill and incineration services are provided
by national, regional and local companies, many of which have substantially
greater resources than the Company. In addition, the Company's direct recycling
competitors have substantially greater financial, marketing and other resources
than the Company. There can be no assurance that one of the Company's
competitors or a new company will not develop a method of recycling paint waste
which is more efficient and less costly than the methods currently employed by
the Company. Additionally, there can be no assurance that large industrial
customers or other waste management companies will not attempt to develop their
own methods of recycling or otherwise minimizing, treating or disposing of
wastes.
RAW MATERIALS In the DryPureTM system, trap rock (a small, inexpensive
stone) is used to facilitate heat transfer, to keep paint waste from adhering to
the equipment and to reduce the size of the EPI-PURETM particles. Trap rock is
readily available at reasonable prices.
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BACKLOG
The steel distribution and processing business typically processes
orders within a relatively short time of receipt. Accordingly there is not a
significant backlog of unfilled orders at any time.
The paint waste recycling business typically processes shipments within
a relatively short time of receipt. Accordingly, no large volume of paint waste
is stored at the Company's Toledo, Ohio facility at any time. Because the
generators and the Company need to carefully control the shipment and processing
of paint waste, upon execution of a sales contract, the Company establishes a
long-term schedule for delivery and processing of the customer's paint waste at
the Company's facility. Accordingly, the Company normally has its maximum
processing capacity scheduled for one to three months in advance.
SEASONALITY
The Company primarily provides products and services to the automotive,
truck and appliance industries. Therefore, the Company's results are affected by
cycles in such industries and changes in demand based on general economic
conditions. Traditionally, many automotive plants operate at reduced levels
during June and July due to holiday and vacation schedules and are closed during
the last part of December, which adversely affects the Company's revenues for
those periods. The operations of EPI are generally unaffected by seasonality
factors since it has been operating its DryPureTM recycling system at or near
capacity for several years.
GOVERNMENT REGULATION
The Company's operations are subject to many federal, state and local
requirements relating to the protection of the environment. Management believes
that the Company is in material compliance with all applicable environmental
laws and that the Company's products and processes do not present any unusual
environmental concerns. The Company does not anticipate any material
expenditures to continue to meet environmental requirements.
The Company's operations are also governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Health and Safety Act and regulations thereunder, which, among other
requirements, establish noise, dust and safety standards. Management believes
that the Company is in material compliance with applicable laws and regulations
and does not anticipate that future compliance with such laws and regulations
will have a material adverse effect on the results of operations or financial
condition of the Company.
EMPLOYEES
As of May 31, 2000, the Company had 115 employees, of whom 87 were
employed in steel distribution and processing (includes 28 leased employees), 22
were employed in waste management, with the remainder serving in executive and
administrative capacities. Approximately 29 of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relations with its own employees and with the leased employees presently
employed at its facilities are good.
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ITEM 2. PROPERTIES
The Company's corporate offices are located in Toledo, Ohio and occupy
approximately one-half of an 8,500 square foot building pursuant to a
month-to-month lease with Greenbelt Associates. Greenbelt is a general
partnership owned by William D. Feniger, Yale M. Feniger and Real P. Remillard,
who are current or former officers and/or stockholders in the Company. The
Company leases the remainder of the building for the offices of its steel
distribution and steel processing operations under identical terms and
conditions. The total monthly rent for these office facilities is $7,344 per
month.
On a site adjacent to its corporate offices, the Company maintains
office space and its active steel pickling operation in a 23,000 square foot
building. Also on the site the Company utilizes an additional 45,000 square feet
in a building for steel warehousing and a steel slitting operation. The
facilities at this site, including an additional 60,000 square feet of outside
storage space, is leased pursuant to a lease executed in July 1997 for an
initial term of 120 months with Chicago Investors. The lease provides for three
optional one-year renewals. Chicago Investors is a general partnership that is
owned, in turn, by two other partnerships. One of these partnerships is
Champlain Investors, a general partnership, which is owned by William D. Feniger
and Yale M. Feniger, who are current or former officers and stockholders in the
Company. The other partnership is unrelated to the Company. The lease provides
for a monthly rent of $14,255 through the June 30, 2007 lease termination date.
The monthly rental for the option periods is $17,106. Chicago Investors, under
an oral arrangement, has agreed to defer the rental increase that was due to
commence on March 1, 1998 and to maintain the monthly rent at $12,255, at the
option of Chicago Investors. The Company also sub-leases another 22,000 square
feet of warehouse space used for steel storage at this site from an affiliate of
the unrelated partnership.
The Company's steel service center in Detroit, Michigan is housed in
two adjacent buildings situated on approximately two acres of land owned by the
Company. The main building consists of 58,500 square feet, including 8,500
square feet of office space. The second building consists of 8,000 square feet
and is being used for steel storage. This property is subject to a mortgage in
favor of William D. Feniger (subsequently assigned to a lender) having an
outstanding balance of $501,000 at February 29, 2000.
In November 1995, the Company acquired the business and assets of a
steel service center located in Gary, Indiana, which operated in a 60,000 square
foot facility in a common building in an industrial park pursuant to a lease
expiring in November 2001 with one renewal option of three years. As of December
15, 1998, the Company has sublet this facility to an unaffiliated company on
substantially the same terms as those contained in the Company's lease.
The Company conducts its paint waste recycling operations in a 19,500
square foot building in Toledo, Ohio. This property, along with certain
recycling equipment, is owned by EPI and is subject to a mortgage of which the
former partner of EPI has assumed 50% of the obligation. EPI's obligation with
respect to this mortgage was $302,000 at February 29, 2000.
In addition, an adjacent 14,000 square foot building is leased by EPI
from Chicago Investors where the recycled powder from the DryPureTM process is
screened, packaged and warehoused prior to shipment. The term of the lease
expires February 28, 2001 at a rental of $1,175 per month.
The Company believes that its existing facilities and properties are
adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the last quarter of the Company's fiscal year ended February 29, 2000.
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EXECUTIVE OFFICERS
Set forth below is certain information regarding the executive officers
of the Company. Officers, who are elected annually by the Board of Directors of
the Company, serve at the pleasure of the Board of Directors.
William D. Feniger 53 Chief Executive Officer and President
James L. Rosino 45 Chief Financial Officer, Vice President-
Finance, Secretary and Treasurer
William D. Feniger has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since August 1985. On March 21, 1991, Mr.
Feniger was named President of the Company.
James L. Rosino has been Chief Financial Officer and Vice President -
Finance of the Company since February 1996. On May 31, 1996, Mr. Rosino was
named Secretary and Treasurer of the Company. Mr. Rosino served as Corporate
Controller from May 1988 through February 1996.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the OTC Bulletin Board
maintained by the National Association of Securities Dealers under the symbol
"MRCO". The following table sets forth, for the quarterly periods indicated, the
high and low bid prices for the Common Stock as quoted on the OTC Bulletin
Board. Such quotations on the OTC Bulletin Board represent bids between dealers
without adjustment for retail mark-ups, markdowns, or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Year ended February 29, 2000 High Low
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<S> <C> <C>
First Quarter $ .19 $.08
Second Quarter .17 .13
Third Quarter .19 .14
Fourth Quarter .29 .15
Year ended February 28, 1999
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First Quarter $.656 $.406
Second Quarter .54 .406
Third Quarter .406 .125
Fourth Quarter .20 .125
</TABLE>
As of May 31, 2000 there were approximately 500 stockholders of record
of the Company's Common Stock.
To date, the Company has not paid any dividends on its Common Stock.
The payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, on the
Company's earnings, its capital requirements and its financial condition, as
well as other relevant factors. The Board does not presently intend to pay any
dividends on its Common Stock in the immediate future, but it intends to retain
all earnings for use in its business operations. Pursuant to a current credit
agreement with the Company's senior lender, the Company cannot pay dividends on
its Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company set forth below should be
read in conjunction with the audited consolidated financial statements, the
notes thereto and other financial information included elsewhere in this report
and in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Year ended February 28 or 29
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2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Net sales $42,562,854 $ 49,291,003 $ 70,683,989 $ 66,511,224 $ 54,672,987
Gross margin 5,227,583 3,973,144 6,284,309 7,988,913 5,659,971
Loss from continuing
operations before extraordinary gain (1,059,205) (5,533,982)(3) (2,617,911)(2) (619,465) (1,728,196)
Net (loss) income (1,059,205) (5,533,982)(3) (2,617,911)(2) 4,392 (1,349,608)
Loss applicable
to common stock (1) (1,172,737) (5,657,700)(3) (2,763,101)(2) (131,967) (1,479,370)
Loss per common share -
Basic and diluted :
Loss from continuing
operations before extraordinary gain $ (0.20) $ (1.54)(3) $ (0.78)(2) $ (0.23) $ (0.71)
Net loss (0.20) (1.54)(3) (0.78)(2) (0.04) (0.56)
Weighted average common shares:
Basic 5,794,601 3,678,082 3,532,195 3,241,349 2,638,126
Diluted 5,794,601 3,678,082 3,532,195 3,241,349 2,638,126
BALANCE SHEET DATA:
Working capital (deficiency) $ (976,840) $(10,141,118) $ (7,511,001) $ (1,866,090) $ (1,443,113)
Total assets 16,571,343 22,122,626 32,924,546 33,700,810 26,546,797
Long-term debt 10,307,810 1,169,705 2,983,375 6,586,293 6,847,416
Stockholders' (deficit) equity (7,956,763) (7,040,026) (1,431,271) 1,198,162 546,581
</TABLE>
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(1) Represents net (loss) income reduced by dividends paid on preferred stock
in cash and in shares of common stock. To date, the Company has not paid
any dividends on its common stock.
(2) Includes a $169,465 charge or 5 cents per share, net of income tax, from
write-down of noncurrent assets.
(3) Includes a $2,702,764 charge or 73 cents per share, net of income tax,
from restructuring charges.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999
STEEL DISTRIBUTION AND PROCESSING SEGMENT The steel distribution and processing
operations reported net sales of $39.2 million for fiscal 2000, a decrease of
$6.2 million or 14% compared to fiscal 1999. The steel processing operations at
the Company's Gary, Indiana facility were significantly curtailed in the fourth
quarter of the prior fiscal year and a sales office servicing the Chicago market
was closed in the latter part of fiscal 2000. Sales generated by the Indiana
operations decreased by $6.0 million in fiscal 2000 compared to fiscal 1999.
Sales volumes were also affected as a result of reduced availability of steel
products from suppliers due to credit constraints earlier in fiscal 2000.
Operating income for this segment amounted to $852,000 for fiscal 2000
compared to operating income of $12,000 for fiscal 1999. Gross margin (net sales
less cost of sales) as a percentage of net sales was 11.4% in fiscal 2000
compared to 7.4% in the prior fiscal year. The increase in gross margin
percentage is a result of stronger sales of value-added product to the
automotive market, which generally has a greater gross margin than as-is sales.
Fiscal 1999 operations were affected by the pervasive effects on the steel
industry, and many of the Company's customers, of a major automotive strike in
the summer of 1998. The Company's gross margins are subject to fluctuation as a
result of changes in the cost of steel purchases. While the Company is typically
able to pass the increase in steel costs on to its customers, the timing of such
increases may not coincide with the purchasing side. Overall, the market for
steel products strengthened somewhat in the latter part of fiscal 2000 as demand
outpaced steel production. Accordingly, as steel prices in the market increased,
the margins the Company generated during the second half of fiscal 2000
decreased. The Company anticipates increasing sales levels in fiscal 2001 as its
ability to purchase steel has been enhanced with the equity investment in the
Company, the loan arrangement with MNP Corporation and the renegotiated
financing arrangements with its senior lender, as discussed in the Liquidity and
Capital Resources section which follows. However, the forecast for fiscal 2001
sales volumes and margins are somewhat unsettled as steel inventories in the
distribution channels are rising and pricing pressures are reappearing in the
steel markets.
WASTE MANAGEMENT SEGMENT This segment reflects the results of operations of the
Company's paint waste recycling business. In July 1999, the Company discontinued
processing of paint waste using its developmental PRS system. In fiscal year
ended 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 PRS system. As a result, operating and administrative
costs of the paint waste recycling operation have been significantly reduced.
Revenues are affected to a lesser extent since revenues are primarily generated
by its continuing DryPureTM recycling process. Net sales for this segment
decreased to $3,342,000 in fiscal 2000 from $3,872,000 in the prior fiscal year,
a 14% decline.
The paint waste recycling business recorded an operating loss of
$73,000 for fiscal 2000. The operating loss of $3,174,000 for fiscal 1999
included a $2,703,000 restructuring charge to write down certain assets,
principally impaired equipment, and accrue certain liabilities related to the
PRS system. The DryPureTM process for the last several years has operated at or
near its capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The $769,000 decrease in selling,
general and administrative expenses in the current fiscal year is primarily
attributable to lower personnel and administration costs for the paint waste
recycling operation and the Gary, Indiana steel operation when compared to the
prior fiscal year.
INTEREST EXPENSE Interest expense decreased $323,000, or 19%, in the current
fiscal year compared to the prior year. Average outstanding borrowings fell due
to a decrease in steel purchasing, significantly lower inventory levels and
reduced working capital requirements.
11
<PAGE>
YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998
STEEL DISTRIBUTION AND PROCESSING SEGMENT The Company's steel distribution and
processing operations reported net sales of $45.4 million for fiscal 1999, a
decrease of $21.5 million or 32% from the prior year. The sales decrease
resulted primarily from the pervasive effects on the steel industry, and many of
the Company's customers, of a major automotive strike in the summer of 1998.
Also a sharp decline in demand for steel products at reasonable pricing was
experienced in the latter half of the year as a result of the large supply of
low-priced foreign steel entering the domestic steel market.
Operating profits for this segment amounted to $12,000 for fiscal 1999,
a decrease of $1,074,000 from the prior year. Gross margin (net sales less cost
of sales) as a percentage of net sales was 7.4% in fiscal 1999 compared to 8.2%
in the prior year. Gross margin percentages decreased due to pricing pressures
resulting from a softening of demand in the steel markets in fiscal 1999.
WASTE MANAGEMENT SEGMENT Net sales for paint waste recycling increased slightly
to $3,872,000 in fiscal 1999 from $3,719,000 in the prior year. For the past
several years, this business has operated at or near its processing capacity.
This segment reported a $3,174,000 operating loss for fiscal 1999,
compared to a $1,067,000 operating loss for the prior year. The operating
results for this segment included operating costs related to the commencement of
the start-up period for the Polymeric Recovery System, which used the new paint
waste recycling technology. In fiscal 1999, the Company recorded restructuring
charges of $2,703,000 to write down certain assets, principally impaired
equipment, and accrue certain liabilities related to the Polymeric Recovery
System. The operating loss in fiscal 1998 also includes $462,000 of costs
written off relating to a proposed public offering for this segment. The funding
for this expansion was to have been provided from the proceeds of an initial
pubic offering of an approximate 50% interest in EPI Technologies. The proposed
offering was abandoned due to weakness in the public market for the offering and
other matters.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The $1,090,000 decrease in selling,
general and administrative expenses is primarily attributable to reduced
personnel and administration costs in response to the significant decline in the
Company's sales in fiscal 1999 and the closing of the steel processing center in
Gary, Indiana.
INTEREST EXPENSE Interest expense decreased $66,000 or 4% in fiscal 1999. The
decrease is due primarily to lower interest rates during fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a $977,000 working capital deficiency at February 29,
2000. The improvement from a working capital deficiency at February 28, 1999 of
$10,141,000 is due primarily to the reclassification of previous short-term
obligations to long-term, as discussed below. Certain components of working
capital, including accounts receivable, inventories, accounts payable and notes
payable, historically may fluctuate significantly based upon trends in overall
market conditions, sales volume and steel purchasing strategies of the Company's
steel operations. In fiscal 2000 the reduction of steel inventories was
primarily responsible for the generation of $2,488,000 of cash flows from
operations.
On September 1, 1999, a private investor group (the "Buyers") purchased
4.2 million previously unissued shares of the Company's common stock pursuant to
a Stock Purchase Agreement dated June 25, 1999 (the "Agreement") for $256,000 in
cash, net of issuance costs of $38,000. The purchase of the common stock
represents approximately 53% of the issued and outstanding shares of the
Company's common stock. The Buyers are affiliated with MNP Corporation ("MNP"),
a privately held company which holds approximately 280,000 shares of the
Company's common stock and whose majority owner is a director of the Company.
The percentage ownership of the Buyers, together with the holdings of MNP,
constitutes 57% of the Company's outstanding and issued common stock.
12
<PAGE>
On September 3, 1999, the Company entered into an Amended and Restated
Loan Agreement (the "Loan Agreement") with the National Bank of Canada (the
"Bank"). The Loan Agreement provides for a $10 million revolving line of credit
with interest at 3/4% above prime and a term loan of $1,650,000 with interest at
1% above prime. Provided there are no covenant defaults or other events of
default under the Loan Agreement, the interest rate on the revolving loan and
the term loan will be reduced by 1/4% as of August 31, 2000. The revolving loan
expires in March 2002. The term loan provides for payments of interest only
through March 2000 and, thereafter, monthly principal payments of $35,000 plus
interest until fully paid in March 2004. Prior to the Loan Agreement, the
revolving line of credit and term loan were classified as current liabilities in
the Company's balance sheet. As a result of the revised terms of its obligations
under the Loan Agreement, the long-term portion of the obligations owing to the
Bank are shown as long-term debt at February 29, 2000.
The Company's primary source of liquidity is the $10 million revolving
credit line with the Bank. Borrowing availability under the revolving credit
line is determined using a formula based upon eligible accounts receivable and
inventories. As of February 29, 2000, the outstanding balance of the revolving
credit line amounted to $7,198,000 and unused availability amounted to $721,000.
The Loan 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. The
Loan agreement prohibits capital expenditures in excess of $250,000 during any
fiscal year and requires maintaining an interest coverage ratio of at least 1.0
to 1.0, and maintaining a fixed charge coverage ratio of at least 1.0 to 1.0
(1.2 to 1.0 for the quarter ended May 31, 2000 and thereafter).
Since July 1999, MNP has loaned the Company a total of $3.6 million as
of February 29, 2000. The loans bear interest at prime plus 1% and are secured
by substantially all assets of the Company, however, all such security interests
and liens are junior and subordinate to the secured positions of the Bank and
other secured lenders. The loans are due on demand, however, MNP, as part of a
subordination agreement with the Company and the Bank, has agreed that while the
Company has any outstanding obligations to the Bank, MNP will not cause the
amount of loans to the Company to be less than $1.5 million. Accordingly, $1.5
million of loans from MNP have been classified as long-term debt in the
accompanying balance sheet at February 29, 2000.
Until midway through fiscal 2000, the Company had not been able to make
timely payments to many of its trade and other creditors. As a result of the
sale of the stock to the Buyers and the financing arrangements made with the
Bank and MNP, the Company was able to negotiate deferred payment terms and
expanded credit lines with most of its major suppliers. Management believes the
arrangements established with its major suppliers will allow for adequate
supplies of steel product at competitive prices to meet its customers'
requirements and allow the Company to increase its sales volume during fiscal
2001.
In addition to the sale of stock, modifications to its debt obligations
and discontinuance of the PRS system during fiscal 2000, 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 improve
operating results and enhance cash generated from operations.
The Company does not have any material capital expenditure commitments
at this time. Capital expenditures are limited under the Loan Agreement with the
Bank. Management believes its existing resources, including cash provided by
operating activities and its credit facilities will be sufficient to satisfy its
working capital and other capital requirements for fiscal 2001.
YEAR 2000
The Company uses computer hardware and financial and manufacturing
software that it purchased from third party suppliers. Such suppliers confirmed
to the Company that such products are Year 2000 compliant. The Company did not
incur any significant costs to become Year 2000 compliant. The Company did not
experience any significant Year 2000 difficulties on January 1, 2000 or
thereafter from its own hardware or software, nor was it affected, to the best
of the Company's knowledge, by any significant Year 2000 problems at its
suppliers or customers.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
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. The Company is
subject to risks inherent in the industries which the Company operates and to
which the Company sells products. These industries, and therefore the Company,
are subject to changes in the economy in general, including the effects of
rising interest rates. The Company's relationship to and business dealings with
significant vendors and customers and the intense price competition in the
Company's markets also may affect the Company's results. Accordingly, actual
results may differ materially from those anticipated by such statements. 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 and such information and statements should not be relied upon. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) that the Company is exposed to is interest
rate risks. The adverse effect of potential changes in this market risk is
discussed below. The sensitivity analysis presented does not consider the
effects that such adverse changes may have on overall economic activity, nor do
they consider additional actions management may take to mitigate the Company's
exposure to such changes. Actual results may differ. See the notes to the
consolidated financial statements for a description of the Company's accounting
policies and other information related to these financial instruments.
VARIABLE-RATE DEBT. As of February 29, 2000, the Company had approximately $12.4
million outstanding under various debt instruments whose interest rates vary in
accordance with the Bank's prime rate. The amount outstanding under these credit
facilities will fluctuate throughout the year based upon working capital
requirements. Based upon the $12.4 million outstanding under these obligations
at February 29, 2000, a hypothetical 1.0% change in the interest rate from the
rates in effect at February 29, 2000 would cause a change in interest expense of
approximately $123,000 on an annual basis. The Company's objective in
maintaining these variable rate borrowings is flexibility and lower overall cost
as compared with fixed-rate borrowings.
FIXED-RATE DEBT. As of February 29, 2000, the Company had approximately $1.6
million of long-term fixed-rate debt outstanding. The estimated fair value of
this debt approximates the carrying value and the market risk from a
hypothetical 1.0% change in interest rates is not considered material due to the
relatively short maturities on the this fixed-rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company are included elsewhere
in this report as listed in Part IV, ITEM 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, except for certain information
relating to Executive Officers set forth at the end of Part I. is omitted
inasmuch as the Company intends to file its definitive 2000 Proxy Statement (the
"2000 Proxy statement") containing such information with the Securities and
Exchange Commission within 120 days after the close of its fiscal year ended
February 29, 2000, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The information required by this Item is incorporated by reference from
the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the 2000 Proxy Statement.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following consolidated financial statements of the
Company are submitted pursuant to the requirements of ITEM 8:
Report of Independent Auditors F-1
Consolidated Balance Sheets at February 29, 2000 and February
28, 1999 F-2
Consolidated Statements of Operations for each of the three
years in the period ended February 29, 2000 F-4
Consolidated Statements of Stockholders' (Deficit) Equity for
each of the three years in the period ended February 29, 2000 F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended February 29, 2000 F-6
Notes to Consolidated Financial Statements F-7
2. The following consolidated financial statement schedule of the
Company is submitted pursuant to the requirements of ITEM 14(d):
Schedule II - Valuation and Qualifying Accounts F-21
All other schedules required pursuant to the requirements of ITEM
14 (d) are omitted because they are not applicable, not material,
not required or the required information is included in the
applicable consolidated financial statements or notes thereto.
3. EXHIBITS
3.1(a)* Certificate of Incorporation of the Company
(incorporated herein by reference from the Company's
Registration Statement on Form 8-A, dated January 31,
1986).
3.1(b)* Amendment to the Certificate of Incorporation of the
Company, effective September 30, 1986 (incorporated
herein by reference from the Company's Report on Form
10-K for fiscal year ended February 28, 1987).
3.1(c)* Amendment to the Certificate of Incorporation of the
Company, effective August 1, 1988 (incorporated herein
by reference from the Company's Registration Statement
on Form S-1, filed April 15, 1989, File No. 33-27955).
3.1(d)* Amendment to the Certificate of Incorporation of the
Company, effective August 18, 1993 (incorporated herein
by reference from the Company's Report on Form 10-Q for
the quarterly period ended August 31, 1993).
3.2(a)* Certificate of Designation, Preferences and Rights of
the Company (incorporated herein by reference from the
Company's Registration Statement on Form S-1, filed
September 16, 1989, File No. 33-27955).
3.2(b)* Amendment to the Certificate of Designation,
Preferences and Rights of the Company, effective August
25, 1993 (incorporated herein by reference from the
Company's Report on Form 10-Q for the quarterly period
ended August 31, 1993).
16
<PAGE>
3.3(a)* By-Laws of the Company (incorporated herein by
reference from the Company's Registration Statement on
Form 8-A, dated January 31, 1986).
3.3(b)* Certificate of Amendment of By-Laws of the Company
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1990).
4.1* Specimen Stock Certificate (incorporated herein by
reference from the Company's Registration Statement on
Form 8-A, dated January 31, 1986).
4.2* Registration Statement on Form 8-A, dated January 31,
1986 (incorporated herein by reference to File No.
0-14203).
4.3* Form of Series B Preferred Stock (incorporated herein
by reference from the Company's Registration on Form
S-1, filed June 4, 1989, File No. 33-27955).
10.01(a) Amended and Restated Loan and Security Agreement, dated
September 3, 1999, among the Company, certain of its
subsidiaries and National Bank of Canada.
10.01(b) Subordination Agreement dated September 3, 1999, among
the Company, certain of its subsidiaries, MNP
Corporation and National Bank of Canada.
10.02(a)* Form of Amended and Restated Non-negotiable Promissory
Note for $596,822.79 issued to William D. Feniger
(incorporated herein by reference from the Company's
Registration Statement on Form S-1, filed June 9, 1989,
File No. 33-27955).
10.02(b)* Escrow Agreement, dated January 4, 1990, by and among
Yale M. Feniger, William D. Feniger, Melvin G.
DeGrazia, Ted R. Meyers and David A. Katz (incorporated
herein by reference from the Company's Report on Form
10-K for fiscal year ended February 28, 1990).
10.02(c)* Amendment to Non-negotiable Promissory Note, dated
November 1, 1992, between the Company and William D.
Feniger (incorporated herein by reference from the
Company's Report on Form 10-K for fiscal year ended
February 28, 1993).
10.02(d)* Subscription Agreement, dated May 31, 1996, between the
Company and William D. Feniger. (Incorporated herein by
reference from the Company's Report on Form 10-K for
fiscal year ended February 29, 1996).
10.03(a)* Lease between the Company and Greenbelt Associates,
dated February 14, 1992 (incorporated herein by
reference from the Company's Report on Form 10-K for
fiscal year ended February 29, 1992).
10.03(b)* Lease between Ottawa River Steel and Greenbelt
Associates, dated February 14, 1992 (incorporated
herein by reference from the Company's Report on Form
10-K for fiscal year ended February 29, 1992).
10.04(a)* Lease between Ottawa River Steel Co. and Chicago
Investors, dated March 1, 1996 (incorporated herein by
reference from the Company's Report on Form 10-K for
fiscal year ended February 29, 1996).
10.04(b)* Lease between Environmental Purification Industries
Company and Chicago Investors, dated March 1, 1996
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 29,
1996).
10.05(a)* Meridian National Corporation 1990 Non-Qualified and
Incentive Stock Option Plan, dated August 20, 1990
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1991).
17
<PAGE>
10.05(b)* Amendment No. 1 to the Meridian National Corporation
1990 Non-Qualified and Incentive Stock Option Plan,
effective May 12, 1994 (incorporated herein by
reference from the Company's Report on Form 10-K for
fiscal year ended February 29, 1996).
10.05(c)* Amendment No. 2 to the Meridian National Corporation
1990 Non-Qualified and Incentive Stock Option Plan,
effective June 6, 1995 (incorporated herein by
reference from the Company's Report on Form 10-K for
fiscal year ended February 29, 1996).
10.06(a)* Amended and Restated 1987 Non-Employee Directors' Stock
Option Plan of Meridian National Corporation, dated
August 20, 1990 (incorporated herein by reference from
the Company's Report on Form 10-K for fiscal year ended
February 28, 1991).
10.06(b)* Amendment No. 1 to the Amended and Restated 1987
Non-Employee Directors' Stock Option Plan of Meridian
National Corporation, effective May 27, 1993
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1994).
10.06(c)* Amendment No. 2 to the Amended and Restated 1987
Non-Employee Directors' Stock Option Plan of Meridian
National Corporation, effective May 12, 1994
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 29,
1996).
10.06(d)* Amendment No. 3 to the Amended and Restated 1987
Non-Employee Directors' Stock Option Plan of Meridian
National Corporation, effective June 6, 1995
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 29,
1996).
10.07* Meridian National Corporation Tax Deferred Retirement
and Savings Plan, as amended and restated (incorporated
herein by reference from the Company's Report on Form
10-K for fiscal year ended February 28, 1995).
10.08* Employment Agreement of William D. Feniger, dated July
31, 1997 (incorporated herein by reference from the
Company's Report on Form 10-K for fiscal year ended
February 28, 1998).
10.9(a)* Bond Purchase Agreement, dated February 12, 1990,
between the Company, EPI, Haden MacLellan Holdings,
plc, Miller & Schroeder Financial, Inc. and The
Toledo-Lucas County Port Authority (incorporated herein
by reference from the Company's Report on Form 10-K for
fiscal year ended February 28, 1990).
10.9(b)* Guaranty Agreement, dated as of December 15, 1989,
between the Company and Society Bank & Trust, Trustee
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1990).
10.9(c)* Loan Agreement, dated as of December 15, 1989
(including the Note as an Exhibit thereto) between
Toledo-Lucas County Port Authority and EPI
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1990).
10.9(d)* Open-End Mortgage and Security Agreement, dated as of
December 15, 1989, between EPI and Society Bank &
Trust, Trustee (incorporated herein by reference from
the Company's Report on Form 10-K for fiscal year ended
February 28, 1990).
18
<PAGE>
10.10* Amended and Restated Partnership Agreement of
Environmental Purification Industries Company
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1994).
10.11(a)* Loan and Security Agreement, dated November 17, 1995,
between Ottawa River Steel Co. and FINOVA Capital
Corporation (incorporated herein by reference from the
Company's Report on Form 10-K for fiscal year ended
February 29, 1996).
10.11(c)* Industrial Building Lease, dated November 10, 1995,
between Ottawa River Steel Co. and Centerpoint
Properties Corporation (incorporated herein by
reference from the Company's Report on Form 10-K for
fiscal year ended February 29, 1996).
10.11(d)* Second Lease Amendment dated December 15, 1998, between
Ottawa River Steel Co., Meridian National Corporation
and Great Lakes Industrial Partners L.P. (incorporated
herein by reference from the Company's Report on Form
10-K for fiscal year ended February 28, 1999).
10.11(e)* Sublease Agreement, effective as of December 15, 1998,
between Ottawa River Steel Co. and Centennial Steel
Processing, LLC (incorporated herein by reference from
the Company's Report on Form 10-K for fiscal year ended
February 28, 1999).
10.13(a)* Stock Purchase Agreement, dated November 19, 1996,
among Environmental Purification Industries, Inc.,
Spencer Browne, MNP Corporation and Elliot Smith
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1997).
10.13(b)* Registration Rights Agreement, dated November 19, 1996,
among Environmental Purification Industries, Inc.,
Spencer Browne, MNP Corporation and Elliot Smith
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1997).
10.13(c)* Stockholders Agreement, dated November 19, 1996,
among Environmental Purification Industries, Inc.,
Spencer Browne, MNP Corporation and Elliot Smith
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1997).
10.14(a)* Cognovit Demand Promissory Note for $618,000, dated
February 4, 1999, of Ottawa River Steel Co. to William
D. Feniger (incorporated herein by reference from the
Company's Report on Form 10-K for fiscal year ended
February 28, 1999).
10.14(b)* Open-end Mortgage, dated February 4, 1999, between
Ottawa River Steel Co. and William D. Feniger
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1999).
10.14(c)* Security Agreement, dated February 4, 1999, between
Ottawa River Steel Co. and William D. Feniger
(incorporated herein by reference from the Company's
Report on Form 10-K for fiscal year ended February 28,
1999).
10.15(a) Stock Purchase Agreement, Dated as of June 25, 1999,
among The Company, the Buyers as listed in the document
and MNP Corporation.
10.15(b) Loan Agreement, dated as of June 30, 1999, among the
Company, certain of its subsidiaries and MNP
Corporation.
19
<PAGE>
21 List of Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports filed on Form 8-K.
There were no reports filed on Form 8-K during the fourth quarter of
the Company's 2000 fiscal year.
------------------------
* Indicates an exhibit previously filed with the Securities and Exchange
Commission and incorporated herein by reference.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 13th day of June
2000.
MERIDIAN NATIONAL CORPORATION
By: /s/ William D. Feniger
-------------------------------------
William D. Feniger
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William D. Feniger Chairman of the Board June 13, 2000
------------------------- of Directors, Director, President
William D. Feniger and Chief Executive Officer
(Principal Executive Officer)
/s/ James L. Rosino Vice President - Finance June 13, 2000
------------------------- (Principal Financial and
James L. Rosino Accounting Officer)
/s/ Larry Berman Director June 13, 2000
-------------------------
Larry Berman
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Meridian National Corporation and Subsidiaries
Toledo, Ohio
We have audited the accompanying consolidated balance sheets of Meridian
National Corporation and Subsidiaries as of February 29, 2000 and February 28,
1999, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the three years in the period ended February
29, 2000. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Meridian National Corporation and Subsidiaries as of February 29, 2000 and
February 28, 1999, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended February 29, 2000, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presented fairly, in
all material respects the information set forth therein.
REHMANN ROBSON, P.C.
Farmington Hills, Michigan
April 21, 2000
F-1
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS FEBRUARY 29 FEBRUARY 28
----------- -----------
2 0 0 0 1 9 9 9
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,350 $ 825,437
Accounts receivable, net of allowance for doubtful
accounts of $477,600 ($448,000 in 1999) 8,032,915 8,021,764
Inventories 4,287,544 8,281,272
Restricted investments 294,516 --
Other current assets 625,131 723,356
----------- -----------
TOTAL CURRENT ASSETS 13,243,456 17,851,829
----------- -----------
PROPERTY AND EQUIPMENT
Buildings, building improvements and
leasehold improvements 1,260,452 1,263,209
Machinery and equipment 4,961,206 4,825,722
Office furniture and equipment 714,602 815,466
Land and land improvements 175,939 163,592
Construction in progress -- 26,350
----------- -----------
Total property and equipment 7,112,199 7,094,339
Less accumulated depreciation and amortization 3,849,994 3,514,601
----------- -----------
NET PROPERTY AND EQUIPMENT 3,262,205 3,579,738
----------- -----------
OTHER ASSETS 65,682 691,059
----------- -----------
TOTAL ASSETS $16,571,343 $22,122,626
=========== ===========
</TABLE>
The accompanying notes are on integral part of these consolidated
financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT FEBRUARY 29 FEBRUARY 28
------------ ------------
2 0 0 0 1 9 9 9
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 7,269,644 $ 11,424,481
Accrued liabilities 814,351 721,882
Accrued compensation 432,029 382,100
Short-term notes payable
Revolving line of credit -- 11,811,627
Affiliate 2,100,000 --
Other 1,642,084 --
Current portion of long-term debt
Loans payable to affiliate 501,465 607,811
Other 1,460,723 3,045,046
------------ ------------
TOTAL CURRENT LIABILITIES 14,220,296 27,992,947
------------ ------------
Long-term debt due after one year
Revolving line of credit 7,198,025 --
Affiliates 1,775,232 275,232
Other 1,334,553 894,473
------------ ------------
Total long-term debt due after one year 10,307,810 1,169,705
------------ ------------
TOTAL LIABILITIES 24,528,106 29,162,652
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
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, issued and outstanding, 7,917,552 shares
(3,717,552 in 1999) 79,176 37,176
Additional paid in capital 11,212,866 10,998,866
Accumulated deficit (20,424,125) (19,251,388)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (7,956,763) (7,040,026)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,571,343 $ 22,122,626
============ ============
</TABLE>
F-3
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2 0 0 0 1 9 9 9 1 9 9 8
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 42,562,854 $ 49,291,003 $ 70,683,989
Cost of sales 37,335,271 45,317,859 64,399,680
------------ ------------ ------------
Gross margin 5,227,583 3,973,144 6,284,309
------------ ------------ ------------
Other costs and expenses (income)
Selling, general and administrative 5,043,142 5,811,642 6,901,510
Interest 1,397,347 1,720,719 1,786,465
Restructuring charges -- 2,702,764 --
Loss (gain) on disposal of property
and equipment 11,413 (501,327) --
Cost of abandoned registration -- -- 462,414
Minority interests -- -- (96,600)
Miscellaneous - net (165,114) (226,672) (151,569)
------------ ------------ ------------
Total other costs and expenses 6,286,788 9,507,126 8,902,220
------------ ------------ ------------
Net loss $ (1,059,205) $ (5,533,982) $ (2,617,911)
============ ============ ============
Loss applicable to common stock $ (1,172,737) $ (5,657,700) $ (2,763,101)
============ ============ ============
Loss per common share -
basic and diluted $ (0.20) $ (1.54) $ (0.78)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MERIDIAN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
$100 $3.75
SERIES A SERIES B
PREFERRED PREFERRED COMMON
STOCK STOCK STOCK
------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at March 1, 1997 $ 400,000 $ 775,320 $ 34,882
Net loss for 1998 -- -- --
Dividends:
Cash dividends on Series A preferred stock -- -- --
Cash dividends on Series B preferred stock -- -- --
136,957 shares of common stock issued
to holders of Series B preferred stock -- -- 1,370
Issuance of warrants for purchase of common
stock of subsidiary -- -- --
------------ ------------ ------------
Balance at February 28, 1998 400,000 775,320 36,252
Net loss for 1999 (5,533,982) (5,533,982)
Dividends:
Cash dividends on Series A preferred stock -- -- --
Cash dividends on Series B preferred stock -- -- --
92,349 shares of common stock issued to holders
of Series B preferred stock -- -- 924
Accrued dividends on Series B preferred stock -- -- --
------------ ------------ ------------
Balance at February 28, 1999 400,000 775,320 37,176
Net loss for 2000 -- -- --
Dividends:
Cash dividends on Series A preferred stock -- -- --
Accrued dividends on Series B preferred stock -- -- --
Issuance of 4,200,000 shares of common stock -- -- 42,000
------------ ------------ ------------
Balance at February 29, 2000 $ 400,000 $ 775,320 $ 79,176
============ ============ ============
<CAPTION>
ADDITIONAL
PAID IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at March 1, 1997 $ 10,818,545 $(10,830,585) $ 1,198,162
Net loss for 1998 -- (2,617,911) (2,617,911)
Dividends:
Cash dividends on Series A preferred stock -- (36,000) (36,000)
Cash dividends on Series B preferred stock -- (22) (22)
136,957 shares of common stock issued
to holders of Series B preferred stock 107,300 (109,170) (500)
Issuance of warrants for purchase of common
stock of subsidiary 25,000 -- 25,000
------------ ------------ ------------
Balance at February 28, 1998 10,950,845 (13,593,688) (1,431,271)
Net loss for 1999
Dividends:
Cash dividends on Series A preferred stock -- (36,000) (36,000)
Cash dividends on Series B preferred stock -- (7) (7)
92,349 shares of common stock issued to holders
of Series B preferred stock 48,021 (48,945) --
Accrued dividends on Series B preferred stock -- (38,766) (38,766)
------------ ------------ ------------
Balance at February 28, 1999 10,998,866 (19,251,388) (7,040,026)
Net loss for 2000 -- (1,059,205) (1,059,205)
Dividends:
Cash dividends on Series A preferred stock -- (36,000) (36,000)
Accrued dividends on Series B preferred stock -- (77,532) (77,532)
Issuance of 4,200,000 shares of common stock 214,000 -- 256,000
------------ ------------ ------------
Balance at February 29, 2000 $ 11,212,866 $(20,424,125) $ (7,956,763)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MERIDIAN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2 0 0 0 1 9 9 9 1 9 9 8
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,059,205) $(5,533,982) $(2,617,911)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 560,343 974,160 856,332
Loss (gain) on disposal of
property and equipment 11,413 (501,327) --
Write-down of inventory 949,000 830,000 --
Restructuring charges -- 2,702,764 --
Minority interest -- -- (96,600)
Write-down of noncurrent assets -- -- 169,463
Changes in operating assets and
liabilities which provided (used) cash:
Accounts receivable (97,129) 3,176,784 (17,124)
Inventories 3,044,728 2,817,683 154,577
Other current assets 136,147 (31,730) (13,122)
Accounts payable and
accrued liabilities (1,057,691) (1,935,031) 786,517
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,487,606 2,499,321 (777,868)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (230,897) (486,591) (331,277)
Proceeds from disposals of property and equipment 31,767 2,119,811 --
Changes in other assets (56,176) 24,543 (17,221)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (255,306) 1,657,763 (348,498)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net line of credit borrowings (repayments) (4,613,602) (1,341,846) 2,015,219
Payments on borrowed debt (2,260,785) (1,975,054) (1,123,349)
Dividends paid on preferred stock (36,000) (36,007) (36,022)
Proceeds from borrowed debt 3,600,000 -- 250,000
Net proceeds from issuance of common stock 256,000 -- --
Net proceeds from exchange of warrants -- -- 25,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,054,387) (3,352,907) 1,130,848
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (822,087) 804,177 4,482
Cash and cash equivalents, beginning of year 825,437 21,260 16,778
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,350 $ 825,437 $ 21,260
=========== =========== ===========
Supplemental cash flows information:
Cash paid for interest $ 1,415,672 $ 1,718,983 $ 1,915,035
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Meridian National Corporation and its subsidiaries (the "Company") are
engaged principally in the trading and processing of steel products for
the automotive, truck and appliance industries. Secondarily, the
Company also recycles or disposes paint wastes for generators of such
wastes in the automotive industries. All customers are located
primarily in the Midwest Region of the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of Meridian
National Corporation and all subsidiaries in which it has in excess of
a 50% ownership interest. All material intercompany transactions and
balances have been eliminated.
Restructuring of the Paint Waste Business
During the year ended February 28, 1999, the Company recorded
restructuring charges of $2,702,764 to write down certain assets,
principally impaired equipment, and accrue certain liabilities related
to the Polymeric Recovery System ("PRS") of the paint waste business
unit. As of February 29, 2000 and February 28, 1999, the accompanying
consolidated financial statements include in accounts payable and
accrued liabilities $400,000 for removal of PRS products in connection
with these restructuring charges. The Company had intended to use this
system to produce a product using recycled paint waste, which would be
marketed as a lower cost replacement for traditional, virgin materials
used in formulated products in the sealant, coating, and adhesive
industries. The Company had been unable to market this product in a
commercially viable manner. The Company continues to recycle paint
waste using the DryPure system, which generates an inert dry powder,
used as a filler in the formulation of certain building and
construction products.
Concentration Risks
Substantially all of the Company's accounts receivable as of February
29, 2000 and February 28, 1999 are due from businesses which operate in
the automotive, truck and appliance industries. The Company extends
credit based on an evaluation of credit reports, payment practices and,
in most cases, financial condition. Generally, collateral or letters of
credit are not required. Allowances for credit losses are provided for
in the consolidated financial statements and such losses consistently
have been within management's expectations.
F-7
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Estimates
are used for, but not limited to, allowances for doubtful accounts
receivable and slow-moving inventory. Actual results may differ from
these estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits in banks, cash on
hand, and certificates of deposit with original maturities when
purchased of less than three months.
Restricted Investments
Restricted investments consist of money market funds held in escrow for
the repayment of a mortgage note payable to trustee bank. These
investments are carried at fair value.
Inventory Valuation
Inventories, consisting primarily of coiled steel, are carried at the
lower of cost, using the specific identification method, or market.
During the years ended 2000 and 1999, the Company recorded charges of
$949,000 and $830,000, respectively, to cost of sales for inventory
write downs to their estimated net realizable values.
Revenue Recognition
Sales are generally recognized at the time of shipment of products or
performance of services.
Property and Equipment and Depreciation
Property and equipment are stated at cost. Major improvements and
renewals are capitalized while ordinary maintenance and repairs are
expensed.
Depreciation and amortization are provided, principally by means of
accelerated methods, except for the paint waste recycling subsidiary
for which all assets are depreciated using the straight-line method,
based on the following estimated useful lives:
Land improvements 15 to 20 years
Buildings, building improvements and
leasehold improvements 32 to 40 years
Machinery and equipment 5 to 15 years
Office furniture and equipment 5 to 10 years
F-8
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Interest
Interest costs of approximately $36,000 in 1998 were capitalized as a
cost of the expansion of the Company's paint waste recycling facility.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments, including notes
payable and long-term debt owed to nonaffiliates, and certain other
assets and liabilities, approximates their carrying costs due to either
short maturity of these instruments, or because interest rates of the
Company's debt approximate rates currently available for borrowings
with similar terms.
Loss Per Common Share
Loss per share is computed using the weighted average number of common
shares outstanding during the year. Diluted per share amounts reflect
the potential dilution of all common stock equivalents. At February 29,
2000 and February 28, 1999 and 1998 options to purchase 435,250,
427,750 and 497,750 shares, respectively, were excluded from the
computation of loss per share because the options' exercise prices were
greater than the average market price of the common shares. Common
shares issued for dividends on preferred stock are included in weighted
average shares outstanding beginning on the date issued. The effects of
options and warrants are excluded from loss per share calculations when
the effect would be anti-dilutive. The weighted average number of
common and common equivalent shares used to compute loss per share for
each year is:
2 0 0 0 1 9 9 9 1 9 9 8
---------- ---------- ----------
Basic and diluted 5,794,601 3,678,082 3,532,195
Cash dividends on preferred stock and the value of common shares issued
in lieu of dividends on Series B preferred stock (totaling $113,532 in
2000, $123,718 in 1999 and $145,192 in 1998) are deducted in arriving
at loss applicable to common stock.
Common Stock Options
All common stock options have been granted at prices not less than the
market price on the date granted. Accordingly, the Company recognizes
no compensation expense related to these options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25).
F-9
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SALE OF COMMON STOCK
On September 1, 1999, a private investor group (the "Buyers") purchased
4.2 million previously unissued shares of the Company's common stock
pursuant to a Stock Purchase Agreement dated June 25, 1999 (the
"Agreement") for $256,000 in cash, net of issuance costs of $38,000.
The purchase of the common stock represented approximately 53% of the
issued and outstanding shares of the Company's common stock. The Buyers
are affiliated with MNP Corporation ("MNP"), a privately held company
which holds 280,000 shares of the Company's common stock and whose
majority owner is a director of the Company. The percentage ownership
of the Buyers, together with the holdings of MNP, constitutes 57% of
the Company's issued and outstanding common stock.
3. DEBT (INCLUDING RELATED PARTY)
Short-term Debt
Short-term notes payable at February 29, 2000 consist of $2,100,000 in
notes payable to MNP (see long-term debt below) and various notes
payable to vendors due within one year at interest rates ranging from
7% to 8%.
Long-term Debt
On September 3, 1999, the Company entered into an Amended and Restated
Loan Agreement (the "Loan Agreement") with the National Bank of Canada
(the "Bank"). The Loan Agreement provides for a $10 million revolving
line of credit with interest at .75% above prime (effective rate of
9.75% at February 29, 2000) and a term loan of $1.65 million with
interest at 1% above prime (effective rate of 10% at February 29,
2000). Provided there are no covenant defaults or other events of
default under the Loan Agreement, the interest rate on the revolving
loan and the term loan will be reduced by .25% as of August 31, 2000.
The revolving loan expires in March 2002. Prior to the Loan Agreement,
the revolving line of credit was classified as a current liability in
the Company's balance sheet. As a result of the revised terms under the
Loan Agreement, the revolving line of credit is shown as long-term at
February 29, 2000.
The revolving line of credit allows borrowings under a lending formula
based upon eligible accounts receivable and inventories less
outstanding letters of credit. The Loan Agreement provides for a
facility fee equal to .25% of the excess of $10 million over average
daily borrowings under the revolving line of credit and is secured by
substantially all of the Company's personal property not otherwise
pledged. The Loan Agreement prohibits the payment of cash dividends on
the Company's common stock and allows 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. The Loan Agreement prohibits capital
expenditures in excess of $250,000 during any fiscal year and
F-10
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
requires maintaining an interest coverage ratio of at least 1.0 to 1.0,
and maintaining a fixed charge coverage ratio of at least 1.0 to 1.0
(1.2 to 1.0 for the quarter ended May 31, 2000 and thereafter).
Since July 1999, MNP has loaned the Company a total of $3.6 million.
The loans bear interest at 1% over prime (effective rate of 10% at
February 29, 2000) and are secured by substantially all assets of the
Company, however, all such security interests and liens are junior and
subordinate to the secured positions of the Bank and other secured
lenders. The loans are due on demand, however, MNP, as part of a
subordination agreement with the Company and the Bank, has agreed that
while the Company has any outstanding obligations to the Bank, MNP will
not cause the amount of loans to the Company to be less than $1.5
million. Accordingly, $1.5 million of loans from MNP have been
classified as long-term debt in the accompanying balance sheet.
Weighted average interest rates, on the revolving Bank line of credit,
during the year were 8.84% in 2000, 9.00% in 1999, and 9.48% in 1998.
Long-term debt consists of the following obligations at February 29,
2000 and February 28, 1999:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9
------------ ------------
<S> <C> <C>
Revolving Bank line of credit $ 7,198,025 $ --
Term notes payable to Bank, due in
monthly installments of $35,000,
commencing April 2000 until final
maturity in March 2004 1,650,000 1,783,000
Note payable to MNP 1,500,000 --
8.5% mortgage note payable to trustee
bank, due in monthly installments of
approximately $73,000, including
interest until final maturity in
November 2000 603,750 1,363,750
Note payable to an officer and
stockholder, due in monthly installments
of $14,000, including interest at 9.25%
with balance due in July 2000. The note
is guaranteed by the Company and a
security interest in certain machinery
and equipment 501,465 607,811
Convertible note payable to an officer
and stockholder, interest payable
quarterly at 9%. The note is subordinate
to bank borrowings and is convertible
into shares of common stock at a
conversion price of $15.60 per share 275,232 275,232
</TABLE>
F-11
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9
------------ ------------
<S> <C> <C>
Unsecured promissory note, which was due
August 1998, and currently in default,
plus interest at a rate of 10% per
annum $ 250,000 $ 250,000
Note payable, collateralized by certain
machinery and equipment, due in monthly
installments of $17,675 including
interest at 11.7% through December 2000 167,625 348,444
Obligations under long-term capital
leases (Note 4) 123,901 151,624
Other -- 42,701
----------- -----------
Total long-term debt 12,269,998 4,822,562
Less amounts due within one year 1,962,188 3,652,857
----------- -----------
Long-term debt due after one year $10,307,810 $ 1,169,705
=========== ===========
</TABLE>
Interest expense incurred on related party debt was $258,000, $30,000
and $25,000 in 2000, 1999 and 1998, respectively.
Effective July 1, 1992, Environmental Purification Industries Company
("EPI") became a wholly-owned subsidiary of the Company when, pursuant
to an agreement, Haden Purification, Inc. ("Haden Purification")
terminated and abandoned its 50% partnership interest in EPI. Under the
agreement, Haden Purification assumed liability for one-half of the
remaining principal, interest and fee payments due under the Company's
8.5% mortgage note payable and was assigned 50% of the amount held in
trust to meet future debt service requirements. Haden Purification
continues to make principal, interest and fee payments directly to the
trustee bank. As such, these payments are excluded from the statement
of cash flows. Interest expense in the accompanying consolidated
statements of operations excludes interest and fee payments made by
Haden Purification amounting to $60,500 in 2000, $91,600 in 1999, and
$120,100 in 1998.
Scheduled maturities of long-term debt in each of the five fiscal years
subsequent to February 29, 2000, including the principal portion of
minimum payments under long-term lease obligations, are approximately
as follows:
2001 $ 1,962,188
2002 9,448,373
2003 434,437
2004 420,000
2005 5,000
-----------
Total $12,269,998
===========
F-12
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount for 2001 includes principal payments to be made by Haden
Purification in the amount of $301,875.
4. LEASE COMMITMENTS
Capitalized Leases
The Company leases certain property and equipment under long-term
agreements classified as capital leases. The property and equipment can
be purchased at the expiration of the leases for nominal amounts.
The cost and accumulated amortization of property leased under capital
leases are as follows as of February 29, 2000 and February 28, 1999:
2 0 0 0 1 9 9 9
----------- ----------
Machinery and equipment $328,521 $328,521
Less accumulated amortization 209,252 153,875
-------- --------
$119,269 $174,646
Future minimum payments and their present value under these leases at
February 29, 2000 are approximately as follows:
2001 $ 61,000
2002 58,000
2003 12,000
--------
Total minimum lease payments 131,000
Less amount representing interest at imputed rates
ranging from 5% to 12.83% 7,000
--------
Present value of net minimum lease payments
included in long-term debt $124,000
========
Operating Leases
The Company leases certain property and equipment under agreements
classified as operating leases. Total rent expense charged to
operations for 2000, 1999, and 1998 approximated $466,000, $588,000,
and $620,000, respectively, which included $242,000, $253,000, and
$249,000, respectively, to related parties. Minimum future rental
commitments under noncancelable operating leases at February 29, 2000,
including aggregate payments of $888,000 to an affiliate of an officer
and certain stockholders, are $460,000 in 2001, $339,000 in 2002,
$173,000 in the years 2003 through 2005.
F-13
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company subleases certain property leased under operating leases.
Minimum future rentals scheduled to be received are $223,000 in 2001
and $149,000 in 2002.
5. COMMITMENTS AND CONTINGENCIES
Litigation and Regulatory Matters
The Company is involved in routine litigation incidental to its
business, management believes that the resolution of these matters will
not materially affect the financial statements.
6. CAPITAL STOCK
The Series B preferred stock has a mandatory dividend payable
semiannually at an annual rate of $.375 per share, if paid in cash, or,
at the Company's option, $.4875 per share if paid in shares of common
stock based on the average market value of the common stock for the 20
days prior to the record date. At February 29, 2000, preferred stock
dividends of $116,298 have been accrued but not paid. Holders of the
Series B preferred stock are entitled to one-tenth vote for each share
held and, subject to certain conditions, vote together with the holders
of common stock as a single class. Each share of the Series B preferred
stock is convertible, at the option of the holder into .25 shares of
common stock, subject to adjustment under certain circumstances. The
Series B preferred stock may be redeemed by the Company, in whole or in
part, at a redemption price of $4.875 per share if the average of the
closing prices of the common stock has been at least $22.50 per share
during twenty consecutive trading days.
Holders of the Series A preferred stock are entitled to receive
quarterly, cumulative dividends of $2.25 per share. The Series A
preferred stock does not have voting rights and is redeemable at the
Company's discretion for $100 plus accrued and unpaid dividends.
Common shares reserved for future issuance at February 29, 2000
aggregated 801,551 and related to the following instruments:
Common stock options 732,220
Convertible debt 17,643
Convertible preferred stock 51,688
F-14
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMON STOCK OPTIONS
The Company has elected to follow APB No. 25, "Accounting for Stock
Issued to Employees", in accounting for its employee and non-employee
director stock options. The alternative fair value accounting provided
for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), requires use
of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25 no compensation expense is
recognized because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock at
the date of the grant.
In the opinion of management, the existing fair value models do not
provide a reliable measure of the fair value of employee stock options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. The Company's employee and
non-employee director stock options have characteristics significantly
different from those of traded options. In addition, option valuation
models require highly subjective assumptions. Changes in these
assumptions can materially affect the fair value estimate.
SFAS No. 123 requires, if APB No. 25 is followed, disclosure of pro
forma information regarding net income and earnings per share
determined as if the Company accounted for its stock options under the
fair value method. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2000, 1999, and 1998,
respectively; a risk-free interest rate of 6.5%; a dividend yield of
0%; expected volatility of the Company's common stock .929, .929, and
.484; and a weighted-average expected life of the options of 7 years.
The weighted-average fair value of options granted in 2000, 1999, and
1998 was $0.13, $0.43, and $0.49, respectively. For purposes of pro
forma disclosures, the estimated fair value of options is amortized to
expense over the option's vesting period. Amortization attributable to
grants awarded in 2000, 1999, and 1998 impact the pro forma results.
The Company's reported and pro forma information follows:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9 1 9 9 8
-------------- ------------- --------------
<S> <C> <C> <C>
Net loss:
Reported $ (1,059,205) $ (5,533,982) $ (2,617,911)
Pro forma (1,073,605) (5,551,390) (2,670,322)
Loss per share:
Reported (0.20) (1.54) (0.78)
Pro forma (0.20) (1.55) (0.80)
</TABLE>
F-15
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a nonqualified and incentive stock option plan for its
officers and key employees under which 600,000 shares of common stock
may be issued. Incentive stock options issued to stockholders
possessing more than ten percent of the combined voting rights of the
Company may be granted at an exercise price of not less than 110
percent of the fair market value of the common stock at the date of the
grant and are exercisable for a period not exceeding five years from
the date of the grant. All other options under the plan may be granted
at amounts not less than the market value of the common stock at the
date of the grant and are exercisable for a period not exceeding ten
years from the date of the grant.
The Company has also established a non-employee directors' stock option
plan under which 150,000 shares of common stock may be issued. Under
this plan, eligible directors who have served twelve consecutive months
are annually granted options to purchase 2,500 shares. Under the plan,
options may be granted at an exercise price equal to the market value
on the date of grant and are exercisable for a period not exceeding ten
years from the date of grant.
Summary information on stock options is as follows for the year ended
February:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9 1 9 9 8
---------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 427,750 $1.41 497,750 $1.48 503,300 $1.48
Granted 7,500 .16 7,500 .52 7,500 .78
Terminated -- -- (77,500) 1.74 (13,050) 1.34
-------- ----- -------- ----- -------- -----
Outstanding,
end of year 435,250 $1.39 427,750 $1.41 497,750 $1.48
======== ===== ======== ===== ======== =====
Options exercisable,
end of year 322,050 $1.49 248,300 $1.57 213,050 $1.74
======== ===== ======== ===== ======== =====
Weighted average fair
value of options
granted during the year $0.13 $0.43 $0.49
===== ===== =====
</TABLE>
The weighted average remaining contractual life of options outstanding
at February 29, 2000 is 5.7 years. Exercise prices for outstanding
options at February 29, 2000 range from $0.16 to $4.00 per share.
8. INCOME TAXES
The Company has net operating loss, alternative minimum tax credit and
business credit carryforwards for federal income tax purposes of
approximately $10,139,000, $9,000 and $18,000, respectively, available
for the reduction of future federal taxable income and income taxes.
Net operating loss carryforwards begin expiring in fiscal 2005.
F-16
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective income tax rate, excluding extraordinary gains and
discontinued operations for 2000, 1999, and 1998 differs from the
statutory U.S. federal income tax rate due to the following:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
<S> <C> <C> <C>
Tax (benefit) based on statutory
U.S. federal income tax rate (34.0)% (34.0)% (34.0)%
Change in valuation allowance 41.0 38.6 27.2
Meals and entertainment 10.1 1.0 3.7
State and local tax effects (7.5) (6.6) (4.5)
Writedown of goodwill -- -- 6.3
Other (9.6) 1.0 1.3
---- ---- ----
Effective rate --% --% --%
==== ==== ====
</TABLE>
Deferred income taxes are measured based on temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows as of February 29, 2000 and February 28,
1999:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,056,000 $ 4,530,000
Inventory 384,000 545,000
Property and equipment 534,000 690,000
Other 438,000 300,000
----------- -----------
Total deferred tax assets 5,412,000 6,065,000
Valuation allowance (5,060,000) (5,494,000)
----------- -----------
Net deferred tax assets 352,000 571,000
----------- -----------
Deferred tax liabilities:
Property and equipment (347,000) (566,000)
Other (5,000) (5,000)
----------- -----------
Total deferred tax liabilities (352,000) (571,000)
----------- -----------
Net deferred tax assets and liabilities $ -- $ --
=========== ===========
</TABLE>
Change in the valuation allowance equals the change in net deferred
taxes.
F-17
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INDUSTRY SEGMENT INFORMATION
The Company has two operating segments which conduct business in
separate industries. The steel distribution and processing segment
handles flat-rolled steel products for the automotive, truck and
appliance industries. The waste management segment recycles paint
wastes for companies in the automotive industry.
Net sales by segment include sales to unaffiliated customers and
intersegment sales at prices which the Company believes approximate
market. Intersegment sales represent services provided by the waste
management segment for the steel distribution and processing segment.
Corporate charges incurred on behalf of the segments are allocated
based on the percentage of time devoted to segment business by
corporate personnel. Operating profit (loss) by segment excludes
unallocated general corporate expenses and net interest expense.
Corporate assets consist primarily of cash and other short-term assets.
Net sales of the steel distribution and processing segment include
$7,366,000, $5,878,000, and $10,101,000 in 2000, 1999, and 1998,
respectively, for slitting of coil steel for a steel stamping customer.
The accounts receivable balances from this customer at February 29,
2000 and February 28, 1999 were approximately $1,631,000 and
$1,079,000, respectively.
The following summarizes the Company's operations and identifiable
assets by segment:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9 1 9 9 8
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Steel distribution and
processing $ 39,220,800 $ 45,418,511 $ 66,965,409
Waste management 3,342,054 3,872,492 3,718,580
------------ ------------ ------------
Total net sales $ 42,562,854 $ 49,291,003 $ 70,683,989
============ ============ ============
Operating profit (loss):
Steel distribution and
processing $ 852,601 $ 12,326 $ 1,085,575
Waste management (a) (72,504) (3,174,435) (1,066,514)
------------ ------------ ------------
Total operating profit (loss) (a) 780,097 (3,162,109) 19,061
General corporate expenses (441,955) (651,154) (850,507)
Interest expense - net (1,397,347) (1,720,719) (1,786,465)
------------ ------------ ------------
Net loss (a) $ (1,059,205) $ (5,533,982) $ (2,617,911
============ ============ ============
</TABLE>
F-18
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9
------------ ------------
<S> <C> <C>
Identifiable assets:
Steel distribution and
Processing $ 14,189,935 $ 18,063,893
Waste management 1,917,297 2,833,790
Corporate and discontinued
operations 464,111 1,227,567
Eliminations -- (2,624)
------------ ------------
Total assets $ 16,571,343 $ 22,122,626
============ ============
</TABLE>
(a) Includes restructuring charges of $2,702,764 in fiscal 1999
and costs of an abandoned registration of $462,000 in 1998.
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9 1 9 9 8
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization:
Steel distribution and
processing $239,073 $423,936 $436,313
Waste management 290,995 522,675 389,724
Corporate assets 30,275 27,549 30,292
-------- -------- --------
Total depreciation and
amortization $560,343 $974,160 $856,329
======== ======== ========
Capital expenditures:
Steel distribution and
processing $184,260 $258,260 355,294
Waste management 45,629 228,331 315,732
Corporate assets and
discontinued operations 1,008 -- 3,505
-------- -------- --------
Total capital expenditures $230,897 $486,591 674,531
======== ======== ========
</TABLE>
F-19
<PAGE>
MERIDIAN NATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COSTS OF ABANDONED REGISTRATION
During 1998, the Company incurred expenses in conjunction with a
proposed initial public offering of approximately 50% of a subsidiary
which includes the Company's paint waste recycling operation. Due to
weakness in the public market and to other matters, the planned
offering was ultimately abandoned. The Company charged to operations in
the fourth quarter of fiscal 1998 approximately $462,000 of legal,
accounting and other costs related to the unsuccessful offering.
11. RELATED PARTY TRANSACTIONS
Note Receivable
Included in accounts receivable is a note receivable from an officer
and stockholder of the Company. The note had a balance of $115,000 and
$110,000, including accrued interest at 6%, of $23,000 and $17,000 at
February 29, 2000 and February 28, 1999, respectively. Interest earned
on the note was $5,600 in each of 2000, 1999 and 1998.
Sale of Property and Equipment
In August 1998, the Company sold property and equipment to MNP 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.
Inventory Financing
During fiscal 1999, the Company entered into an agreement whereby it
was advanced $680,000 from MNP to purchase steel. In return, the
Company paid MNP interest on unpaid advances at a rate of 7.75% plus
50% of the gross profit resulting from the related sale of steel
products totaling $161,000.
* * * * *
F-20
<PAGE>
MERIDIAN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS UNCOLLECTIBLE
BALANCE AT CHARGED TO ACCOUNTS
BEGINNING OF COSTS AND CHARGED TO BALANCE AT
DESCRIPTION YEAR EXPENSES THE ALLOWANCE END OF YEAR
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 29, 2000
Allowance for doubtful
trade accounts receivable $448,000 $216,939 $187,339 $477,600
YEAR ENDED FEBRUARY 28, 1999
Allowance for doubtful
trade accounts receivable $149,492 $368,816 $ 70,308 $448,000
YEAR ENDED FEBRUARY 28, 1998
Allowance for doubtful
trade accounts receivable $152,500 $ 99,074 $102,082 $149,492
</TABLE>
F-21
<PAGE>
MERIDIAN NATIONAL CORPORATION
FORM 10-K
INDEX TO EXHIBITS
10.01(a) Amended and Restated Loan and Security Agreement, dated September
3, 1999, among the Company, certain of its subsidiaries and
National Bank of Canada.
10.01(b) Subordination Agreement dated September 3, 1999, among the
Company, certain of its subsidiaries, MNP Corporation and
National Bank of Canada.
10.15(a) Stock Purchase Agreement, Dated as of June 25, 1999, among The
Company, the Buyers as listed in the document and MNP
Corporation.
10.15(b) Loan Agreement, dated as of June 30, 1999, among the Company,
certain of its subsidiaries and MNP Corporation.
21 List of Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
