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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MAY 31, 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 of Incorporation) (I.R.S. Employer
Identification Number)
805 CHICAGO STREET, TOLEDO, OH 43611
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (419) 729-3918
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X__ No ____
As of June 30, 2000, 7,917,552 shares of Meridian National Corporation common
stock were outstanding.
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MERIDIAN NATIONAL CORPORATION
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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The accompanying condensed consolidated financial statements of
Meridian National Corporation are unaudited but, in the opinion of management,
reflect all adjustments (including only normal recurring accruals) necessary to
present fairly such information for the periods and at the dates indicated. The
results of operations for the three months ended May 31, 2000 may not be
indicative of the results of operations for the year ending February 28, 2001.
Since the accompanying condensed consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X, they do not contain
all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
consolidated financial statements and notes thereto appearing in the Company's
Annual Report on Form 10-K for fiscal year ended February 29, 2000.
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MERIDIAN NATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MAY 31, February 29,
------ 2000 2000
------------------ ---------------
<S> <C> <C>
Current assets:
Cash $ 6,441 $ 3,350
Accounts receivable 8,742,581 8,032,915
Inventories 5,260,826 4,287,544
Other current assets 791,782 919,647
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Total current assets 14,801,630 13,243,456
Property and equipment, at cost 7,133,891 7,112,199
Less accumulated depreciation and amortization 3,955,243 3,849,994
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3,178,648 3,262,205
Other assets 60,295 65,682
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Total assets $ 18,040,573 $ 16,571,343
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
Short-term notes payable:
Affiliate $ 2,400,000 $ 2,100,000
Other 895,826 1,642,084
Accounts payable and accrued liabilities 9,855,030 8,516,024
Current portion of long-term debt:
Affiliate 470,888 501,465
Other 1,245,882 1,460,723
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Total current liabilities 14,867,626 14,220,296
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Long-term debt due after one year:
Affiliate 1,775,232 1,775,232
Other 9,503,272 8,532,578
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11,278,504 10,307,810
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Total liabilities 26,146,130 24,528,106
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Stockholders' deficit:
Preferred stock, $.001 par value, authorized 5,000,000 shares:
$100 Series A, 5,000 shares authorized,
4,000 shares issued and outstanding 400,000 400,000
$3.75 Series B, 1,375,000 shares authorized,
206,752 shares issued and outstanding 775,320 775,320
Common stock, $.01 par value, authorized 20,000,000 shares,
7,917,552 shares outstanding 79,176 79,176
Additional paid in capital 11,212,866 11,212,866
Accumulated Deficit (20,572,919) (20,424,125)
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Total stockholders' deficit (8,105,557) (7,956,763)
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Total liabilities and stockholders' deficit $ 18,040,573 $ 16,571,343
================== ===============
</TABLE>
See accompanying notes.
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MERIDIAN NATIONAL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
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2000 1999
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<S> <C> <C>
Net sales $ 12,002,964 $ 10,863,631
Costs of sales 10,478,622 9,186,452
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Gross margin 1,524,342 1,677,179
Other costs and expenses (income):
Selling, general and administrative 1,270,001 1,294,517
Interest 395,110 370,362
Miscellaneous - net (975) (975)
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Total other costs and expenses 1,664,136 1,663,904
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Net income (loss) $ (139,794) $ 13,275
=============== ===============
Loss applicable to common stock $ (168,177) $ (15,108)
=============== ===============
Loss per common share -
basic and diluted: $ (0.02) $ 0.00
=============== ===============
Weighted average common
shares outstanding 7,917,552 3,717,552
=============== ===============
</TABLE>
See accompanying notes.
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MERIDIAN NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (139,794) $ 13,275
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 110,987 155,140
Changes in operating assets and liabilities:
Accounts receivable (709,666) 553,126
Inventories (973,282) 1,632,360
Other current assets 27,240 (35,590)
Accounts payable and accrued liabilities 1,339,006 (933,738)
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Net cash provided by (used in) operating activities (345,509) 1,384,573
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (21,692) (97,129)
Changes in other assets (351) (13,639)
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Net cash (used in) investing activities (22,043) (110,768)
CASH FLOWS FROM FINANCING ACTIVITIES
Net line of credit borrowings (repayments) 1,087,074 (1,807,058)
Payments on borrowed debt (1,007,431) (260,617)
Proceeds from borrowed debt 300,000 --
Dividends paid on preferred stock (9,000) (9,000)
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Net cash provided by (used in) financing activities 370,643 (2,076,675)
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Increase (decrease) in cash and cash equivalents 3,091 (802,870)
Cash and cash equivalents at beginning of period 3,350 825,437
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Cash at end of period $ 6,441 $ 22,567
=============== ===============
</TABLE>
See accompanying notes.
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MERIDIAN NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. RELATED PARTY TRANSACTIONS
The Company leases property and equipment from affiliates of certain
officers and directors of the Company. Lease payments to these affiliates during
each of the three months ended May 31, 2000 and 1999 approximated $64,000. The
Company's management believes the terms of the leases are at least as favorable
as those that could have been obtained from unrelated parties.
A steel service center, affiliated with certain officers and directors
of the Company, provides steel processing services to the Company. Operations of
the steel service center began in February 2000. Services provided by the steel
service center amounted to $49,500 for the quarter ended May 31, 2000. These
services are priced and paid for as arms-length transactions according to
industry standard terms.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
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FIRST QUARTER ENDED MAY 31, 2000
COMPARED TO
FIRST QUARTER ENDED MAY 31, 1999
STEEL DISTRIBUTION AND PROCESSING SEGMENT The steel distribution and processing
operations reported net sales of $11.2 million for the first quarter, an
increase of $1.2 million or 12% compared to the first quarter of the prior year.
An increase in the availability of steel products from suppliers due to the
Company's improved credit position led to an increase in the distribution volume
of unprocessed steel products. The Company has experienced improved credit
relationships with suppliers due to an equity investment in the Company, the
loan arrangement with MNP Corporation, and the renegotiated financing
arrangement with its senior lender, as discussed in the Liquidity and Capital
Resources section which follows. The increase in distribution volume was offset
slightly by the closing of the Indiana sales office in the latter part of fiscal
2000.
Operating income for this segment amounted to $390,000 for the first
quarter, a decrease of $208,000 from the prior year quarter. Gross margin (net
sales less cost of sales) as a percentage of net sales was 11.6% in the first
quarter compared to 14.7% in the first quarter of the prior year. The decrease
in margins reflects the effects of higher steel prices in the marketplace during
the latter part of fiscal 2000 and into the first quarter of the current fiscal
year as a result of decreased steel imports and strong demand for steel
products. The Company's gross margins are subject to fluctuations as a result of
changes in the cost of steel purchases. While the Company is generally able to
pass on the increases in steel costs to its customers, the timing of such
increases may lag behind, resulting in lower margins in times of rising prices.
Additionally, the increase in sales of unprocessed steel products, which
generally carry a lower gross margin than value-added product sales, contributed
to the lower overall gross margin percentage.
WASTE MANAGEMENT SEGMENT This segment reflects the results of the operations of
the Company's paint waste recycling business. Net sales for this segment
decreased to $797,000 in the first quarter from $887,000 in the first quarter of
the prior year due to the shutdown of the Company's developmental Polymeric
Recovery System in July 1999. The system generated revenues of $100,000 in the
first quarter of the prior year. For the past several years, this segment's
operations have operated at or near processing capacity.
This segment reported operating income of $57,000 for the first
quarter, an improvement of $85,000 from an operating loss of $28,000 experienced
in the first quarter of the prior year. The improvement is due primarily to
decreased labor, repairs, and lower depreciation expense for this segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The $25,000 decrease in selling,
general and administrative expenses in the first quarter is primarily
attributable to lower personnel and administration costs of the paint waste
recycling operation when compared to the same quarter of fiscal 1999.
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INTEREST EXPENSE Interest expense increased $25,000 or 7% in the first quarter
compared to the prior year. While average outstanding borrowings fell due to a
decrease in steel purchases, lower inventory levels, and decreased working
capital requirements, higher interest rates on the Company's variable-rate debt
led to an overall increase in interest expense when compared to the first
quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a $66,000 working capital deficiency at May 31, 2000.
The improvement from a working capital deficiency at February 29, 2000 of
$977,000 is due primarily to increased receivables from higher sales compared to
the previous quarter, and borrowings on the revolving line of credit, which is
classified as long term. 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.
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. 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.
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 May 31, 2000, the outstanding balance of the revolving credit
line amounted to $8,285,000 and unused availability amounted to $614,000. 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 1.2 to 1.0.
The Company violated the covenants requiring the maintenance of the interest
coverage ratio and the fixed charge coverage ratio as a result of the net loss
incurred in the quarter ending May 31, 2000. The Company has requested that the
Bank waive the violation of these covenants, and management expects such waiver
will be granted.
On September 1, 1999, a private investor group (the "Buyers") purchased
4.2 million previously unissued shares of the Company's common stock 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.
Since July 1999, MNP has made loans to the Company, with a total of
$3.9 million outstanding as of May 31, 2000. The loans bear interest at prime
plus 1% and are secured by
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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 May 31, 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 steel distribution and
processing sales volume during fiscal 2001.
In addition to the sale of stock, modifications to its debt obligations
and discontinuance of the Polymeric Recovery 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
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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.
FORWARD-LOOKING STATEMENTS
--------------------------
This Form 10-Q, other SEC filings, and other pronouncements made from
time to time by the Company may include a number of forward-looking statements,
including, but not limited to, statements with respect to the Company's future
financial performance, operating results, plans and objectives. Such statements
are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based upon
the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. The Company is
subject to risks inherent in the industries in 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
fluctuating steel prices and rising interest rates. The Company's relationship
to and business dealings with
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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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 contained in the Company's Annual Report on
Form 10-K for the fiscal year ended February 29, 2000 for a description of the
Company's accounting policies and other information related to these financial
instruments.
VARIABLE-RATE DEBT. As of May 31, 2000, the Company had approximately $13.8
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 $13.8 million outstanding under these obligations
at May 31, 2000, a hypothetical 1.0% change in the interest rate from the rates
in effect at May 31, 2000 would cause a change in interest expense of
approximately $136,000 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 May 31, 2000, the Company had approximately $1.5 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.
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MERIDIAN NATIONAL CORPORATION
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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The Company is in arrears in the payment of dividends on its
$3.75 Series B Preferred Stock, $.001 par value. The arrearage consists of
semiannual dividends payable on February 1, 1999, August 1, 1999, and February
1, 2000, aggregating $116,298 if paid in cash, and has been accrued in the
accompanying balance sheet.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MERIDIAN NATIONAL CORPORATION
(Registrant)
Date: July 13, 2000 By /s/ William D. Feniger
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William D. Feniger
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: July 13, 2000 By /s/ James L. Rosino
---------------------------------------
James L. Rosino
Vice President - Finance and
Chief Financial Officer
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