FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from __________ to __________
Commission file number 33-75594
MERIDIAN FINANCIAL CORPORATION
(Name of small business issuer in its charter)
INDIANA 35-1894846
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8250 HAVERSTICK ROAD, SUITE 110
INDIANAPOLIS, INDIANA 46240-2401
(Address of principal executive offices)
(317) 722-2000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve 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 [ ]
Number of common shares, without par value, outstanding at August 5,
1996: 1,000
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
MERIDIAN FINANCIAL CORPORATION
FORM 10-QSB
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets at June 30, 1996 and
September 30, 1995 3
Condensed Statements of Earnings (Loss) for the
three months and the nine months ended
June 30, 1996 and 1995 4
Condensed Statements of Cash Flows for the
nine months ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Index to Exhibits 13
2
<PAGE>
MERIDIAN
FINANCIAL
CORPORATION
(UNAUDITED)
<TABLE>
<S> <C> <C>
JUNE 30, SEPTEMBER 30,
1996 1995
ASSETS
Finance receivables, net of unearned finance charges:
Net investment in direct
financing leases $ 4,147,772 $ 3,811,531
Loans
receivable 920,455 930,137
Total finance receivables
5,068,227 4,741,668
Cash and short-term investments
180,613 311,701
Cash held in origination account
1,051,375 1,004,262
Debt service reserve funds
156,240 128,640
Bond issue costs, net
622,971 692,395
Other assets
544,806 249,639
Total assets
$ 7,624,232 $ 7,128,305
LIABILITIES AND
SHAREHOLDERS' EQUITY
Bonds Payable $ 6,582,435
$ 5,838,498
Accounts payable and accrued expenses
48,751 164,477
Total liabilities
6,631,186 6,002,975
SHAREHOLDERS' EQUITY:
Preferred stock
1,789,560 1,789,560
Common stock
68,533 68,533
Additional paid-in capital
37,500 37,500
Accumulated deficit
(902,547) (770,263)
Total shareholders' equity
993,046 1,125,330
Total liabilities and shareholders' equity
$ 7,624,232 $ 7,128,305
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
<TABLE>
<CAPTION>
MERIDIAN
FINANCIAL
CORPORATION
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
<S> <C> <C>
REVENUE:
Interest income from leases and mortgage
loan $ 256,978 $ 217,781 $ 766,105 $ 470,451
Gains from brokerage activity
132,613 0 132,613
Gain on early termination of leases
0 0 43,344 78,716
Investment income and other
29,341 14,739 87,669 74,965
Total revenue 418,932 232,520 1,029,731 624,132
EXPENSES:
Interest expense
227,697 156,987 678,824 397,866
Legal and professional
12,000 20,345 41,050 70,462
Other general and administrative
103,976 138,601 322,141 272,595
Total expenses
343,673 315,933 1,042,015 740,923
NET EARNINGS (LOSS) 75,259 (83,413) (12,284) (116,791)
Less - Preferred stock dividends
(40,000) (40,000) (120,000) (120,000)
EARNINGS (LOSS) TO COMMON
SHAREHOLDERS $ 35,259 $(123,413) $ (132,284) $ (236,791)
EARNINGS (LOSS) PER COMMON
SHARE
$ 26.44 $ (123.41) $ (132.28) $ (236.79)
</TABLE>
The accompany notes are an integral part of these condensed financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
MERIDIAN
FINANCIAL
CORPORATION
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)
$ (12,284) $(116,791)
Adjustments to reconcile net earnings (loss) to net
cash from operating activities-
Depreciation and amortization
243,997 159,000
Increase in other
assets (106,767) (96,107)
Increase (decrease) in accounts payable
and accrued expenses
(72,343) 83,893
Net cash provided by operating activities
52,603 29,995
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to direct financing leases
(2,583,600) (2,442,340)
Additions to loans receivable
- (935,000)
Principal payments received on direct financing leases and
loans receivable 2,081,936 814,893
Other
(33,493) (55,952)
Net cash used in investing activities
(535,157) (2,618,399)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock
- 1,427,060
Proceeds from issuance
of bonds payable 1,375,000 2,517,000
Principal payments on bonds payable
(631,063) (368,042)
Increase in cash held in
debt service reserves
and origination
accounts (74,713) (285,750)
Bond issue costs paid
(129,375) (441,965)
Preferred stock dividends
(120,000) (120,000)
Other
(68,383) -
Net cash provided by financing activities
351,466 2,728,303
NET CHANGE IN CASH (131,088) 139,899
CASH AND SHORT-TERM INVESTMENTS, at beginning of period 311,701 62,147
CASH AND SHORT-TERM INVESTMENTS, at end of period $ 180,613 $ 202,046
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. General
The financial information included herein was prepared in conformity with
generally accepted accounting principles, and such principles were
applied on a basis consistent with those reflected in the Annual Report
on Form 10-KSB for the year ended September 30, 1995.
The information furnished includes all adjustments and accruals which
are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. Results for any interim period may not
be indicative of the results for the entire year.
The disclosures in the notes presume that the users of the interim
financial information have read or have access to the audited financial
statements included in the Annual Report on Form 10-KSB for the year
ended September 30, 1995.
2. Net Investment in Direct Financing Leases:
The componenet of the Company's net investment in direct financing leases
are as follows:
JUNE 30, SEPTEMBER 30,
1996 1995
Minimum Lease payments to be received $ 6,359,328 $ 5,682,329
Less -- Unearned income 2,211,556 1,870,798
Net investment in direct
financing leases $ 4,147,772 $ 3,811,531
During the nine months ended June 30, 1996, the Company sold two of its
leases to a third party on a non-recourse basis. The leases had a
remaining net investment of approximately $683,000. The Company recorded
a gain of $132,613 in connection with this sale. The proceeds from this
sale are being reinvested into new leases.
During the nine months ended June 30, 1996, four leases, with a remaining
net investment of approximately $754,000, were terminated by the lessee.
The Company recorded gains totaling $43,344 in connection with these
early terminations. The proceeds from these terminations were reinvested
into new leases.
During the nine months ended June 30, 1995, a lease, with a remaining net
investment of approximately $414,000, was terminated by the lessee. The
Company recorded a gain totaling $78,716 in connection with this early
termination. The proceeds from the termination were reinvested into new
leases.
6
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Loans Receivable
Loans receivable include a mortgage loan with an initial amount of
$800,000. The principal balance of the mortgage loan at June 30, 1996 is
$785,455. The mortgage term is 60 months with a fifteen year
amortization and a final balloon payment due April 1, 2000.
4. Bonds Payable:
At June 30, 1996, bonds payable consist of two series of bonds, bearing
interest at rates of either 9% or 10%; collateralized by equipment
purchased and leases originated from proceeds of the offerings, cash held
in the origination account, and by debt service reserve funds held by a
trustee. The two series are not cross-collateralized, but are cross-
defaulted. Quarterly principal payments are required from the principal
portions of the related lease payments received by the Company. Based on
the leases in place as of June 30, 1996, quarterly principal payments for
the next twelve months are expected to total $814,104.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
The Company's historical cash in-flows consist primarily of lease
payments and net proceeds from the sale of bonds and preferred stock
offerings, the most significant of which is the sale of its Five-Year
Series II Bonds, an offering which expired December 31, 1995. The
Company's historical cash out-flows consist primarily of investments in
leases, debt service obligations, dividend payments on the Company's
preferred stock, and general and administrative expenses. The
profitability of the Company depends largely on the Company's ability to
enter into suitable leases, to realize an adequate spread between the
interest rate paid by the Company on its borrowings and the implicit
interest rate charged on the leases, and to avoid defaults on the leases.
LIQUIDITY AND CAPITAL RESOURCES:
With the expiration of the Company's offering of Series II Bonds on
December 31, 1995, the Company continues to explore various other sources
of funding. The Company has been in discussions with numerous banking
institutions and other commercial lenders, as well as potential
individual investors and venture capital funds. The types of financing
vehicles discussed include a traditional senior credit facility with one
or more banks or commercial lenders, additional equity or subordinated
debt, and a warehouse credit facility. All of the possible financing
scenarios are intended to ultimately reduce the Company's borrowing costs,
and to provide the Company with an adequate source of funding to grow
the lease portfolio.
The Company has been in discussions regarding the sale of existing or future
lease transactions to financing sources, which would generate immediate
income recognition to the Company. As a result of these discussions,
during the quarter ended June 30, 1996, the Company sold its first block
of lease portfolio to a third party financing source. Total proceeds
to the Company were $816,000, generating a gain from brokerage activity
of $133,000. In addition to generating current income recognition, this
method of financing transactions also allows the Company to consider deals
which it previously might have rejected, such as deals too large that would
cause a concentration issue or deals with smaller interest spreads. It is
the Company's intention to continue the sale of future lease portfolio to
third parties as part of the Company's overall financial plan.
In addition, on July 1, 1996, the Company entered into an agreement with
a bank for a $1 million warehouse line of credit. The Company intends to
use this warehouse line to fund new lease transactions on an interim
basis prior to selling the leases to other financing sources or keeping
the leases for its own portfolio. The warehouse line will be implemented
once the funds from the Company's origination have been fully invested.
As of June 30, 1996, the Company has approximately $1.0 million remaining
in its origination account which is available for investment in new
leasing transactions.
Management believes that its overall sources of liquidity will continue
to be sufficient to satisfy the foreseeable financial obligations of the
Company. Management of the Company knows of no material requirements for
capital expenditures other than to enter into leases.
<PAGE>
ANALYSIS OF CASH FLOWS:
Net cash flows from operating activities result primarily from net
earnings or losses, adjusted for non-cash items such as depreciation and
amortization of assets and from changes in working capital. The Company
experienced net cash inflows from operations of $52,603 for the nine
months ended June 30, 1996, compared to a net cash inflow of $29,995 for
the nine months ended June 30, 1995. The improvement in cash flows from
operations from period to period is due to the smaller net loss,
partially offset by a paydown in accounts payable which had been
increasing prior to March 31, 1996. Net earnings from operations before
non-cash charges of depreciation and amortization were $231,713 compared
with $42,209 in the 1995 period. The 1996 period includes a gain from
brokerage activity of $132,613. Both reporting periods include gains
from the early termination of leases totaling $43,344 and $78,716 in the
1996 and 1995 periods, respectively. Excluding these gains, net earnings
from operations before non-cash charges improved in the 1996 period over
the comparable 1995 period by approximately $92,000.
Net cash flows used in investing activities consist primarily of
investments in leases and a mortgage loan, which is the Company's primary
requirement for cash, and principal payments received from lessees, which
is one of the Company's principal sources of cash. During the nine
months ended June 30, 1996, the Company invested $2,583,600 in
eighteen leases, compared to $2,442,340 in sixteen leases for the same
period in 1995. Principal payments received on leases and loans
receivable totaled $2,081,936 for the nine months ended June 30, 1996
compared to $814,893 for the same period in 1995. Principal payments
received include approximately $754,000 and $414,000 from the early
terminations of leases in the 1996 and 1995 reporting period,
respectively, and $816,000 from brokerage activity in the 1996 reporting
period. Excluding the effects from these early terminations, principal
payments received have increased approximately $111,000 from period to
period, reflecting the increasing size of the finance receivable
portfolio. Investments in leases and principal payments received on
leases and the mortgage loan are expected to grow in future periods.
Cash inflows from financing activities have consisted of proceeds from
the sale of equity and debt securities. Cash outflows consist of costs
incurred in the sale of the securities, principal payments on debt
securities, preferred stock dividends, and amounts deposited in the debt
service reserve and origination accounts. During the nine months ended
June 30, 1996, the Company sold $1,375,000 of bonds, all of which
occurred prior to the expiration of the offering on December 31, 1995.
During the nine months ended June 30, 1995, the Company collected
subscriptions receivable relating to its Series B Preferred Stock and
warrants totaling $1,427,060 and sold $2,517,000 of bonds. Principal
payments on bonds were $631,063 in the 1996 period compared to $368,042
for the 1995 period, reflecting the growth in the related lease
portfolio. Management anticipates that the Company's primary cash
inflows from financing activities in the future will be from borrowing
arrangements other than the sale of bonds, and that the amount of
borrowings will continue to grow as the Company's growth in leasing
transactions continues. As previously indicated, however, the Company is
still exploring alternatives with respect to these anticipated borrowing
arrangements.
Subsequent to June 30, 1996, a lessee was placed in default of its
lease agreement. The Company's net investment is approximately $350,000.
The Company is currently in discussions with the lessee, the franchisor
and the landlord to resolve this default. Management estimates that
the Company will fully recover its investment.
RESULTS OF OPERATIONS:
For the nine months ended June 30, 1996, the Company reflected an
operating loss, before preferred dividend requirements, of $12,284
compared to a loss for the same period in 1995 of $116,791. Preferred
dividend requirements totaled $120,000 in each reporting period.
Included in operating earnings for the 1996 and 1995 reporting periods
are gains of $43,344 and $78,716, respectively, from the early
termination of leases, as well as a gain of $132,613 on brokerage
activity in the 1996 reporting period . For the three months ended June
30, 1996, the Company reflected operating income, before preferred
dividend requirements, of $75,259, compared to an operating loss of
9
<PAGE>
$83,413 in the corresponding 1995 period. Preferred dividend
requirements totaled $40,000 in each reporting period.
Interest income from leases, loans receivable and invested funds for the
nine months ended June 30, 1996 was $853,774 and interest expense was
$678,824 in the same period, or a net interest spread of $174,950,
compared to a net interest spread of $147,550 in the comparable period in
1995. The Company considers the gains from brokerage activity and early
terminations to be a component of its income from leases. Including
these gains, the interest spread for the 1996 period increases to $350,907,
compared to $226,266 in the 1995 period. In future periods, management
expects the interest spread to increase as the Company continues to invest
in new leases, reduce its cash held in the origination account and its cash
and short-term investments, and initiate new funding arrangements which will
lower the Company's overall cost of funds.
Other general and administrative expenses increased approximately $49,000
during the nine months ended June 30, 1996 compared to the same period in
1995. For the three months ended June 30, 1996, these expenses decreased
approximately $35,000 compared to the same period in 1995. These
changes are in line with management's expectation and reflect lease
origination activity and the increased level of lease portfolio. In
addition, the Company has increased its marketing efforts. However, with
its management team and systems in place, general and administrative
costs going forward should be relatively fixed, with the exception of a
limited number of personnel additions required by anticipated growth in
the Company's lease portfolio. Therefore, interest earned on leases is
expected to grow at a faster pace than the related general and
administrative expenses.
The Company's cost of funds and implicit lease rates react over varying
periods of time to movements in interest rates generally. A change in
the interest rate environment will not have any direct impact on leases
booked to date, as the spreads (i.e. the difference between the implicit
rates on the leases and the Company's cost of funds) on leases booked to
date are fixed throughout the lease term. On a prospective basis, the
Company will continue to monitor its cost of funds and evaluate its
implicit lease rates based on factors such as the availability of funds
at certain rates, the suitability of the lessee and the long-term trend
in interest rates.
The Company's primary focus involves the leasing of complete packages of
restaurant equipment for restaurant franchises. While competition within
the restaurant industry is high, the industry itself is thriving. The
percentage of the total food-dollar spent on food prepared outside the
home has been increasing. The Company expects this trend to continue,
and
10
<PAGE>
anticipates that, as the number of restaurants increases, the Company
should have a growing source of potential lessees.
Inflation has not had a material effect on the Company's operations.
FORWARD-LOOKING STATEMENTS
The statements contained in this filing on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Actual results may differ materially from
those included in the forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to, the
following: changes in general economic conditions, including changes in
interest rates; competitive or regulatory changes that affect the cost of or
demand for the Company's lease product; and the availability of funds or third-
party financing sources to purchase equipment and enter into new leases.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on June 18,
1996. During the meeting, common shareholders and Series B preferred
shareholders voted on the election of directors. All of the nominees to
serve as members of the Board of Directors were reelected as directors. The
following identifies each nominee by name and tabulates the votes case in
his election:
DIRECTORS ELECTED BY COMMON SHAREHOLDERS VOTES CAST FOR
Michael F. McCoy 775
J. Phillip Beatty 775
DIRECTOR ELECTED BY SERIES B PREFERRED SHAREHOLDERS VOTES CAST FOR
Curtis Miller 1,500
No other matters were voted on during the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the Index to Exhibits
appearing on page 13 are filed herewith.
(b) No reports on Form 8-K were filed by the
Registrant during the quarter ended June 30, 1996.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERIDIAN FINANCIAL CORPORATION
By: /s/ Michael F. McCoy
Michael F. McCoy
President
By: /s/ Gerald W. Gerichs
Gerald W. Gerichs
Vice President, Secretary
and Treasurer
(Principal Financial
Officer)
Date: August 8, 1996
13
<PAGE>
INDEX TO EXHIBITS
Page No.
In
Exhibit this
No. Description Filing
3-A (1) Articles of Incorporation of Registrant, as amended to date
3-B (1) By-Laws of Registrant, as amended to date
4-A (1) Specimen of Five-Year Series II Bond
4-B (1) Indenture of Trust, dated as of December 15, 1993, between
Registrant and Texas Commerce Bank National Association, as
Trustee
4-C (2) First Supplemental Indenture, dated as of February 15, 1994,
between Registrant and Texas Commerce Bank National Association,
as Trustee
4-D (2) Specimen of Five-Year Series I Bond
11 (3) Statement re: Computation of Per Share Earnings (Loss)
27 (3) Financial Data Schedule
(1) The copy of this exhibit is incorporated by reference to the exhibit
with the same number filed as part of the Registrant's Registration
Statement on Form SB-2 (File #33-75594C).
(2) The copy of this exhibit is incorporated by reference to the exhibit
with the same number filed as part of the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 31, 1994.
(3) Filed with this report on Form 10-QSB.
14
COMPUTATION OF PER SHARE EARNINGS (LOSS)
Earnings (loss) per common share is calculated by subtracting preferred
stock dividends from net earnings (loss) and dividing that amount by the
weighted average shares outstanding for the period. Weighted average
shares outstanding for the three month period ending June 30, 1996 is
1,333, and 1,000 for all other periods presented. The number of weighted
average shares outstanding in all periods except the three month period
ending June 30, 1996 exclude 333 shares relating to warrants outstanding,
which entitle the holders to purchase, at a nominal exercise price, a
number of common shares equal in the aggregate to 25% of the total number
of common shares that would be outstanding immediately after issuance of
all such common shares, since these warrants are antidilutive.
Exhibit 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,231,988
<SECURITIES> 0
<RECEIVABLES> 5,068,227
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,624,232
<CURRENT-LIABILITIES> 0
<BONDS> 6,582,435
0
1,789,560
<COMMON> 68,533
<OTHER-SE> (865,047)
<TOTAL-LIABILITY-AND-EQUITY> 7,624,232
<SALES> 0
<TOTAL-REVENUES> 1,029,731
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 363,191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678,824
<INCOME-PRETAX> (12,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132,284)
<EPS-PRIMARY> (132.28)
<EPS-DILUTED> 0
</TABLE>
