FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549
ANNUAL REPORT
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 46240-2401
Indianapolis, Indiana (Zip Code)
(Address of principal executive
offices)
(317) 722-2000
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
NONE
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-
KSB or any amendment to this Form 10-KSB. Not applicable.
Issuer's revenues for the fiscal year ended September 30, 1996: $1,334,989
Aggregate market value of the voting stock held by non-affiliates: The
voting stock of the Company is closely held and there is no market for it.
Number of common shares, without par value, outstanding at December 20,
1996: 1,000
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Transitional Small Business Disclosure
Format: Yes [ ] No [X]
<PAGE>
MERIDIAN FINANCIAL CORPORATION Indianapolis, Indiana Annual Report to
Securities and Exchange Commission September 30, 1996
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Meridian Financial Corporation (the "Company") is an Indiana
corporation organized in 1993 to engage primarily in the business of
commercial equipment leasing. The Company's primary niche is the
leasing of restaurant equipment to franchisees of national restaurant
chains under full-payout, triple-net leases. As of September 30, 1996,
the Company's total finance receivables were approximately $6.2
million.
To date, the Company has funded its purchases of equipment primarily
through a private placement of five-year bonds, a public offering of
five-year bonds, and private placements of common and preferred
stock. During 1994 and 1995, the Company issued and sold approximately
$7.8 million aggregate principal amount of bonds under an indenture of trust,
the net proceeds of which were used to fund equipment leases. The Company's
payment obligations on the bonds are secured by security interests in the
equipment acquired with the proceeds, collateral assignments of the related
leases, and a debt service reserve fund on deposit with the trustee. Also
during 1994, the Company realized net proceeds of approximately $1.4 million
from the issuance of preferred stock together with warrants to purchase
common stock. These proceeds were used to fund equipment leases and a
mortgage loan and for general corporate purposes.
During the year ended September 30, 1996, the Company entered into an
agreement to sell leases to a third party from time to time on a non-recourse
basis. This brokerage activity allows
the Company to recognize immediate income on brokered transactions and
reinvest the proceeds into new leases. In addition, the Company has
entered into an agreement with a bank for a warehouse line of credit to
fund new transactions on an interim basis. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity
and Capital Resources."
The Company currently has five full-time employees. The Company's executive
offices are located at 8250 Haverstick Road, Suite 110, Indianapolis, Indiana
46240-2401, and its telephone number is (317) 722-2000.
Marketing
The marketing of the Company's leasing product is accomplished through
a variety of methods including franchisor referrals, equipment leasing
brokers, restaurant equipment dealer referrals and referrals from other
leasing companies across the country. Management of the Company also
attends food industry trade shows and conventions, providing the
Company with high visibility in the industry.
The Company's target market is seasoned, multi-site, national franchise
restaurant operators who are adding locations under a franchise agreement
with a Company-approved franchisor group. These franchisees typically
require leases in the $100,000 to $250,000 range. Substantially all of the
Company's equipment leases are for a 60 month term. These qualified
franchisees are most likely seasoned operators who have outgrown their local
banks' credit ceilings, geographic boundaries or willingness to fund newer,
unfamiliar (from the bank's perspective) franchise concepts. From a
geographic standpoint, the Company's market is national.
The Company also has opportunities to review equipment financing
transactions which are outside of the Company's target market, and which
principally arise through referrals. These nonrestaurant deals are
considered by management on a case-by-case basis.
Leasing Activities
As of September 30, 1996, the Company had entered into or purchased the
following leases:
<TABLE>
<CAPTION>
Type of Cost of Type of Restaurant Date Term of
Equipment Equipment or Other Business of Lease Lease
<S> <C> <C> <C> <C>
Restaurant $ 123,871 Great Steak and Fry(1) 12/30/93 60 mos.
Restaurant 100,000 Great Steak and Potato(1) 01/06/94 60 mos.
Restaurant 31,666 Great Steak and Potato(1) 01/06/94 60 mos.
Restaurant 132,610 Flamers Charbroiled Hamburgers(1) 02/08/94 60 mos.
Restaurant 57,000 Perkins Family Restaurants(1) 03/30/94 60 mos.
Restaurant 440,248 Boston Chicken(2) 05/05/94 60 mos.
Restaurant 147,500 Flamers Charbroiled Hamburgers(1) 06/24/94 60 mos.
Water Slide 300,000 Old Indiana Family Fun Park(1) 07/08/94 60 mos.
Restaurant 256,234 Delancey Street Deli(1) 08/31/94 52 mos.
Restaurant 36,764 Delancey Street Deli 08/31/94 60 mos.
Restaurant 388,794 Pretzel Time(1) 09/07/94 36 mos.
Restaurant 149,000 Applebee's Neighborhood Grill(2) 10/15/94 23 mos.
Restaurant 65,000 Great Steak and Fry(1) 10/19/94 60 mos.
Restaurant 114,445 Great Steak and Potato(1) 10/24/94 60 mos.
Restaurant 118,771 Great Steak and Fry(1) 11/04/94 60 mos.
Restaurant 68,503 Delancey Street Deli 11/21/94 60 mos.
Restaurant 197,665 Krystal(2) 11/28/94 60 mos.
Restaurant 318,000 Great Steak and Fry(1) 02/15/95 60 mos.
Agricultural 557,000 Agricultural business(1) 03/24/95 48 mos.
Restaurant 78,323 Applebee's Neighborhood Grill(3) 03/29/95 9 mos.
Restaurant 90,647 Applebee's Neighborhood Grill(3) 03/29/95 11 mos.
Restaurant 89,186 Applebee's Neighborhood Grill(3) 03/29/95 13 mos.
Auto Repair 35,724 T & K Front Wheel Drive(1) 03/29/95 23 mos.
Office 33,392 Dependable Affordable(1) 03/29/95 36 mos.
Water Park 800,000 Old Indiana Family Fun Park(4) 04/01/95 60 mos.
Restaurant 58,341 Great Steak and Fry(1) 06/07/95 60 mos.
Restaurant 84,884 Applebee's Neighborhood Grill(3) 07/20/95 11 mos.
Restaurant 96,313 Applebee's Neighborhood Grill(3) 07/20/95 13 mos.
Restaurant 55,879 Perkins Family Restaurants(1) 07/20/95 24 mos.
Food Storage 82,714 50 Below(1) 07/26/95 60 mos.
Convenience Store 164,515 Marathon Convenience Store(1) 07/31/95 60 mos.
Restaurant 223,541 Papa John's(2) 08/29/95 60 mos.
Convenience Store 23,905 Marathon Convenience Store(1) 09/12/95 60 mos.
Food Storage 86,229 50 Below(1) 09/29/95 60 mos.
Restaurant 110,690 Great Steak and Fry(1) 08/24/95 60 mos.
Restaurant 20,000 Great Steak and Fry(1) 10/06/95 60 mos.
Restaurant 52,295 Great Steak and Fry(1) 10/13/95 60 mos.
Restaurant 500,000 Burger King(5) 12/14/95 60 mos.
Restaurant 330,135 TGI Friday's(1) 12/14/95 60 mos.
Food Storage 35,372 50 Below(1) 12/21/95 60 mos.
Restaurant 100,000 Papa John's(2) 12/13/95 60 mos.
Restaurant 100,000 Papa John's(2) 12/13/95 60 mos.
Restaurant 188,243 Taco Bell(5) 12/15/95 60 mos.
Restaurant 100,000 Chuck E. Cheese's(1) 01/31/96 60 mos.
Restaurant 241,154 Damon's Ribs(1) 03/26/96 60 mos.
Restaurant 200,000 Italian Oven(5) 03/29/96 60 mos.
Restaurant 68,900 Papa John's(1) 06/03/96 60 mos.
Restaurant 160,000 Chuck E. Cheese's(1) 06/04/96 60 mos.
Restaurant 109,000 Chuck E. Cheese's(5) 06/04/96 60 mos.
Restaurant 191,536 Italian Oven(5) 06/23/96 60 mos.
Restaurant 15,915 Great Steak and Fry(1) 07/12/96 60 mos.
Restaurant 100,000 Chuck E. Cheese's(1) 07/01/96 60 mos.
Restaurant 145,600 Hooters(1) 07/23/96 60 mos.
Restaurant 54,472 Papa John's(1) 07/31/96 60 mos.
Restaurant 238,413 Checkers(1) 07/31/96 60 mos.
Restaurant 272,386 Checkers(1) 07/31/96 60 mos.
Restaurant 119,219 Checkers(1) 07/31/96 60 mos.
Restaurant 31,108 Delancey Street Deli 07/31/96 60 mos.
Restaurant 250,761 Great Steak and Fry(1) 07/31/96 60 mos.
Restaurant 199,500 Great Steak and Fry(1) 07/31/96 60 mos.
Restaurant 150,000 Great Steak and Fry(1) 07/31/96 60 mos.
Restaurant 41,028 Great Steak and Fry(1) 07/31/96 60 mos.
Restaurant 75,514 Italian Oven(5) 08/02/96 60 mos.
Restaurant 33,130 Papa John's(1) 09/16/96 60 mos.
Restaurant 113,400 Krystal's 09/30/96 60 mos.
<FN>
<F1>(1) These leases are pledged as collateral for the Company's
outstanding bonds.
<F2>(2) These leases were prepaid and the Company has reinvested the
proceeds into other leases.
<F3>(3) These were purchased leases which have matured. <F4>(4) This
equipment financing transaction is structured as a mortgage loan because
the Company took substantial additional collateral in the form
of real estate. The mortgage term is 60 months, with a fifteen year
amortization and a final balloon payment due April 1, 2000.
<F5>(5) These leases were subsequently sold to a third party on a non-
recourse basis.
</TABLE>
<PAGE>
Equipment
The Company focuses on purchasing and leasing complete packages of
restaurant equipment for national restaurant franchises, including
freezers, refrigerators, grills, broilers, fryers, signs, exterior lighting,
point-of-sale registers, seating units and other items necessary for the
operation of a restaurant. However, the Company may purchase and lease a wide
variety of other types of equipment where, in the opinion of management, the
nature of the opportunity and the creditworthiness of the potential lessee
warrant.
Purchases of equipment may be made directly from manufacturers, from
dealers, from independent third parties, or from existing users subject to
saleleasebacks. In most cases, management of the Company does not obtain
appraisals or other indications of fair value of the equipment acquired
because all equipment is acquired subject to full-payout
leases, and because most of the equipment is new and is purchased
from vendors specified by the franchisor.
Leases
Although certain minimum requirements must be met for each lease, the terms
and conditions of the leases are determined by negotiation between the
Company and the lessee and may vary from lease to lease. Substantially
all of the Company's current leases have a fixed base lease rate, and it is
anticipated that future leases generally will also have a fixed base lease
rate. Some future leases may provide for percentage rentals subject to a
specified guaranteed minimum. All of the Company's leases are full-payout,
non-cancelable leases, and most have non-renewable five-year terms. At the
termination of each lease, the lessee is required to purchase the equipment
subject to the lease for an amount agreed upon by the Company and the lessee.
Each of the Company's present leases is a triple-net lease, which requires the
lessee to repair and maintain the equipment, pay all taxes relating to the
lease and the lessee's use of the equipment, and bear the entire risk of the
equipment being lost, damaged, destroyed or rendered unfit or
unavailable for use. Historically the Company has retained and serviced all
of its leases, except for those sold to a third party on a non-recourse
basis, and it reserves the right to sell its interest in other leases and
the underlying equipment.
Credit Criteria
The Company bases its credit decisions upon the ability of the potential
lessees to make payments under the leases. Accordingly, the Company
conducts a detailed credit review of potential lessees. Except to the extent
discussed below, the Company has established and uses the following standards
and procedures:
(a) Historical debt service from operations of at least 1.5 to 1 or pro forma
debt service coverage of at least 2.0 to 1, both tests inclusive of payments
under the proposed lease. If only one of these tests is met, additional
collateral of a value at least equal to the equipment cost is required.
If neither test is met, additional collateral of a value in excess of twice
the equipment cost is required. Additional collateral may be in the form of
additional guarantees, supporting letters of credit, vendor guarantees,
pledges of other assets or combinations thereof.
(b) The franchisor must be a national chain of at least 100 stores. The
lessee must currently be a multi-site operator and must have 2 or more years in
business. Significant additional experience in the food industry is also
required.
(c) At least three years of income statements and tax returns are
evaluated.
(d) Personal credit checks from commercial credit bureaus unless the
lessee's financial strength based upon published information is compelling
enough to waive this requirement.
(e) Satisfactory banking checks and verifications.
(f) No single lessee may exceed $1.5 million.
The Company may, in its discretion, make exceptions to the standards above
if, in the Company's opinion, the overall creditworthiness of the potential
lessee warrants special consideration. Similar investigation and evaluation are
performed with respect to any guarantors of the lessees' obligation under
the leases.
One of the Company's keys to successful credit underwriting is that prior
to approval of each lease, a senior member of the management team visits the
franchise location, inspects operations and interviews the
management/ownership of the franchise. The Company utilizes an
internally developed, comprehensive "Franchisee Site Visit Checklist"
which focuses on the key operational issues confronting restaurant
franchisees. This site visitation is performed only after an initial review
of the lessee's financial and credit information, including a "Lessee
Profile" which includes all of the relevant business information concerning
the potential lessee.
The Company focuses its leasing efforts on the franchise restaurant
industry partly because national franchisors generally monitor their
franchisees on a regular basis and insist that the franchisees stay
current in their obligations to creditors. In the event of a default,
franchisors can intervene to assist in curing the default in order to
protect the value of the franchise.
As of December 16, 1996, the Company had declared only two lessees in the
franchise restaurant industry to be in default under their leases. One of
those defaults was resolved without loss to the Company and the other is
still in process. In addition, at such date, two lessees outside the restaurant
industry had been declared to be in default. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Credit Risk."
Competition
The equipment leasing industry is highly competitive, and the Company faces
competition from various sources. There are numerous other potential
competitors seeking to purchase and lease equipment, many of which have
greater financial resources than the Company and/or more experience than
management of the Company. The Company competes in the leasing marketplace
with various entities, including equipment dealers, brokers, leasing
companies, financial institutions and manufacturers or their affiliates.
In addition to attractive financial terms, manufacturers may also provide
certain ancillary services which the Company cannot offer directly, such as
maintenance services (including possible equipment substitution rights),
warranty services, purchase rights and trade-in privileges. The Company
identifies potential lessees by a number of means. Management of the Company
has relationships with various restaurant franchisors and other potential
sources of business. Because the Company's business is concentrated in the
restaurant industry, the Company receives referrals from other leasing
companies that do not serve the restaurant industry.
ITEM 2. DESCRIPTION OF PROPERTY
Due to the nature of the Company's business, its investment in tangible
property, other than equipment subject to leases, is not significant in
relation to its total assets. The Company leases its executive offices.
ITEM 3. LEGAL PROCEEDINGS.
In December, 1996, the Company filed a complaint in the Superior Court of
Boone County, Indiana, against Old Indiana Limited Liability Company and certain
other parties as a result of defaults by Old Indiana under the
equipment lease and mortgage loan made by the Company to Old Indiana. The
complaint seeks a money judgment against Old Indiana for all amounts due
and payable to the Company under the lease and mortgage loan, together with
attorneys fees, prejudgment interest and costs of the action. The
complaint also requests the court to enter a judgment to foreclose the
Company's security interests and mortgage lien on Old Indiana's assets and
to approve the disposition of those assets for the purpose of satisfying the
money judgment that is being sought. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Credit Risk."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the 1996 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no public trading market for the Company's common shares. As of
December 20, 1996, there were 12 holders of record of the common shares.
No cash dividends were declared or paid on the common shares in fiscal 1995
and 1996.
The terms of the Company's Series A and Series B Preferred Stocks provide
that no dividends (other than dividends paid in common shares) may be paid
or declared and set aside for payment or other distribution upon the common
shares unless full cumulative dividends on the Series A or the Series B
Preferred Stocks, as the case may be, have been paid. In addition, the
terms of an agreement between the Company and a holder of shares of
Series B Preferred Stock prohibit, without such shareholder's prior written
consent, payment of any dividend on common shares at any time prior to
the exercise of a warrant to purchase common shares held by such shareholder.
The Company's Articles of Incorporation and the Indiana Business Corporation
Law further provide that no dividend or other distribution may be made upon any
shares if, after giving it effect, the Company would be unable to pay its
debts as they become due in the usual course of business or the Company's
total assets would be less than its total liabilities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company's current cash in-flows consist primarily of the receipt of
lease payments from lessees. The Company's current 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 by the
lessees.
Liquidity and Capital Resources
As of September 30, 1996, the Company had completed two private equity
offerings, one private debt offering and one public debt offering. All of
the offerings initiated by the Company have been part of a detailed
financial plan devised by the Company to provide funds for investment in leasing
or lending transactions and for working capital while maintaining a proper
debt to equity ratio. As of September 30, 1996, the Company's debt to equity
ratio was 6.9 to 1, which is slightly higher than the industry average for
independent financial services companies of approximately 6.6 to 1,
according to the 1995 Survey of Industry Activity & Business Operations
conducted by the Equipment Leasing Association.
With the expiration of the Company's public offering of bonds on December
31, 1995, the Company has continued 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 being discussed include a
traditional senior credit facility with one or more banks or commercial
lenders, additional equity and/or subordinated debt, and a warehouse credit
facility. All of the possible financing scenarios would be intended to
ultimately reduce the Company's borrowings costs, and to provide the
Company with an adequate source of funding to grow the lease portfolio.
In addition to the discussions above regarding additional financing
vehicles being pursued, the Company entered into an agreement on September
18, 1996 to sell leases to a third party from time to time on a non-recourse
basis. 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. For the
year ended September 30, 1996, the Company sold two separate blocks of
portfolio to this third party, generating gross proceeds of $1,405,000 and
income from this brokerage activity totaling $149,144. 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.
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. As of September 30, 1996, the Company had not commenced
borrowing on this credit line.
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.
Analysis of Cash Flows
Net cash flows from operating activities result primarily from net earnings
or losses, adjusted for noncash items such as depreciation and amortization of
assets and from changes in working capital. For the year ended September
30, 1996, the net cash inflow from operations was $41,645, compared with $2,812
of net cash inflow from operations for the prior year. The most significant
contributor to operating cash flow are the net earnings before noncash
charges for depreciation and amortization. Net earnings before non cash charges
improved from a net outflow of $12,842 in 1995 to an inflow of $282,668 in
1996. This improvement in income before non-cash charges, totaling
$295,510 from year to year, was positively impacted by gains from brokerage
activity and early terminations of leases totaling $192,488 for 1996
compared with $78,716 for 1995. Brokerage activity was begun in fiscal 1996
and included the investment of $1,256,000 into eight leases held for sale and
the receipt of $1,405,000 in proceeds from sales of the leases.
Net cash flows used in investing activities consist primarily of
investments in leases and a mortgage loan, which represent the
Company's primary requirement for cash, and principal payments received on
its finance receivables, which is currently the Company's principal source of
cash. During the year ended September 30, 1996, the Company invested $2,796,043
in twenty-four leases, compared to $3,322,060 in nineteen leases and $935,000
in loans receivable for fiscal 1995. Principal payments received on leases
and loans receivable totaled $1,550,935 for fiscal 1996 compared to $983,766
for fiscal 1995. Principal payments received in fiscal 1996 include
approximately $754,000 from the early termination of leases, compared to
$414,000 during 1995. Investments in leases and principal payments
received on leases and the mortgage loan are expected to continue 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 reserves and the
origination accounts. During the year ended September 30, 1996, the Company
sold $1,375,000 of bonds, compared to $3,392,000 during 1995. This decrease
during 1996 was due to the termination of the bond offering on December 31,
1995. Principal payments on bonds payable increased during 1996 to $831,381
from $519,988 during 1995, reflecting the increase in principal payments
received on direct financing leases from year to year. During the year
ended September 30, 1995, the Company collected subscriptions receivable
relating to its Series B Preferred Stock and warrants totaling $1,500,000
($1,427,060 net of a finder's fee and offering expenses). 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.
Results of Operations
For the year ended September 30, 1996, the Company incurred an operating
loss, before preferred dividend requirements, of $44,533 compared to a loss
for the same period in 1995 of $242,938. These operating losses have
narrowed each year as the Company has continued to experience growth in its
lease portfolio. Preferred dividend requirements totaled $160,000 in fiscal
1996 and 1995. Included in operating earnings for fiscal 1996 are gains of
$192,488 from brokerage activity and the early termination of leases,
compared to $78,716 in gains during fiscal 1995.
Interest income from finance receivables and invested funds for the year
ended September 30, 1996 was $1,142,501 and interest expense was $898,764 in
the same period, or a net interest spread of $243,737, compared to a net
interest spread of $232,953 in fiscal 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 fiscal 1996
increases to $436,225, compared to $311,669 for fiscal 1995. In
future periods, management expects the interest spread to increase as the
Company continues to invest in new leases, and initiates new funding
arrangements which will lower the Company's overall cost of funds.
Legal and professional expenses decreased approximately $78,000 for the
year ended September 30, 1996 compared to fiscal 1995. As discussed in liquidity
and capital resources, the Company has been pursuing other sources of
financing. During fiscal 1995, the Company incurred legal and accounting
costs totaling approximately $60,000 in connection with these activities.
Other general and administrative expenses increased approximately $4,000
for the year ended September 30, 1996 compared to fiscal 1995. This small
increase in expenses reflects the relative fixed nature of the Company's general
and administrative expenses. With its management team and systems in place,
general and administrative costs going forward should continue to be
relatively fixed, with the exception of a limited number of personnel additions
required by growth in the Company's lease portfolio. Therefore, the interest
spread on finance receivables is expected to grow at a much faster pace than
the related general and administrative expenses.
Impact of Interest Rate Changes and the Restaurant Industry
The overall strength of the U.S. Economy and the general interest rate
environment have remained relatively stable during the past few years. To
date the Company has funded its fixed rate leases with fixed rate debt, with
similar duration, thereby avoiding any interest rate risk. While a dramatic
rise in future interest rates would not have a direct impact on leases booked
to date, it may have an impact on the industry's growth rate. A rising
interest rate environment may also impact the Company's future gains on
brokerage activities. As the Company continues to discuss other funding
arrangements with third parties, it is management's intention to
structure future funding arrangements so as to minimize interest rate risk.
The Company's primary focus involves the leasing of complete packages of
restaurant equipment for restaurant franchises. The franchise restaurant
industry has experienced rapid growth as the number of franchise concepts
and units continues to grow. As large metropolitan areas in some geographic
areas begin to reach saturation points from the standpoint of restaurant
locations, the Company is seeing more prospective deals in more rural
locations, which would tend to be the smaller type franchisee that the
Company targets. In addition, the Company is seeing some consolidation in the
marketplace as franchisees purchase other franchisees' operations. While
these types of transactions are generally larger in size than the
Company's typical lease deal, the Company expects this consolidation to present
opportunities to utilize the Company's third party brokerage source.
Inflation has not had a material effect on the Company's operations.
Credit Risk
Since inception of the Company through September 30, 1996, the Company had
declared only three lessees to be in default under their leases. The first
two defaults have been resolved and payments remain current. The third
default is currently being addressed. Management expects the Company to
recover in full its net investment in the lease and, therefore, no loss has
been reflected in the Company's financial statements.
In addition, subsequent to September 30, 1996, the Company declared the
mortgage loan and a lease with the same entity, and one other lease to be
in default of its terms. In addition, one lease is not performing in
accordance with its contractual terms. The Company's net investment
balance at September 30, 1996 in these assets which are not performing in
accordance with their contractual terms is approximately $2,161,000.
Management of the Company has reviewed its collateral position on these
credits and have consulted with legal counsel. Based on this review and
consultation, management believes that the Company is adequately secured and
will recover all amounts presently owed, including interest for the default
period, selling costs and legal and professional fees. Accordingly, no loss
has been reflected in the Company's financial statements. Management of the
Company is actively pursuing the resolution of these finance receivables,
and expects during the first quarter of calendar 1997 that all of the
non-performing leases and loan will either be repaid or brought current in
accordance with their contractual provisions. Additionally, management has
assessed its cash position if these non-performing leases and loan are
not resolved within planned time frames. The results of this analysis
demonstrate that the Company's ability to meet its obligations is
not significantly affected by a more lengthy resolution time frame, should
it be necessary.
The evaluation of a potential lessee's credit is an important part of the
Company's underwriting procedures, but it is not the only variable. The
Company looks at operations experience, collateral, the strength of
personal guarantees and operating efficiency. By carefully analyzing each
component, management can structure transactions which will attempt to
strengthen the overall financing, (by obtaining substantial other collateral,
for example) and thus attempt to lower the credit risk inherent in
each financing. Therefore, if a lessee were to experience difficulty in
meeting its payment obligations in the future, the Company can be in a position
to minimize its exposure to losses.
Forward-looking Statements
The statements contained in this filing on Form 10-KSB 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 and spending on food prepared outside the home; 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
allow the Company to purchase equipment and enter into new leases. The
Company's future results also could be adversely affected if it is unable
to resolve the current defaults in its portfolio without significant loss.
ITEM 7. FINANCIAL STATEMENTS.
The financial data required by this Item are set forth in the Company's
financial statements contained in this report and are incorporated herein
by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The Company filed a Form 8-K dated October 25, 1996, indicating a change in
their certifying accountant from Arthur Andersen LLP to Crowe Chizek and
Company LLP. There have been no disagreements with either of the Company's
independent accountants on accounting or financial disclosures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Board of Directors of the Company consists of Michael F. McCoy, J.
Phillip Beatty and Curtis Miller. Mr. McCoy serves as Chairman of the Board
and President; neither Mr. Beatty nor Mr. Miller is an officer of the Company.
William L. Wildman serves as Vice President of the Company and Gerald W.
Gerichs serves as Vice President, Secretary and Treasurer of the Company.
The Company has no other officers. Directors are elected for a term of one year
and until their successors are elected and have qualified. The holders of the
Series B Preferred Stock have the right to elect one Director. The other
two Directors are elected by the holders of the Company's Common Stock. There
is no family relationship between any of the Directors or officers of
the Company.
The following are brief biographies of the Directors and officers of the
Company:
Michael F. McCoy. Mr. McCoy was President, Treasurer and a Director of
United Capital Leasing Corporation, a company engaged in commercial
equipment leasing ("UCL"), from its inception in October 1990 until
October 1993. UCL specialized in restaurant equipment leasing and
maintained and serviced its own portfolio. From April 1978 to March
1991, Mr. McCoy was Vice President of Keystone Leasing Corporation, a
company engaged in the equipment leasing business ("Keystone").
During this period of time, Keystone originated numerous lease transactions
for equipment used in restaurant, industrial, office and manufacturing
industries. Substantially all of the leases arranged by Keystone were brokered
for the accounts of other institutions and were full-payout, triple-net leases
with lessees similar in credit experience to those targeted by the Company.
Mr. McCoy also serves as Secretary of Meridian Hospitality Group, Inc. ("MHG").
The Company previously has entered into Leases with affiliates of MHG. During
the year ended September 30, 1996, MHG sold its interests in the entities
involved in these lease transactions to affiliates of Geneva Securities, Inc.
See "Certain Relationships and Related Transactions." Mr. McCoy received a
Bachelor of Science degree and a Master's degree in Business Administration
with a concentration in finance from Indiana University. He is 52 years
old. Mr. McCoy has served as a Director and officer of the Company since its
inception.
J. Phillip Beatty. Mr. Beatty served first as Secretary and later as Vice
President and Secretary of UCL from its inception in October 1990 to
October 1993. Prior to that time, he served as Vice President and Chief
Financial Officer of On-Line Plastics, Inc., a manufacturing company, where he
was responsible for all financial, accounting, treasury and administrative
functions, a position that he continued to hold for a period of time after
joining UCL. Mr. Beatty currently is the Chief Financial Officer of Dealers
Engine Sales, Inc. He is a Certified Public Accountant and a member of the
Indiana CPA Society and the American Institute of Certified Public
Accountants. Mr. Beatty is 49 years old. Mr. Beatty has served as a Director of
the Company since its inception and, until December 1994, also served as Vice
President, Secretary and Treasurer of the Company.
Curtis Miller. Mr. Miller has been the Managing Partner of Katz, Sapper &
Miller, a public accounting firm, since 1978. He received a Bachelor of
Science degree from Butler University with a major in accounting. Mr.
Miller is a Certified Public Accountant and a member of the Indiana
Association of Certified Public Accountants and the American Institute of
Certified Public Accountants. He is 55 years old. Mr. Miller has served as a
Director of the Company since December 1994. He was elected by the holders of
the Series B Preferred Stock.
William Wildman. Mr. Wildman was self employed as a consultant in the
equipment leasing business from July 1990 until December 1993. In such
capacity he provided marketing and other consulting services to UCL and
other firms. From 1985 until June 1990, Mr. Wildman was associated with Ag
Services, Inc., a feed mill, originally as President and principal shareholder
and, after the sale of the business to a third party, as an employee. Mr.
Wildman is 48 years old. Mr. Wildman has served as an officer of the Company
since November 1993.
Gerald W. Gerichs. Mr. Gerichs was Vice President of Financial Reporting
of Southwestern Life Corporation, an insurance holding company, from April
1990 to December 1994. From July 1985 to March 1990, he was an Audit Manager
with Coopers & Lybrand, a public accounting firm. Mr. Gerichs received a
Bachelor of Science degree from the University of Kentucky with a
major in accounting. He is a Certified Public Accountant and a Certified
Management Accountant and is a member of the Indiana CPA Society, the
American Institute of Certified Public Accountants and the Institute of
Management Accountants. Mr. Gerichs is 39 years old. He has served as an
officer of the Company since December 1994.
Because none of the Company's securities are registered pursuant to Section
12 of the Securities Exchange Act of 1934, the reporting requirements of
Section 16(a) of such Act are not applicable.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth a summary of the compensation paid by the
Company to the Company's President for services rendered in all capacities
to the Company during each of the three most recent fiscal years. No other
executive officer received in excess of $100,000 in salary and bonus in any
of those fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual
Name and Principal Year Salary Compensation
Position
Michael F. McCoy, 1996 $108,000 $ 12,469 (1)
President
1995 $105,000 $ 12,469 (1)
1994 $88,000 $ 10,166 (2)
_________________
(1) Of the amount indicated, $9,600 represents the payment of a car
allowance and $2,869 represents the payment of disability insurance
premiums.
(2) Of the amount indicated, $8,800 represents the payment of a car
allowance and $1,366 represents the payment of disability insurance
premiums.
Certain officers receive car allowances and are reimbursed for certain
expenses that they incur on behalf of the Company. Although the Company
pays health insurance, life insurance and disability insurance premiums for
certain of its officers, there are presently no stock option, bonus, profit
sharing, pension or similar employee benefit plans. The Company may adopt
such plans in the future.
The Company has entered into an employment agreement with Mr. McCoy which
continues through December 31, 1997. Under the terms of the agreement, Mr.
McCoy receives an annual base salary of $108,000, subject to 5% minimum
annual increases, plus certain other employee benefits. Upon termination,
if such termination is at the request of Mr. McCoy, is due to the death or
disability of Mr. McCoy, or is for cause, Mr. McCoy will be entitled to
compensation through the date of termination. If the Company terminates
Mr. McCoy without cause, other than in connection with a sale of the
Company, he will be entitled to receive his regular base salary for a
period of two years. There are currently no other employment or similar
agreements between the Company and its officers.
Mr. McCoy, Mr. Beatty and Mr. Miller are the only Directors and none
receives any additional compensation for services rendered as a Director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common stock, Series A Preferred
Stock and Series B Preferred Stock as of January 6, 1997, by each person or
group of persons who is known by the Company to own beneficially more than 5%
of any class of the Company's voting securities, by each of the Company's
Directors and executive officers who owns any such voting securities,
and by all Directors and executive officers as a group. Except as otherwise
noted, the persons named in the table have sole voting and investment power
with respect to all securities shown as beneficially owned by them. The
Series A Preferred Stock has no voting rights with respect to the election of
the Directors of the Company.
<TABLE>
<CAPTION>
Series A Series B
Common Stock Preferred Stock Preferred Stock
Beneficial Percent Beneficial Percent Beneficial Percent
Name Ownership Of Class Ownership Of Class Ownership of Class
<S> <C> <C> <C> <C> <C> <C>
Michael F. McCoy (1) 525 52.5% 70 7.0% 0 ---
J. Phillip Beatty (2) --- --- 30 3.0% 0 ---
Curtis Miller (3) 0 --- 0 --- 1,200 (4) 80.0%
RTM Financial Services(5) 60 6.0% 200 20.0% 0 ---
MFC Investors, LLC (6) 0 --- 0 --- 1,200 80.0%
John Weyreter (7) 0 --- 0 --- 300 20.0%
William L. Wildman (8) 235 23.5% 200 20.0% 0 ---
Gerald W. Gerichs (9) 15 1.5% 50 5.0% 0 ---
All Directors and executive
officers as a group 775 77.5% 350 35.0% 1,200 (4) 80.0%
______________
<FN>
<F1>(1) Mr. McCoy's address is 8250 Haverstick Road, Suite 110,
Indianapolis, IN 46240-2401.
<F2>(2) Mr. Beatty's address is 3645 Developers Road, Indianapolis, IN
46227.
<F3>(3) Mr. Miller's address is 11711 North Meridian Street, Suite 800,
Carmel, Indiana 46032.
<F4>(4) All of such shares of Series B Preferred Stock are owned
by MFC Investors, LLC, a limited liability company. Mr. Miller owns a
percentage of the total equity interest in MFC Investors, LLC,
and possesses shared voting power and shared investment power with respect
to such shares of Series B Preferred Stock. None of the officers or
directors of the Company other than Mr. Miller owns any equity interest in MFC Investors,
LLC.
<F5>(5) The address for RTM Financial Services is 253 Post Road West,
Westport, Connecticut 06880.
<F6>(6) The address of MFC Investors, LLC is 11711 North Meridian Street,
Suite 800, Carmel, Indiana 46032.
<F7>(7) Mr. Weyreter's address is 1458 E. 19th Street, Indianapolis, IN
46218
<F8>(8) Mr. Wildman's address is 8250 Haverstick Road, Suite 110,
Indianapolis, IN 46240-2401.
<F9>(9) Mr. Gerichs' address is 8250 Haverstick Road, Suite 110,
Indianapolis, IN 46240-2401.
</TABLE>
Because Mr. McCoy owns more than 50% of the outstanding shares of Common
Stock, he is in a position to elect a majority of the Directors and to control
the affairs and management of the Company.
Under an agreement between the Company and MFC Investors, LLC, a holder of
the Series B Preferred Stock, the Company is prohibited, without such
holder's prior written consent, from paying dividends on its shares of
Common Stock, issuing or redeeming certain types of equity securities, or
selling substantially all of the Company's assets
outside of the ordinary course of business (other than in conjunction with
a plan of liquidation or dissolution of the Company).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended September 30, 1995, the Company purchased from United
Capital Leasing Corporation ("UCL") a total of nine equipment leases
(and the underlying equipment) for an aggregate purchase price of $713,000.
In October, 1995, the Company completed its final purchase of one additional
equipment lease (and the underlying equipment) from UCL for a purchase price
of $52,000. These leases meet the Company's credit criteria and are
otherwise comparable, in the judgment of management, to the leases the
Company enters into directly. Prior to founding the Company, Mr. McCoy was an
officer and director of UCL. UCL was acquired in 1994 by affiliates of
Geneva Securities, Inc., the placement agent for the Company's bonds.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: A list of exhibits required to be filed as part of this
report is set forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996. On October 25, 1996, the Company filed a Form 8-K indicating a change
in its certifying accountant.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
The Company has not sent to its security holders (i) an annual report to
security holders for the fiscal year ending September 30, 1996, or (ii) a
proxy statement, form of proxy or other proxy soliciting material with
respect to any annual or other meeting of security holders.
<PAGE>
MERIDIAN FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-2
Balance Sheets as of September 30, 1996 and 1995 F-3
Statements of Operations for the years ended
September 30, 1996 and 1995 F-4
Statements of Shareholders' Equity for the years
ended September 30, 1996 and 1995 F-5
Statements of Cash Flows for the years ended
September 30, 1996 and 1995 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Meridian Financial Corporation
Indianapolis, Indiana
We have audited the accompanying balance sheet of Meridian Financial
Corporation as of September 30, 1996 and the related statements of
operations, shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The balance sheet as of September 30, 1995 and related
statements of operations, shareholders' equity, and cash flows for the year
ended September 30, 1995 were audited by other auditors whose report
dated November 10, 1995 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Meridian Financial
Corporation as of September 30, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally
accepted accounting principles.
As more fully discussed in Note 2 to the financial statements, the Company
has approximately $1,000,000 outstanding to a borrower that has experienced
disrupted operations and legal action. Based on the Company's collateral
position and consultation with legal counsel, management has concluded that
all amounts due will be collected and, therefore, no allowance for loss has
been established. Management's conclusion is an estimate that is
susceptible to change in the future should circumstances change or other
information become available.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
December 6, 1996
F-2
<PAGE>
<TABLE>
MERIDIAN FINANCIAL CORPORATION BALANCE SHEETS
<CAPTION>
September 30
1996 1995
ASSETS
<S> <C> <C>
Finance receivables, net of unearned
finance charges:
Net investment in direct financing leases $ 5,425,285 $ 3,811,531
Loans Receivable 781,940 930,137
Total Finance Receivables 6,207,225 4,741,668
Cash 115,744 311,701
Cash held in origination account 4,252 1,004,262
Debt service reserve funds 156,789 128,640
Debt issue costs, net 610,321 692,395
Other assets 268,483 249,639
Total assets $ 7,362,814 $ 7,128,305
LIABILITIES AND
SHAREHOLDERS' EQUITY
Bonds Payable $ 6,382,117 $ 5,838,498
Accounts payable and accrued expenses 59,900 164,477
Total liabilities 6,442,017 6,002,975
SHAREHOLDERS' EQUITY:
Preferred stock-
Series A, no par value, $40 per annum
cumulative dividend, liquidation value
$400 per share, 1,000 shares authorized,
issued and outstanding 400,000 400,000
Series B, no par value, $80 per annum
cumulative dividend, liquidation value
$1,000 per share, 1,500 shares authorized,
issued and outstanding 1,389,560 1,389,560
Common stock, no par value, 10,000 shares
authorized, 1,000 shares issued and
outstanding 68,533 68,533
Additional paid-in capital 37,500 37,500
Accumulated deficit (974,796) (770,263)
Total shareholders' equity 920,797 1,125,330
Total liabilities and shareholders'
equity $ 7,362,814 $ 7,128,305
The accompanying notes are in integral part of these financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
MERIDIAN FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
Years Ended September 30,
1996 1995
<S> <C> <C>
REVENUE:
Interest income from leases and
mortgage loan $ 1,043,910 $ 715,750
Gains from brokerage activities 149,144
Gains on early termination of leases 43,344 78,716
Investment income and other 98,591 100,378
Total revenue 1,334,989 894,844
EXPENSES:
Interest expense 898,764 583,175
Legal and professional 53,104 131,473
Other general and administrative 427,654 423,134
Total expenses 1,379,522 1,137,782
NET LOSS (44,533) (242,938)
Less - Preferred stock dividends (160,000) (160,000)
LOSS TO COMMON SHAREHOLDERS $ (204,533) $ (402,938)
LOSS PER COMMON SHARE $ (204.53) $ (402.94)
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
MERIDIAN FINANCIAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years ended September 30, 1996 and 1995
Preferred Stock Additional
Common Stock Series A and B Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994 1,000 $68,533 2,500 $1,795,846 $37,500 $(367,325) $1,534,554
Series B Preferred Stock
additional expenses of
offering (6,286) (6,286)
Net Loss (242,938) (242,938)
Preferred Stock Dividends (160,000) (160.000)
BALANCE, SEPTEMBER 30, 1995 1,000 68,533 2,500 1,789,560 37,500 (770,263) 1,125,330
Net Loss (44,533) (44,533)
Preferred stock dividends (160,000) (160,000)
BALANCE, September 30, 1996 1,000 $68,533 2,500 $1,789,560 $37,500 $(974,796) $ 920,797
The accompanying notes are an integral part of these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
MERIDIAN FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(44,533) $(242,938)
Adjustments to reconcile net loss to net
cash from operating activities-
Depreciation and amortization 327,201 230,096
Increase in other assets (179,829) (95,968)
Increase (decrease) in accounts payable
and accrued expenses (61,194) 111,622
Net cash provided by operating activities 41,645 2,812
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to direct financing leases (2,796,043) (3,322,060)
Additions to loans receivable (935,000)
Principal payments received on direct financing
leases and loans receivable 1,550,935 983,766
Other (108,247) (76,559)
Net cash used in investing activities (1,353,355) (3,349,853)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 1,427,060
Proceeds from issuance of bonds payable 1,375,000 3,392,000
Principal payments on bonds payable (831,381) (519,988)
(Increase) decrease in cash held in debt service
reserves and origination accounts 971,861 (16,827)
Debt issue costs paid (181,344) (512,650)
Preferred stock dividends (160,000) (160,000)
Other (58,383) (13,000)
Net cash provided by financing activities 1,115,753 3,596,595
NET CHANGE IN CASH (195,957) 249,554
CASH, beginning of year 311,701 62,147
CASH, end of year $ 115,744 $ 311,701
Supplemental disclosure of cash flow information:
Cash paid for interest $ 630,958 $ 379,667
The accompanying notes are an integral part of these financial statements.
F-6
</TABLE>
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
1. Description of Business:
The Company was formed in August 1993 and is engaged in the commercial
equipment leasing business and to date has funded its purchases of
equipment primarily through the sale of debt securities. The Company has
issued, from time to time, 5-year bonds, bearing a fixed rate of interest.
Payment of principal and interest on the bonds is a general obligation of the
Company, secured by a security interest in the equipment acquired with the
proceeds of the bonds, collateral assignments of the leases related thereto and
a debt service reserve fund established with respect to the bonds.
The Company may purchase and lease a wide variety of types of equipment,
but a substantial proportion of its leases involve restaurant equipment.
The terms and conditions of the leases are determined by negotiation
between the Company and the lessee and vary from lease to lease. Most of the
leases have a fixed base lease rate. Substantially all of the leases
have a nonrenewable 5-year term. At the termination of each lease, the
lessee will generally be required to purchase the equipment for an
agreed upon amount. Each lease is a triple net lease which requires
the lessee to repair and maintain the equipment, pay all taxes relating to
the lease and the lessee's use of the equipment and bear the entire risk of
the equipment being lost, damaged, destroyed or rendered unfit or
unavailable for use. To date the Company has retained and
serviced the majority of its leases.
During the year ended September 30, 1996, the Company entered into an
agreement with a third party to sell leases from time to time on a non-
recourse basis. This brokerage activity allows the Company to recognize
immediate income on brokered transactions and reinvest the proceeds into
new leases. No leases were held for sale at September 30, 1996.
2. Use of Estimates in Preparing Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported and the disclosures provided.
These estimates and assumptions may change in the future and future results
could differ. Estimates that are more susceptible to change in the near term
include management's evaluation of the need for an allowance for lease and
loan losses and the fair value of certain financial instruments.
F-7
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
At September 30, 1996, the Company had a lease and mortgage loan
outstanding to Old Indiana Limited Liability Company, which owns and operates
a theme park (the "park") in Thorntown, Indiana, in the total amount of
approximately $1,000,000. During the year, an accident occurred at the
park which involved the death of one customer and the injury of another. This
accident resulted in a disruption of the park's operations and the filing
of legal claims against the park. Subsequent to September 30, 1996, the
Company declared the park's lease and mortgage loan to be in default.
Management of the Company has reviewed its collateral position on these
credits and has consulted with legal counsel and the owners of the park.
Based on this review and consultation, management believes that the
Company is adequately secured and will recover all amounts presently owed
plus interest through the date of collection. Accordingly, management does
not consider the mortgage loan to be impaired, and no allowance for loss has
been established for the lease or loan. Collection is expected to occur
through an orderly sale of property and collection from guarantors, if
needed. Management's conclusion regarding the collectibility of these
credits is based on information available at the date of preparation of these
financial statements which management, in consultation with legal counsel,
believes to be reliable; however, management's conclusion is an estimate that is
susceptible to change in the future should circumstances change or other
information become available.
3. Summary of Significant Accounting Policies:
Revenue Recognition
The Company's leases are all direct financing leases which provide for
the recognition of financing revenue over the life of the lease at a
constant rate of return.
Gains from brokerage activities and early termination of leases are
computed based on the net proceeds received less the net investment in the
leases. Leases held for sale are carried at the lower of cost or market
value. There were no leases held for sale at September 30, 1996 or 1995.
Debt Issue Costs
Costs associated with the Company's bond offerings have been deferred and
are being amortized and reflected in interest expense in the statement of
operations using the effective interest method over the life of the bonds.
F-8
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Property and Equipment
Property and equipment are recorded at cost and included in other assets in
the balance sheet. Depreciation is provided using the straight-line method
over the estimated service lives of the depreciable assets.
Loss per Common Share
Loss per common share is calculated by subtracting preferred stock
dividends from net income or loss and dividing that amount by the weighted
average shares outstanding for the period. Weighted average shares outstanding
for the periods ended September 30, 1996 and 1995 were 1,000. The weighted
average shares outstanding in both periods exclude 333 shares relating to
warrants outstanding, since these warrants are antidilutive.
4. Preferred Stock and Warrants:
On September 30, 1994, the Company issued in a private offering 1,500
shares of its Series B Preferred Stock, together with warrants 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. The warrants are
exercisable only in connection with an initial public offering by, or a
merger or other sale of, the Company, or upon the adoption by the Company of
a plan of liquidation or dissolution. The aggregate purchase price for the
Series B Preferred Stock and warrants was $1,500,000. The net proceeds
to the Company, after payment of a finder's fee and offering expenses, were
$1,427,060, of which $37,500 was allocated to the warrants and reflected
in Additional Paid-in Capital and $1,389,560 was allocated to Preferred Stock.
Holders of the Series A and B Preferred Stock are entitled to cumulative
annual dividends of $40 and $80 per share, respectively, payable quarterly
on the last day of the months of March, June, September and December, subject
to the approval of the board of directors. Unless full cumulative dividends
have been paid on the Series A and B Preferred Stock, no dividends may be
paid on the Common Shares and no Common Shares may be redeemed, purchased
or otherwise acquired by the Company.
In the event of a liquidation of the Company, holders of the Series A and B
Preferred Stock will be entitled to receive the sum of $400 and $1,000 per
share, respectively, plus accumulated but unpaid dividends,
F-9
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
before any payment or other distribution is made to the holders of Common
Shares. The shares of Series A Preferred Stock may
be redeemed in whole or in part at any time by the Company at a price equal
to $400 per share plus all accumulated but unpaid dividends. Except as
required by law, the holders of the Series A Preferred Stock have no voting
rights. The holders of Series B Preferred Stock, voting as a group, have the
right to elect one director of the Company, and, if two or more
consecutive quarterly dividends on the Series B Preferred Stock are in
arrears, such holders have the right to vote together as a single voting
group with the common shareholders and to exercise 40% of the voting power
possessed by that group on all matters submitted to the vote of
shareholders.
Under an agreement between the Company and a holder of the Series B
Preferred Stock, the Company is prohibited, without such holder's prior
written consent, from paying dividends on its common stock, issuing or
redeeming certain types of equity securities, or selling substantially all
of the Company's assets outside of the ordinary course of business (other than
in conjunction with a plan of liquidation or dissolution of the Company).
5. Net Investment in Direct Financing Leases:
The components of the Company's net investment in direct financing leases
are as follows:
September 30
1996 1995
Minimum lease payments to be received $7,524,065 $5,682,329
Less - Unearned Income (2,098,780) (1,870,798)
Net Investment in direct financing
leases $5,425,285 $3,811,531
As of September 30, 1996, future annual minimum lease payments to be
received are as follows:
Fiscal Year Amount
1997 $2,088,094
1998 $1,647,649
1999 $1,815,720
2000 $1,064,764
2001 and Thereafter $ 907,838
The Company capitalizes internal costs which are directly associated with
originating a lease, net of any reimbursements from lessees. These costs
include costs associated with the review of a potential lessee's financial
condition, guarantees and collateral; negotiating lease terms; preparing and
processing lease documents; closing the transaction; and recording
guarantees, collateral and other security arrangements. These capitalized
costs are included in the net investment in direct financing.
F-10
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
leases and are amortized over the life of the lease using the
effective interest method. Capitalized costs net of amortization totaled
$141,724 and $105,778 as of September 30, 1996 and 1995, respectively.
In addition to the Old Indiana loan and lease discussed in Note 2, the
Company has additional leases with a net investment balance of approximately
$1,161,000 which are not performing in accordance with their contractual
terms at September 30, 1996. These leases include an agricultural equipment
lease with a net investment balance of $628,000. Based on the Company's
collateral position, management expects no losses on these leases and no
allowance for losses has been provided.
6. Loans Receivable:
As discussed in Note 2, loans receivable include an 18% mortgage loan with an
initial amount of $800,000. The principal balance of the mortgage loan at
September 30, 1996 and 1995 is $781,940 and $795,137, respectively. The
mortgage term is 60 months with a fifteen year amortization and a final
balloon payment due April 1, 2000.
7. Bonds Payable:
The Company has initiated two bond offerings. The Series I Offering was a
private offering of five-year bonds, with total bond sales of $565,000. The
Series I Offering was followed with the Series II Offering, which was a
public offering of five-year bonds with a maximum offering amount of
$10,000,000. The Series II offering terminated December 31, 1995.
Bond sales under the Series II offering totaled $7,242,000. Principal and
interest, on both series, are paid quarterly.
As of September 30, 1996, bonds payable consist of the Series I and Series II
Offerings, bearing interest at rates of either 9% or 10% ($2,932,242 at 9% and
$3,449,875 at 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. The cash
held in the origination account is restricted, and can only be used
to fund equipment lease transactions.
Principal payments on the bonds are made in quarterly installments and vary in
amount in accordance with the amount of principal payments received by the
Company under the leases securing the bonds, which are spread on a pro rata
basis over the aggregate principal amount of bonds outstanding. Because
the amount of principal payments on the bonds prior to maturity depends
on the amount of principal payments received by the Company under those
leases, there is no minimum amount of principal required to be paid by the
Company prior to maturity. However, the annual amounts of
principal payments scheduled to be received by the Company under leases in
effect as of September 30, 1996, which amounts, if actually received, are
required to be applied
F-11
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
to principal payments on the bonds, are as follows:
Fiscal Year Amount
1997 $ 898,735
1998 962,126
1999 1,417,961
2000 949,618
2001 839,456
The fiscal year of final maturity of the bonds outstanding at September 30,
1996 are as follows: $2,336,815 in 1999, $2,805,621 in 2000, and
$1,239,681 in 2001.
The trust indenture for the Series I and Series II Offerings requires a
debt service reserve fund for each of the series representing 2% of the
outstanding principal balance of the bonds to be maintained and held for
the benefit of the bondholders of that series.
Amortization of debt issue costs for the years ended September 30, 1996 and 1995
totaled $263,418 and $193,821, respectively.
During the year ended September 30, 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. As of September 30, 1996, the
Company had not commenced borrowing on this credit line. The interest
rate on this warehouse line is 2% over prime, and it is secured by all leases
of the Company, excluding those securing bonds payable. The agreement requires
the Company to maintain a defined level of tangible net worth and limits the
payments of preferred dividends to $40,000 quarterly and common dividends to
no more than 5% of net income.
8. Income Taxes:
The Company recognizes income taxes under the liability method.
The liability method measures the expected tax impact of future taxable
income or deductions resulting from differences in the tax and financial
reporting bases of assets or liabilities reflected in the balance sheet and the
expected tax impact of carryforwards for tax purposes.
Deferred tax assets arise from temporary differences and carryforwards as
of September 30,
1996 and 1995, as follows:
Net deferred tax assets: 1996 1995
Initial direct costs deducted for tax not
books $ (48,000) $ (31,000)
US tax loss carry forwards expiring 2009
thru 2011 254,000 225,000
Other (2,000) (1,000)
Total deferred tax assets 204,000 193,000
Valuation allowance (204,000) (193,000)
Net deferred taxes $ - $ -
F-12
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
A reconciliation of income tax expense computed by applying the Federal
statutory income tax rate of 34% to income from operations before taxes to the
provision for Federal income taxes, is as follows:
1996 1995
Computed tax expense (credit) at 34% $(15,000) $(83,000)
Increase in the valuation allowance for
deferred tax assets 11,000 79,000
Other 4,000 4,000
Income Tax Provision $ - $ -
9. Commitments:
The Company entered into an operating lease for its office space, which
expires July, 1997. Rent expense under this lease for the years ended
September 30, 1996 and 1995 was $22,327 and $22,880, respectively. Future
annual minimum lease payments under this lease are $19,430 in fiscal 1997.
10. Disclosures About Fair Value of Financial Instruments:
The carrying value and estimated fair values of the Company's financial
instruments as of September 30, 1996 are as follows:
Carrying Fair
Financial assets: Value Value
Loans receivable $ 782,000 $ 782,000
Cash and short-term investments 116,000 116,000
Cash origination and reserve funds 161,000 161,000
Financial Liabilities:
Bonds payable $6,382,000 $6,404,000
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Loans receivable: Loans receivable consists of one mortgage loan
which is in default. Fair value is the estimated amount expected to be
collected from liquidation of collateral and from guarantors.
Cash, and cash origination and reserve funds: The carrying amount
is a reasonable estimate of fair value for these short-term instruments.
Bonds payable: Rates currently available to the Company for debt
with similar terms and remaining maturities are used to estimate fair
value of existing debt.
F-13
<PAGE>
MERIDIAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Off-balance sheet items: The estimated value of off-balance sheet
financial instruments approximates carrying value (none) and is not
considered significant to this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that the estimated fair values
would necessarily have been achieved had the financial instruments been
disposed at the balance sheet date, since market values may differ
depending on various circumstances. In addition, other assets and
liabilities of the Company that are not defined as financial
instruments are not included in the above disclosures, such as direct
financing leases and office equipment.
F-14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 8th day of January, 1997.
MERIDIAN FINANCIAL CORPORATION
By: /s/ Michael F. McCoy
(Michael F. McCoy, President)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates stated.
Signature Title Date
/s/ Michael F. McCoy Chairman of the January 8, 1997
Michael F. McCoy Board, President and
Director
(Principal Executive
Officer)
/s/ Gerald W. Gerichs Vice President, Secretary January 8, 1997
Gerald W. Gerichs and Treasurer
(Principal Financial
Officer and
Principal Accounting
Officer)
Director
Curtis Miller
/s/ J. Phillip Beatty Director January 8, 1997
J. Phillip Beatty
<PAGE>
INDEX TO EXHIBITS
Page No.
Exhibit Description In This
No. 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
10-H (1) Schedule of Restrictive Stock Transfer Agreements
10-I (1) Form of Restrictive Stock Transfer Agreement
10-M (1) Employment Agreement, dated as of December 15, 1994, between
Registrant and Michael F. McCoy
10-N (1) Agreement, dated September 30, 1994, between Registrant, MFC
Investors, LLC and Michael F. McCoy
10-O (1) Warrant to Purchase Common Stock, dated as of September 30, 1994,
issued to MFC Investors, LLC
10-P (1) Warrant to Purchase Common Stock, dated as of September 30, 1994,
issued to Paine Webber Custodian FBO John Weyreter, IRA
10-S (1) Loan Agreement, dated as of February 28, 1995, between Registrant
and Old Indiana Limited Liability Company
10-T (3) Assignment for Purchase of Equipment and Assignment of Lease dated
July 20, 1995, and related Master Lease Agreement dated July 1, 1992,
regarding purchase of Manna Group, Inc. lease from United
Capital Leasing Corporation
11 (4) Statement re: Computation of Per Share Earnings (Loss)
27 (4) Financial Data Schedule
99 (4) Report of Prior Independent Public Accountants for the year
ended September 30, 1995
(1) The copy of this exhibit is incorporated by reference to the exhibit with
with the same number as part of the Registrant's Registration statement
on Form SB-2 (File #33-75549C).
(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) 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 June 30, 1995.
(4) Filed with this report on Form 10-KSB.
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 years
ending September 30, 1996 and 1995 were 1,000. The weighted average shares
outstanding in both periods 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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Meridian Financial Corporation:
We have audited the accompanying balance sheet of Meridian
Financial Corporation (an Indiana corporation) as of
September 30, 1995, and the related statements of
operations, shareholders' equity and cash flows for the year
then ended. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
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 audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Meridian Financial Corporation as of September
30, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
November 10, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 276,785 1,444,603
<SECURITIES> 0 0
<RECEIVABLES> 6,207,225 4,741,668
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 7,362,814 7,128,305
<CURRENT-LIABILITIES> 0 0
<BONDS> 6,382,117 5,838,498
0 0
1,789,560 1,789,560
<COMMON> 68,533 68,533
<OTHER-SE> (937,296) (732,763)
<TOTAL-LIABILITY-AND-EQUITY> 7,362,814 7,128,305
<SALES> 0 0
<TOTAL-REVENUES> 1,334,989 894,844
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 480,758 554,607
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 898,764 583,175
<INCOME-PRETAX> (44,533) (242,938)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (204,533) (402,938)
<EPS-PRIMARY> (204.53) (402.94)
<EPS-DILUTED> 0 0
</TABLE>
