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, 1998
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 Identification No.)
incorporation or organization)
9265 Counselor's Row, Suite 106
Indianapolis, Indiana
46240-6402
(Address of principal executive offices)
(Zip Code)
(317) 814-2000
(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, 1998: Not
Available
Aggregate market value of the voting stock held by non-affiliates: The
voting stock of the Company is closely held and there is currently no
liquid market.
Number of common shares, without par value, outstanding at December 31,
1998: 1,066.63
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format: Yes [ ] No
[X]
MERIDIAN FINANCIAL CORPORATION
Indianapolis, Indiana
Annual Report to Securities and Exchange Commission
September 30, 1998
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Meridian Financial Corporation ("Company") is an Indiana corporation
organized in 1993 to engage primarily in the business of commercial
equipment leasing to franchisees of national restaurant chains under
full-payout, triple-net leases.
Through 1996, the Company funded its purchases of equipment primarily
through the proceeds of 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 finance receivables and for general corporate purposes.
During the year-ended September 30, 1997 ("FY/97") the Company successfully
completed two financing transactions that represented the culmination of
efforts to secure alternative sources of financing after the expiration of
the Company's public bond offering on December 31, 1995. On March 28, 1997
the Company entered into a transaction with three venture capital funds
raising $6.5 million of new capital in two stages. This capital was in the
form of Series C Convertible Preferred Stock ($3 million) and Subordinated
Debt ($3.5 million in two tranches). The Company utilized $1.5 million of
the proceeds to redeem its Series B Preferred Stock and related warrants.
In conjunction with this capital transaction, on April 18, 1997 the Company
entered into a credit agreement ("Agreement") with LaSalle National Bank
("Bank") for a total of $10 million. The Agreement consisted of two $5
million warehouse lines, which were to convert to term loans six months
after their respective effective dates.
During the year-ended September 30, 1998 ("FY/98") the Company converted
the first warehouse line to a 29-month term loan for $4,906,000 on November
18, 1997. The second warehouse line was converted to a 28-month term loan
for $4,799,000 on July 19, 1998. Equipment leases originated by the
Company's personnel collateralized both term loans. These term loans are
being repaid on a monthly basis with principal payments of $89,200 and
$85,700 respectively plus interest. On September 29, 1998 the Company
signed an agreement for a third warehouse line of $2.5 million with the
Bank. The Company currently is in default of covenants under its credit
facilities with the Bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The closing of these transactions has allowed the Company access to
significant amounts of capital, which previously were unavailable. The
Company has been able to grow the lease portfolio at a much faster rate in
FY/98 and FY/97 than in prior years.
To better maintain its expanded lease portfolio, the Company installed
state-of-the-art accounting and lease accounting software on its computer
network during the fourth quarter of FY/98. The addition of this software
will enable the Company to maintain real-time financial information on all
of its leasing customers.
The Company currently has eight full-time employees. The Company's
executive offices are located at 9265 Counselor's Row, Suite 106,
Indianapolis, Indiana 46240-6402, and its telephone number is 317.814.2000.
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 amounts from $100,000 to $300,000. Substantially all of
the Company's equipment leases are for a 60-month term. The qualified
franchisees are 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 includes both the United States
and Canada.
The Company also has opportunities, principally through referrals, to
review financing transactions, which are outside of the Company's, target
market. Management considers these non-targeted leases on a case-by-case
basis.
Leasing Activities
The Company has entered into restaurant equipment leases with franchisees
representing a wide variety of national restaurant chains. Those chains
representing more than 5% of the total finance receivables at September 30,
1998 include Great Steak and Potato, Papa John's Pizza, Red River Barbecue,
Checkers and T.G.I.Friday's. The current portfolio represents 22 different
franchise restaurant concepts.
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
sale-leaseback. 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, 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. All of the
Company's current leases have a fixed base lease rate, however 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 at the
inception of the lease.
Each of the Company's present leases is a triple-net lease. All leases
require 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 a two-tiered approval process.
Senior management initially reviews and performs due diligence on the
franchise concept and the financial capital of the franchisor. If these
components are acceptable, the Company will consider applications from
franchisees of the approved concept. The Company's credit officer will
then conduct an initial review of the potential lessee's credit and
financial information and generate a "Lessee Profile" which includes
relevant business information concerning the potential lessee. 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. After all due diligence is complete, the Company
will issue its conditional commitment to fund.
The Company focuses its leasing efforts on the franchise restaurant
industry because the franchisor generally monitors its franchisees on a
regular basis and insists that franchisees stay current with their
obligations to creditors. In the event of default, the franchisor may
intervene to protect the value of the franchise.
Competition
The equipment leasing industry is highly competitive, and the Company faces
competition from various sources. There are numerous potential competitors
seeking to purchase and lease equipment, many of which have greater
financial resources than the Company and/or more experience than the
Company's management. 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 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 through various sources.
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
relative to its total assets. The Company leases its executive offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders during the 4th
quarter of FY/98.
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 31, 1998, there were 11 holders of record of the common shares.
No cash dividends were declared or paid on the common shares in FY/97 or
FY/98.
The terms of the Company's Series A Preferred Stock 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 Preferred Stock
have been paid. The Company paid all quarterly dividends on the Series A
Preferred Stock during FY/98.
The terms of the Company's Series C Convertible Preferred Stock provide
that approval by the holders of at least two-thirds of the outstanding
shares of Series C Convertible Preferred Stock, voting separately as a
series, is required prior to the purchase of, or payment of any dividends
or distributions on, any shares of stock of the Company other than the
Series C Convertible Preferred Stock. Dividends payable on the common
shares solely in the form of additional common shares and regular quarterly
dividends on the Series A Preferred Stock are excluded. The Company's
Articles of Incorporation and 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
The Company's Financial Statements are not Available
The Company is filing this Annual Report on Form 10-KSB without its audited
financial statements for FY/98. These financial statements and the related
audit are not complete as of the date this report is being filed. The
Company will file the financial statements as soon as they are available,
which is expected to be on or before January 31, 1999. At that time, the
company also will complete the portions of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that discuss
financial statement items.
Liquidity and Capital Resources
As stated under "Description of Business" above, the Company has funded its
leasing activities primarily by:
* the sale of five-year bonds under an indenture of trust,
* the issuance of common and preferred stock,
* the issuance of subordinated notes to three venture capital funds and
* borrowing under a credit facility with the Bank.
The Company currently is in default of several covenants under its credit
facility with the Bank. Management does not expect the Company to return
into compliance with these covenants, as they are currently written, during
the next 12 months; however, Management is working with the Bank to resolve
the defaults, either by waiver, modification of the covenants, or some
other means. If the defaults are not resolved, the Bank would be entitled
to declare the entire amount of the Company's indebtedness to the Bank to
be immediately due and payable. This, in turn, would likely result in
defaults under other financing agreements of the Company. The acceleration
of any material portion of the Company's indebtedness would have a material
adverse effect on the Company.
The covenant defaults under the credit facility result from delinquencies
and defaults in the Company's lease portfolio. The Company historically
has experienced some delinquency in payments by its lessees.
Management considers a certain level of delinquency to be consistent with
normal business operations in the segment of the leasing industry in which
the Company operates. The credit facility provides that the Company's
ratio of delinquent receivables to total receivables will not exceed 5%;
however, at December 31, 1998 the dollar amount of delinquent receivables
was $6,196,110 which represented 32.9% of the total. A delinquent
receivable outside the restaurant industry in the amount of $920,743
contributed to the ratio. In addition, defaulted leases from two lessees,
whose operations are now controlled by the Company, contributed $2,480,854
to the ratio. The overall delinquency ratio was 26.9% at September 30,
1998 compared to 10.3% at September 30, 1997.
While delinquencies are not unusual for the Company, before 1998 the
Company had not experienced significant defaults with lessees in the
restaurant industry. In FY/98, however, five restaurant leases defaulted,
resulting in net charge-offs of $107,112 against the Company's reserve for
credit losses. Management believes that these defaults are not due to
problems applicable to the portfolio as a whole, but instead occurred as a
result of circumstances unique to each case.
The Company is diligently addressing its delinquencies and defaults. The
newly installed automated system provides on-line access to information on
delinquent accounts. The report generator in the program provides daily
reports for the collection effort and individual account responsibility has
been assigned to collectors. Although the program has been recently
implemented, at least 25% of the delinquent accounts, by number, have been
brought current. Management believes the Company's allowance for credit
losses of $152,217 at September 30, 1998 is adequate to absorb any losses
that are likely to result from the current defaults.
In addition to addressing the delinquency and default issues, Management is
working to establish additional funding sources for the Company. These
funding sources are needed in order to refinance maturing portions of the
Company's indebtedness and to originate new lease transactions.
In FY/98, the Company expects the following indebtedness to mature,
assuming the current covenant defaults are resolved without acceleration of
any indebtedness:
Five-Year Bonds:
$1,278,873
Bank Indebtedness:
$1,514,100
Other:
$1,341,000
Total
$4,133,973
The company expects to repay maturing indebtedness through a combination of
activities including:
* Cash flow generated by lease payments on performing leases. Monthly
payments currently average $320,000/month.
* Recovery of delinquent accounts, success in litigation and liquidation of
defaulted accounts. Approximately $1.0 million is expected to be recovered
in the second fiscal quarter.
* Sale of leases to third parties. Performing lease receivables totaling
$3.0 million have been identified and will be discounted to lessors and
investors at rates below the contract lease rate. These sales of leases on
a discounted basis will generate an immediate gain on sale.
* Additional funding with the Bank and other participating banks are being
sought to increase the funds available to the Company. Increased capacity at
competitive
rates will increase lease revenues.
* The board will consider an infusion of capital through the addition of
new common shares.
The Company's business plan anticipates continued growth in its lease
portfolio. The financing transactions completed in prior years positioned
the Company to achieve growth. During FY/98, the Company substantially
increased
the size of its lease portfolio from $11.1 million to $17.8 million.
As of December
30, 1998, however, the Company has borrowed substantially all of the funds
available to it under the credit facility with the Bank. The Company will
have to establish a new funding source in 1999 to achieve its growth
targets.
Management believes the best funding source to support future growth is a
warehouse credit facility in which lease receivable would be aggregated for
later sale in a securitization. Management has been in negotiations
throughout 1998 with various lenders that provide this type of financing,
and these negotiations are continuing. The Company has signed a term sheet
with one of these lenders. The term sheet, which is subject to numerous
substantial conditions, contemplates establishing a $50 million warehouse
facility. The lender is continuing its due diligence of the Company. If the
Company is unsuccessful in engaging in a securitization program,
another liquidity provider will be sought to supplement or replace the
Bank. Management continues to discuss this option with the Bank and other
liquidity providers.
As an additional means of obtaining liquidity for the origination of new
lease transactions or for other purposes, the Company has entered into
agreements to sell leases on a non-recourse basis to third parties from
time to time. Newcourt/ATT Capital provides, through a discount agreement,
an annual line of approximately $10 million, funding for leases that the
Company can sell from its portfolio. Additionally, two additional leasing
companies interested in buying leases on terms similar to or better than,
those offered by Newcourt/ATT have approached the Company. In the past the
focus has primarily been on building the portfolio's critical mass rather
than selling lease receivables; liquidity pressure has forced the company
to step-up sale efforts. The Company is currently in discussion for the
sale of $2.0 million of leases. The Company typically recognizes immediate
income on the sale of the lease. The Company recognized gains of $39,776
in FY/98 from the sale of leases.
1997 and 1998 Financing Transactions
On March 28, 1997 the Company entered into a $6.5 million Securities
Purchase Agreement ("Purchase Agreement") with Inroads Capital Partners,
L.P. ("Inroads"), Mesirow Capital Partners VII, an Illinois Limited
Partnership ("Mesirow"), Edgewater Private Equity Fund II, L.P.
(collectively, the "Purchasers"), Michael F. McCoy and William L. Wildman
pursuant to which the Purchasers purchased from the Company a total of
3,000 shares of the Company's new Series C Convertible Preferred Stock
("Preferred Shares") and $3,500,000 aggregate principal amount of 10%
Subordinated Notes due March 31, 2002 ("Subordinated Notes"). The
aggregate purchase price for the Preferred Shares was $3,000,000 and the
aggregate purchase price for the Subordinated Notes was $3,500,000. On
March 28, 1997 $500,000 of the Subordinated Notes were purchased, with the
remaining $3,000,000 being purchased on September 18, 1997.
The Subordinated Notes are subject to a Subordination and Intercreditor
Agreement between the Company, the Purchasers and the Bank. The Bank is
further described below under the heading "Bank Credit Facility".
The Company utilized $1.5 million of the proceeds from the sale of the
Preferred Shares to redeem its Series B Preferred Stock and the attached
warrants to purchase Common Shares.
Bank Credit Facility
In conjunction with the described equity transaction, on April 18, 1997 the
Company entered into an Agreement with the Bank. The Agreement consisted
of two $5 million warehouse lines that were to convert to term loans within
six months after their respective effective dates. The interest rate on
these warehouse lines was the Bank's prime lending rate plus 100 basis
points, or LIBOR plus 300 basis points, at the option of the Company. Upon
conversion to a term loan, the interest rate was to be either (1) prime
plus 125 basis points, (2) LIBOR plus 325 basis points, or (3) the U.S.
Treasury rate for similar maturities plus 325 basis points, at the option
of the Company. The term loans were initially scheduled for thirty (30)
month maturities.
The warehouse lines required monthly payments of interest only. The term
loans require monthly payments of principal and interest, with the
principal portion based on a five-year level amortization.
During FY/98, the Company borrowed $4,906,000 against the initial term loan
and began tendering monthly principal payments of $89,200 plus interest on
December 20, 1997. Additionally, the Company borrowed $4,799,000 against
the second term loan and began tendering monthly principal payments of
$85,700 plus interest on August 20, 1998. The Company has entered into
interest rate swaps that will hedge the Company against interest rate risk
on its floating rate term loans.
On September 29, 1998 the Company signed an agreement for a third
warehouse line of $2.5 million with the Bank. This agreement allows the
Company to expand the availability to $5.0 million at the Bank's option.
The Company will need to obtain additional financing during FY/99 to meet
the projected portfolio growth rate under its five-year financial plan.
Brokerage Activity
The Company also has agreements to sell leases on a non-recourse basis to
third parties from time to time. This brokerage activity allows the
Company to recognize immediate income on brokered transactions and reinvest
the proceeds into new leases. This activity also creates another source of
liquidity. During FY/98, the Company closed three transactions with
third-party lenders resulting in booked gains. It is the Company's
intention to continue to pursue sales of future leases to third parties as
part of the Company's overall financial plan.
The Company is already experiencing, and expects to continue to experience,
a significant increase in the amount of funded lease transactions.
However, with its management team 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, the interest spread on finance
receivables is expected to continue to grow at a much faster pace than the
related general and administrative expenses.
Impact of Interest Rate Changes and the Restaurant Industry
The Company markets and funds fixed rate leases, and has attempted to raise
funds for investment in new leases at fixed interest rates, and similar
duration, thus virtually eliminating interest rate risk. This was
accomplished in prior years with the five-year Series I and II Bond sales.
The Company's current borrowings also allow the Company to manage exposure
to interest rate risk. The Subordinated Notes bear interest at a fixed
rate of 10%. With the use of swaps in conjunction with the term loans in
the Bank credit facility, the Company expects to be able to virtually fix
the rate of interest on the term loans. The first term loan utilized a
LIBOR based swap to effectively fix the rate for twenty-nine months at an
all-in rate of 9.37%. The second term loan utilized a similar LIBOR based
swap to effectively fix the rate for twenty-eight months at an all-in rate
of 9.64%. The Company's warehouse lines carry a variable rate of interest,
but have duration of only six months. 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
restaurant industry's growth rate. A rising interest rate environment may
also impact the Company's future gains on brokerage activities.
In the last ten years, the franchise restaurant industry has experienced
rapid growth and the number of franchise units continues to grow. As some
concepts begin to reach a mature stage, and it becomes increasingly more
difficult to sustain a high level of growth in sales, the market is
experiencing a significant increase in the number of new, emerging
concepts. Since the Company's target market includes the smaller chains
(from 100 to 300 units), this increase in new concepts should provide the
Company with an increase in prospective lease deals. In addition, as large
metropolitan areas in some geographic areas begin to reach a saturation
point from the standpoint of restaurant locations, the Company is reviewing
more prospective lease deals in rural locations, which would tend to be the
smaller franchisee, which the Company targets.
Inflation has not had a material effect on the Company's operations.
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. Forward-looking statements are
made based upon Management's current expectations and beliefs concerning
future developments and their potential effects upon the Company. There
can be no assurance that future developments affecting the Company will be
those anticipated by Management. 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.
Reader's are also directed to other risks and uncertainties discussed in
other documents filed by the Company with the Securities and Exchange
Commission. The Company undertakes no obligation to update or revise any
forward-looking information, whether as a result of new information, future
developments or otherwise.
Year 2000 Readiness
The approach of the year 2000 presents potential problems to any business
that utilizes computers. The Company relies upon computers for its
communications and accounting requirements. All computer hardware will be
tested during FY/99 to determine Y2K compatibility. In addition it has been
determined that all software is fully compliant except the Company's
network software. The network software version owned by the Company is not
compliant and will be replaced to attain Y2K compliance. The Company's
costs related to Y2K compliance are estimated by Management to be less than
$10,000. These costs may include the testing of equipment and software
programs, new equipment and software upgrades. It is difficult to predict
such costs and additional funds may be needed. The Company's failure to
successfully recognize and address Y2K issues could interfere with its
ability to operate and could have an adverse effect on its financial
condition and results of operations.
ITEM 7. FINANCIAL STATEMENTS
No financial data is presented with this filing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with 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, Jerrold
B. Carrington, Thomas E. Galuhn and Salvatore F. Mulia. Mr. McCoy serves
as Chairman of the Board and President; none of the other directors is an
officer of the Company. William L. Wildman serves as Vice President of the
Company and Robert W. Johnson serves as Vice President, Secretary and
Treasurer of the Company. The Company has no other officers. In
connection with the issuance of the Series C Convertible Preferred Stock,
the Company entered into a Voting Agreement with the Purchasers, Mr. McCoy
and Mr. Wildman. Under the Voting Agreement, the parties agreed to
cooperate to cause the Company's Board of Directors to consist of five
members. One member would be designated by Inroads, Mesirow would
designate one member, one member would be designated by the holders of
two-thirds of the voting power of the Company exercisable by the
Purchasers, and two members would be designated by Mr. McCoy. There is
presently one vacancy on the Board of Directors. The rights of the parties
to designate directors terminate under certain circumstances. Directors
are elected for a term of one year and until their successors are elected
and have qualified. 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
received a Bachelor of Science degree and a Master's degree in Business
Administration with a concentration in Finance from Indiana University. He
is 54 years old. Mr. McCoy has served as a Director and officer of the
Company since its inception.
Jerrold B. Carrington For the last six years, Mr. Carrington has been the
General Partner of Inroads Capital Partners, L.P. ("Inroads") a venture
capital fund that invests in growing companies. Inroads is one of three
venture capital funds which purchased the Company's Series C Convertible
Preferred Stock and provided Subordinated Debt Financing. He received a
Bachelors of Arts degree from Connecticut College with a major in
Government, a Masters degree in Business Administration with a
concentration in Finance from the University of Chicago and a Law degree
from the UCLA Law School. Mr. Carrington is 41 years old and was elected a
Director of the Company in March 1997.
Thomas E. Galuhn For the last six years, Mr. Galuhn has been Senior
Managing Director of Mesirow Financial. Mesirow Financial is the general
partner of Mesirow Capital Partners VII, an Illinois Limited Partnership,
which is one of three venture capital funds that purchased the Company's
Series C Convertible Preferred Stock and provided Subordinated Debt
Financing. He received a Bachelors degree
at the University of Notre Dame with a major in Finance and a Masters
degree in Business Administration with a concentration in Finance from the
University of Chicago. Mr. Galuhn is 48 years old and was elected a
Director of the Company in March 1997.
Salvatore F. Mulia Mr. Mulia has been a Director and Secretary since 1993
of RTM Financial Services, Inc., a firm in which Mr. Mulia and his wife own
100% of the common stock. RTM Financial Services provides investment
advisory services and currently provides consulting services to the
Company. Prior to that time, he was affiliated with R.W. Pressprich, a
bond-trading house, as Director of Equities from May 1994 to May 1995.
From May 1993 to January 1994, he was Sr. VP of Marketing for L.S.I.
Financial Group, a mortgage and loan servicer. From 1986 to May 1993, he
was a Sr. VP of GE Capital Markets. Mr. Mulia received a Bachelors degree
from Brooklyn College with a major in Economics and a Masters degree in
Marketing from Columbia University. He is 51 years old. Mr. Mulia was
elected a Director of the Company in March 1997.
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 50 years old. Mr. Wildman has served as an
officer of the Company since November 1993.
Robert W. Johnson Mr. Johnson was a divisional Vice President of
Countrymark Cooperative, an agricultural cooperative, from May 1996 to June
1998. From October 1992 to May 1996, he was the CFO of Premium Standard
Foods, a large pork production and processing company. From June 1985 to
October 1992, he was the Director of Agribusiness Lending with Prudential
Insurance Company. Mr. Johnson received a Bachelor of Science degree from
Purdue University with a major in Agricultural Finance and a Masters degree
in Business Administration with a concentration in Finance and Strategic
Management from Purdue University. Mr. Johnson is 49 years old. He has
served as an officer of the Company since October 1998.
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
Name and Principal Position
Year
Salary
Other Annual Compensation
Michael F. McCoy, President
1998
$137,500
$ 12,469 (1)
1997
$122,750
$ 12,469 (1)
1996
$108,000
$ 12,469 (1)
_________________
(1) Of the amount indicated, $9,600 represents the payment of a car
allowance and $2,869 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.
Under the Securities Purchase Agreement dated March 28, 1997, if the
Company terminates Mr. McCoy or Mr. Wildman without cause, as defined in
the agreement, the Company will pay to the individual an amount equal to
his base salary for the Company's most recent fiscal year ended prior to
the date of such termination less any severance or similar payment payable
by the Company to such officer pursuant to any agreement entered into with
such officer after the date of the agreement. In addition, each of Mr.
McCoy and Mr. Wildman has agreed that at all times during which he is
employed by the Company and continuing for an additional period of 24
months following the date of termination of such employment he shall not
compete against the Company as defined in the agreement. There are
currently no other employment or similar agreements between the Company and
its officers.
None of the directors 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 C Convertible Preferred Stock as of December 31, 1998 by
each person or group of persons known by the Company to:
* Own beneficially more than 5% of any class of the Company's voting
securities, or
* be a Director or executive officer of the Company who owns any such
voting securities, or
* consist of all Directors and executive officers
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.
Series A
Series C Convertible
Common Stock
Preferred Stock
Preferred Stock
Name
Number of Shares
Percent
of Class (1)
Number of Shares
Percent
of Class
Number of Shares
Percent
of Class
Michael F. McCoy (2)
540
13.2%
120
12.0%
- ---
- ---
Jerrold B. Carrington (3)
1,384.61538
33.9%
- ---
- ---
1,384.61538
46.2%
Thomas E. Galuhn (4)
807.69231
19.8%
- ---
- ---
807.69231
26.9%
Salvatore F. Mulia (5)
171.63
4.2%
50
5.0%
- ---
- ---
Inroads Capital Partners, L.P. (3)
1,384.61538
33.9%
- ---
- ---
1,384.61538
46.2%
Mesirow Capital Partners VII, an Illinois Limited Partnership (4)
807.69231
19.8%
- ---
- ---
807.69231
26.9%
Edgewater Private Equity Fund II, L.P. (6)
807.69231
19.8%
- ---
- ---
807.69231
26.9%
RTM Financial Services, Inc.(5)
171.63
4.2%
250
25.0%
- ---
- ---
William L. Wildman (2)
235
5.8%
200
20.0%
- ---
- ---
Robert W. Johnson (2)
- ---
- ---
- ---
- ---
- ---
- ---
All Directors and executive officers as a group
3,138.93769
76.9%
620
62.0%
2,192.30769
73.1%
______________
(1) As of December 31, 1998, there were 1,066.63 shares of Common Stock
outstanding. The Series C Convertible Preferred Stock is convertible into
Common Stock at any time (on a one-for-one basis as of December 31, 1998).
The percentages in this column assume the conversion of all 3,000
outstanding shares of Series C Convertible Preferred Stock into Common
Stock.
(2) The address for Messrs. McCoy, Wildman and Johnson is 9265 Counselor's
Row, Suite 106, Indianapolis, IN 46240.
(3) Inroads Capital Partners own all shares shown as beneficially owned by
Mr. Carrington of record, L.P. ("Inroads"). Mr. Carrington is the General
Partner of Inroads. The address for Mr. Carrington and Inroads is 1603
Orrington Avenue, Suite 2050, Evanston, IL 60201.
(4) All shares shown as beneficially owned by Mr. Galuhn are owned of
record by Mesirow Capital Partners VII, an Illinois Limited Partnership
("Mesirow"). Mr. Galuhn is Senior Managing Director of the general partner
of Mesirow. The address for Mr. Galuhn and Mesirow is 350 North Clark
Street, Chicago, IL 60610.
(5) All shares shown as beneficially owned by Mr. Mulia are owned of
record by RTM Financial Services, Inc. ("RTM"). Mr. Mulia and his spouse
own all of the outstanding stock of RTM. The address for Mr. Mulia and RTM
is 253 Post Road West, Westport, CT 06880.
(6) The address for Edgewater Private Equity Fund II, L.P. is 900 North
Michigan Avenue, 14th Floor, Chicago, IL 60611
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Securities Purchase Agreement dated March 28, 1997,
the Company also entered into a Voting Agreement, Registration Rights
Agreement and an Executive Share Agreement.
On March 28, 1997, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement") with Inroads Capital Partners, L.P. ("Inroads"),
Mesirow Capital Partners VII, and Illinois Limited Partnership ("Mesirow"),
Edgewater Private Equity Fund II, L.P. (collectively, the "Purchasers")
Michael F. McCoy and William L. Wildman pursuant to which the Purchasers
purchased from the Company a total of 3,000 shares of the Company's Series
C Convertible Preferred Stock and $3,500,000 aggregate principal amount of
10% Subordinated Notes due March 31, 2002 ("Subordinated Notes"). The
aggregate purchase price for the Series C Convertible Preferred Stock was
$3,000,000 and the aggregate purchase price for the Notes was $3,500,000.
The Subordinated Notes are subject to a Subordination and Intercreditor
Agreement between the Company, the Purchasers and the Bank. The
Subordinated Notes are subordinate to the Bank's Credit Facility. From the
period of inception through FY/98, the interest accrued on the Subordinated
Notes has been added to the principal balance. One-half of the principal
amount of the Subordinated Notes is due on March 31, 2001, with the
remainder being due on March 31, 2002.
The Series C Convertible Preferred Stock is convertible into Common Shares
of the Company at any time. The conversion ratio is one-for-one, but is
subject to adjustment under certain circumstances. In general, the Series
C Convertible Preferred Stock has full voting rights (voting together with
the Common Shares) on all actions submitted to a vote of the Company's
shareholders. Each share of the Series C Convertible Preferred Stock
entitles the holder thereof to one vote on each matter submitted, but the
number of votes is subject to adjustment on the same basis as the
conversion ratio.
The Company's outstanding capital stock consists of 1,066.63 Common Shares
(with full voting rights), 540 which are owned by Mr. McCoy, 1,000 shares
of Series A Preferred Stock (without full voting rights), and the Series C
Convertible Preferred Stock. The Company utilized $1.5 million of the
proceeds from the sale of the Series C Convertible Preferred Stock to
redeem its Series B Preferred Stock and related warrants.
After the issuance of the Series C Convertible Preferred Stock and the
redemption of the Series B Preferred Stock, the Purchases collectively are
entitled to exercise 73.5% of the voting power of the Company under
ordinary circumstances. Prior to the issuance of the Series C Convertible
Preferred
Stock, Mr. McCoy was entitled to exercise a majority of the voting power of
the Company under ordinary circumstances.
In connection with the issuance of the Series C Convertible Preferred
Stock, the Company also entered into a Voting Agreement with the
Purchasers, Mr. McCoy and Mr. Wildman. Under the Voting Agreement, the
parties agreed to cooperate to cause the Company's Board of Directors to
consist of five members. One member would be designated by Inroads,
Mesirow would designate one member, the holders of two-thirds of the voting
power of the Company exercisable would designate one member by the
Purchasers, and two members would be designated by Mr. McCoy. The rights
of the parties to designate directors terminate under certain
circumstances.
The Company and the Purchasers also entered into a Registration Rights
Agreement entitling the Purchasers, under certain circumstances, to demand
or otherwise participate in a public offering of the Company's equity
securities.
The Company, the Purchasers and Mr. McCoy also entered into an Executive
Share Agreement pursuant to which the Purchasers are obligated, subject to
certain conditions, to transfer, for no consideration other than the
fulfillment of such conditions, to Mr. McCoy and/or such other officers,
directors, employees or consultants of the Company as he designates, up to
8% of the Series C Convertible Preferred Stock purchased by each Purchaser.
Holders of the Series A Preferred Stock are entitled to cumulative annual
dividends of $40 per share payable quarterly, subject to the approval of
the board of directors. The Series C Convertible Preferred Stock has no
dividend. Unless full cumulative dividends have been paid on the Series A
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. The terms of the Company's Series C Convertible Preferred Stock
provide that approval by the holders of at least two-thirds of the
outstanding shares of the Series C Convertible Preferred Stock, voting
separately as a series, is required prior to the purchase of, or payment of
any dividends or distributions on any shares of stock of the Company other
than the Series C Convertible Preferred Stock, except for dividends on the
common shares payable solely in the form of additional common shares and
for regular quarterly dividends on the Series A Preferred Stock.
In the event of a liquidation of the Company, holders of the Series A and C
Preferred Stock will be entitled to receive the sum of $400 and $1,000 per
share, respectively, plus accumulated but unpaid dividends, 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 Series C Convertible Preferred Stock holders may require the Company to
redeem the Series C Convertible Preferred Stock at $1,000 per share
($3,000,000 total redemption value) after March 28, 2002. The Series C
Convertible Preferred Stock are also to be redeemed in the following
circumstances, unless waived by 75% of the Series C Convertible Preferred
Stock holders:
1. The Company defaults on the Subordinated Notes or any covenant of the
Purchase Agreement.
2. A representation or warranty of the Company under the Purchase Agreement
is found to be materially incorrect.
3. Chapter 7 or 11 bankruptcy is filed with respect to the Company, or all
Company's assets are sold or disposed.
The Company also has certain other transactions and relationships with
related parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits were filed with this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1998
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, 1998 or (ii) a
proxy statement, form of proxy or other proxy soliciting material with
respect to any annual or other meeting of security holders.
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 13th day of January, 1999.
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
Michael F. McCoy
Chairman of the Board, President and Director
(Principal Executive Officer)
January 13, 1999
/s/ Robert W. Johnson
Robert W. Johnson
Vice President, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
January 13, 1999
/s/ Jerrold B. Carrington
Jerrold B. Carrington
Director
January 13, 1999
/s/ Thomas E. Galuhn
Thomas E. Galuhn
Director
January 13, 1999
/s/ Salvatore F. Mulia
Salvatore F. Mulia
Director
January 13, 1999
S-1
