FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from __________ to __________
Commission file number 33-75594
MERIDIAN FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Indiana 35-1894846
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9265 Counselor's Row, Suite 106
Indianapolis, Indiana 46240-6402
(Address of principal executive offices)
(317) 814-2000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of common shares, without par value, outstanding at January 30, 1998:
1,081.63
Transitional Small Business Disclosure Format: Yes [ ] No [X]
MERIDIAN FINANCIAL CORPORATION
FORM 10-QSB
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets at December 31, 1997 and
September 30, 1997 3
Condensed Statements of Operations for the three
months ended December 31, 1997 and 1996 4
4
Condensed Statements of Cash Flows for the three months
ended December 31, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 11
Index to Exhibits 13
PART I. FINANCIAL INFORMATION
MERIDIAN FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1997
ASSETS
Finance receivables, net:
Net investment in direct financing leases $ 12,535,173 $ 9,552,098
Loan held for sale 1,714,745 1,317,707
Total finance receivables 14,249,918 10,869,805
Cash 1,255,559 627,098
Cash held in origination account 3,776 3,658
Debt service reserve funds 106,667 112,467
Debt issue costs, net 673,020 694,381
Other assets 392,556 392,627
Total assets $ 16,681,496 $ 12,700,036
LIABILITIES AND
SHAREHOLDERS' EQUITY
Bonds payable $ 5,263,850 $ 5,472,283
Bank borrowings-warehouse line 1,140,000 1,629,000
Bank borrowings-term loan 4,769,800 -
Subordinated debt 3,624,384 3,536,164
Accounts payable and accrued expenses 209,547 290,776
Total liabilities 15,007,581 10,928,223
SHAREHOLDERS' EQUITY:
Preferred stock 3,203,060 3,203,060
Common stock 241,866 68,533
Note receivable, common stock (173,333) -
Accumulated deficit (1,597,678) (1,499,780)
Total shareholders' equity 1,673,915 1,771,813
Total liabilities and shareholders' equity $ 16,681,496 $12,700,036
The accompanying notes are an integral part of these condensed financial statements.
3
MERIDIAN FINANCIAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
Interest and fee income $500,186 $ 292,146
Interest expense 373,631 218,070
Net interest income 126,555 74,076
Provision for credit losses 49,024 -
Net interest income after provision
for credit losses 77,531 74,076
Other income:
Gains from brokerage activities 26,280 5,194
General and administrative expenses:
Salaries and employee benefits 136,412 87,960
Other 55,297 59,166
191,709 147,126
Net loss (87,898) (67,856)
Preferred stock dividends 10,000 40,000
Loss to common shareholders $ (97,898) $(107,856)
Loss per common share and loss per
common share assuming dilution $ (96.70) $ (107.86)
Weighted average common shares
outstanding 1,012.42 1,000.00
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED FINANCIAL STATEMENTS.
4
MERIDIAN FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (87,898) $ (67,856)
Adjustments to reconcile net earnings (loss)
to net cash from operating activities-
Depreciation and amortization 100,153 80,190
Capitalization of subordinated debt 88,220 -
interest
Provision for credit losses 49,024 -
Additions to loan held for sale (397,038) -
Decrease in other assets 14,265 6,409
Increase (decrease) in accounts payable
and accrued expenses (66,229) 3,119
Net cash provided by (used in) operating (299,503) 21,862
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to direct financing leases (3,831,954) (1,018,909)
Principal payments received on direct
financing leases and loans receivable 778,249 363,600
Other (21,380) -
Net cash provided by (used in) investing
activities (3,075,085) (655,309)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on bonds payable (208,433) (170,086)
Proceeds from bank borrowings 4,417,000 880,730
Principal payments on bank borrowings (136,200) (120,006)
Decrease in cash held in debt service
reserves and origination accounts 5,682 33,157
Financing costs paid (65,000) -
Preferred stock dividends (10,000) (40,000)
Net cash provided by financing activities 4,003,049 583,795
NET CHANGE IN CASH 628,461 (49,652)
CASH, at beginning of period 627,098 115,744
CASH, at end of period $1,255,559 $ 66,092
The accompanying notes are an integral part of these condensed financial statements.
5
MERIDIAN FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
1. GENERAL:
THE FINANCIAL INFORMATION INCLUDED HEREIN WAS PREPARED IN CONFORMITY WITH
GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES, AND SUCH PRINCIPLES WERE APPLIED ON A BASIS
CONSISTENT
WITH THOSE REFLECTED IN THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
SEPTEMBER 30, 1997.
THE INFORMATION FURNISHED INCLUDES ALL ADJUSTMENTS AND ACCRUALS WHICH ARE, IN
THE
OPINION OF MANAGEMENT, NECESSARY FOR A FAIR PRESENTATION OF RESULTS FOR THE
INTERIM PERIODS.
RESULTS FOR ANY INTERIM PERIOD MAY NOT BE INDICATIVE OF THE RESULTS FOR THE
ENTIRE YEAR.
THE DISCLOSURES IN THE NOTES PRESUME THAT THE USERS OF THE INTERIM FINANCIAL
INFORMATION
HAVE READ OR HAVE ACCESS TO THE AUDITED FINANCIAL STATEMENTS INCLUDED IN THE
ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 1997.
2. FINANCE RECEIVABLES:
THE COMPONENTS OF THE COMPANY'S NET INVESTMENT IN DIRECT FINANCING LEASES ARE
AS FOLLOWS:
DECEMBER 31, SEPTEMBER 30,
1997 1997
MINIMUM LEASE PAYMENTS TO $ 16,994,715 $ 12,995,061
BE RECEIVED
LESS - UNEARNED INCOME (4,353,144) (3,385,589)
LESS - ALLOWANCE FOR (106,398) (57,374)
CREDIT LOSSES
NET INVESTMENT IN DIRECT $ 12,535,173 $ 9,552,098
FINANCING LEASES
THE COMPANY HAD LEASES WITH A NET INVESTMENT BALANCE OF APPROXIMATELY $1.6
MILLION AT
DECEMBER 31, 1997, WHICH WERE NOT PERFORMING IN ACCORDANCE WITH THEIR
CONTRACTUAL TERMS.
BASED ON THE COMPANY'S COLLATERAL POSITION, MANAGEMENT EXPECTS NO LOSSES ON
THESE
BALANCES.
3. BONDS PAYABLE:
AT DECEMBER 31, 1997, BONDS PAYABLE CONSIST OF TWO SERIES OF BONDS, BEARING
INTEREST
AT RATES OF EITHER 9% OR 10% ($2,387,719 AT 9% AND $2,876,131 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. QUARTERLY
PRINCIPAL PAYMENTS
ARE REQUIRED FROM THE PRINCIPAL PORTIONS OF THE RELATED LEASE PAYMENTS RECEIVED
BY THE
COMPANY. BASED ON THE LEASES IN PLACE AS OF DECEMBER 31, 1997, QUARTERLY
PRINCIPAL
PAYMENTS FOR THE NEXT TWELVE MONTHS ARE EXPECTED TO TOTAL APPROXIMATELY
$1,082,000.
6
MERIDIAN FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
4. BANK CREDIT FACILITY:
DURING THE QUARTER ENDED DECEMBER 31, 1997, THE COMPANY CONVERTED $4,906,000
FROM ITS
INITIAL WAREHOUSE LINE INTO ITS INITIAL TERM LOAN. THE COMPANY UTILIZED THE
LIBOR RATE OPTION,
AND ENTERED INTO A LIBOR INTEREST RATE SWAP WITH THE BANK TO EFFECTIVELY FIX
THE INTEREST RATE
RELATED TO THIS TERM LOAN. THE TERM LOAN REQUIRES MONTHLY PAYMENTS OF
PRINCIPAL TOTALING
$89,200 PLUS INTEREST.
AS A RESULT OF THE ABOVE CONVERSION, THE COMPANY ALSO BEGAN BORROWING ON ITS
SECOND
$5 MILLION WAREHOUSE LINE. AS OF DECEMBER 31, 1997, THE COMPANY HAD BORROWED
$1,140,000 ON THIS CREDIT LINE.
5. EARNINGS PER SHARE:
EARNINGS (LOSS) PER COMMON SHARE AND EARNINGS (LOSS) PER COMMON SHARE ASSUMING
DILUTION ARE COMPUTED UNDER A NEW ACCOUNTING STANDARD EFFECTIVE IN THIS QUARTER
ENDED
DECEMBER 31, 1997. ALL PRIOR AMOUNTS HAVE BEEN RESTATED TO BE COMPARABLE.
EARNINGS
(LOSS) PER COMMON SHARE IS BASED ON NET INCOME (LOSS) AFTER PREFERRED
DIVIDENDS, DIVIDED BY
THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. EARNINGS
(LOSS) PER
COMMON SHARE ASSUMING DILUTION SHOWS THE DILUTIVE EFFECT, IF ANY, OF ADDITIONAL
COMMON
SHARES ISSUABLE UNDER CONVERTIBLE SECURITIES.
THE COMPANY HAS PREVIOUSLY ISSUED 3,000 SHARES OF SERIES C CONVERTIBLE
PREFERRED STOCK.
THESE SHARES OF PREFERRED STOCK ARE CURRENTLY CONVERTIBLE INTO 3,000 SHARES OF
THE COMPANY'S
COMMON STOCK, BUT HAVE BEEN EXCLUDED FROM THE COMPUTATION OF EARNINGS PER
COMMON
SHARE ASSUMING DILUTION BECAUSE THEY WERE ANTIDILUTIVE FOR THE THREE MONTHS
ENDED
DECEMBER 31, 1997.
6. NOTE RECEIVABLE, COMMON STOCK:
IN DECEMBER, 1997, THE COMPANY ISSUED 81.63 SHARES OF ITS COMMON STOCK TO A
DIRECTOR
OF THE COMPANY, PURSUANT TO THE TERMS OF A CONSULTING AGREEMENT. THE PURCHASE
PRICE
FOR THE SHARES OF COMMON STOCK WAS $173,333, AND IS EVIDENCED BY A NOTE
RECEIVABLE TO
THE COMPANY, BEARING INTEREST AT 6.5% PER ANNUM.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview:
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. The closing of
two financing transactions during the year ended September 30, 1997 allows the
Company access to significant amounts of capital which previously had not been
available. Accordingly, the Company has been able to grow the its portfolio at
a much faster rate than in prior years, while maintaining a debt-to-equity
ratio that is below industry average.
Liquidity and Capital Resources:
During the fiscal year ended September 30, 1997, the Company entered into a $10
million Credit Agreement with LaSalle National Bank, which consists of two $5
million warehouse lines which convert to term loans. During the quarter ended
December 31, 1997, the Company converted its initial warehouse line, with a
balance of $4,906,000, into a term loan. The Company selected the LIBOR rate
option, and entered into a LIBOR interest rate swap to effectively fix the
interest rate related to this term loan.
As of December 31, 1997, the Company had borrowed approximately $1.1 million on
its second $5 million warehouse line.
The Company intends to continue to expand its lease portfolio during fiscal
year 1998 at a growth rate greater than that experienced in fiscal year 1997.
In order to do so, the Company will need additional sources of financing
beginning in the summer of 1998. If no new or expanded credit facilities or
other funding sources are obtained, the Company's cash flow from its existing
lease portfolio would permit only limited growth; however, the Company believes
it will be successful in establishing one or more new or expanded funding
sources by the summer of 1998.
During the quarter ended December 31, 1997, the Company sold two leases to a
third party on a non-recourse basis as part of its brokerage activity. Total
proceeds were $502,000, and the transaction resulted in a gain of approximately
$26,000. The Company expects this type of brokerage activity to continue in
the future.
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 non-cash items such as depreciation and amortization of
assets and from changes in working capital. The Company experienced a net cash
outflow from operations of $299,503 for the three months ended December 31,
1997, compared to a net cash inflow of $21,862 for the three months ended
December 31, 1996. The primary component of cash outflow from operations was
the continued funding of a loan held for sale, which amounted to $397,038
during the current quarter. The sale of this loan in the future will result in
a cash inflow from operations. Excluding
the outflow from the loan held for sale, the most significant contributor to
operating cash flow is the
8
net earnings before non-cash charges for depreciation and amortization,
capitalization of interest on subordinated debt and provisions for credit
losses. Net earnings before these non-cash charges were $149,499 in 1997
compared to $12,334 in 1996. This increase in income before non-cash charges,
totaling $137,165, benefited from the increase in net interest income for the
period of $52,479, and the continued capitalization of interest on the
Company's subordinated debt as required in the agreement with the subordinated
debt holders.
8
Net cash flows used in investing activities consist primarily of investments in
leases, which is the Company's primary requirement for cash, and principal
payments received from lessees, which is currently the Company's principal
source of cash. During the three months ended December 31, 1997, the Company
invested $3,831,954 in twenty-two leases, compared to $1,018,909 in ten leases
for the same period in 1996, which reflects the Company's accelerated growth
rate. Principal payments received on leases and loans receivable totaled
$778,249 for the three months ended December 31, 1997 compared to $363,600 for
the same period in 1996. Principal payments received include approximately
$477,000 and $145,000 from brokerage activity in the 1997 and 1996 periods,
respectively. Investments in leases and principal payments received on leases
are expected to continue to grow in future periods.
Cash inflows from financing activities historically have consisted of bank
borrowings and proceeds from the sale of equity and debt securities. In the
quarter ended December 31, 1997, the Company's only significant source of cash
inflows from financing activities was bank borrowings. Cash outflows consist
of costs incurred in the sale of the securities, principal payments on
borrowings and debt securities, and preferred stock dividends. During the three
months ended December 31, 1997, the Company received proceeds from bank
borrowings of $4,417,000 from its credit lines, a substantial increase from the
$880,730 under its previous borrowing arrangements during the 1996 period. The
Company also paid $65,000 during the three months ended December 31, 1997 for
costs related to its previously completed financing transactions. Preferred
dividends for the three months ended December 31, 1997 were $10,000, which is
less than the $40,000 paid in the 1996 period due to the redemption of the
Company's Series B Preferred Stock in March, 1997. Management anticipates that
the Company's primary cash inflows from financing activities in the future will
be from bank borrowings, and that the amount of borrowings will continue to
grow as the Company's growth in leasing transactions continues.
Results of Operations:
For the three months ended December 31, 1997, the Company reflected an
operating loss, before preferred dividend requirements, of $87,898 compared to
a loss for the same period in 1996 of $67,856. Gains from brokerage activities
were $26,280 in the 1997 period compared to $5,194 in the 1996 period.
Brokerage gains will fluctuate from period to period, however the Company
expects these gains to increase in the future.
Interest and fee income from for the three months ended December 31, 1997 was
$500,186 and interest expense was $373,631 in the same period, or a net
interest spread, before a provision for credit losses, of $126,555, compared to
$292,146 of interest income, $218,070 of interest expense, and a net interest
spread of $74,076 in the comparable period in 1996. The 1997 figures reflect
the increased leasing activity resulting from the Company's financing
transactions, which were consummated in March and April of 1997. In future
periods, management expects the interest spread to increase as the Company
continues to invest in new leases, and continues to realize the benefits from
its 1997 financing arrangements which should lower the Company's overall cost
of funds.
9
The Company has continued to add to its general reserve for losses on finance
receivables based on the volume of new lease production. During the three
months ended December 31, 1997, the Company added approximately $49,000 to the
reserve, resulting in a reserve balance of approximately $106,000. There have
been no chargeoffs against this reserve to date.
General and administrative expenses increased approximately $45,000 during the
three months ended December 31, 1997 compared to the same period in 1996,
primarily due to an increase in payroll related costs, as the number of
employees has increased from five to seven from the 1996 period to 1997 to
handle the increase in leasing activity.
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 grow at a
much faster pace than 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 through the issuance of five-year fixed rate bonds. The
Company's more recent funding sources also allow the Company to manage exposure
to interest rate risk. The Subordinated Notes issued in March and September of
1997, bear interest at a fixed rate of 10%. With the use of swaps in
conjunction with the term loans in the new bank credit facility, the Company
expects to be able to virtually fix the rate of interest on the term loans.
The warehouse lines which the Company is utilizing carry a variable rate of
interest, but have a 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 concepts emerging. Since the
Company's target market is the smaller chains (from 100 to 500 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 saturation points from the standpoint of
restaurant locations, the Company is seeing more prospective lease deals in
more rural locations, which would tend to be the smaller type franchisee that
the Company targets.
Inflation has not had a material effect on the Company's operations.
10
Credit Risk:
The Company's net investment balance at December 31, 1997 in assets which are
not performing in accordance with their contractual terms is approximately $1.6
million. Management of the Company has reviewed its collateral position on
these credits and has 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 and legal and
professional fees. Management of the Company is actively pursuing the
resolution of these finance receivables, and expects that all of the non-
performing leases will either be repaid or brought current in accordance with
their contractual provisions.
Forward-looking Statements:
The statements contained in this filing on Form 10-QSB 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 non-performing leases in its portfolio without significant
loss. Readers are also directed to other risks and uncertainties discussed in
other documents filed by the Company with the Securities and Exchange
Commission.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
In December, 1997, the Company issued 81.63 shares of its common stock to
Salvatore F. Mulia, a director of the Company, pursuant to the terms of a
consulting agreement between Mr. Mulia and the Company. The purchase price for
the shares of common stock was $173,333 to be payable by Mr. Mulia pursuant to
the terms of the consulting agreement. The common stock was issued pursuant to
the registration exemption contained in Section 4(2) of the Securities Act of
1933.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the Index to Exhibits appearing on
page 13 are filed herewith.
(b) No reports on Form 8-K dated were filed by the Registrant
during the quarter ended December 31, 1997.
11
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.
MERIDIAN FINANCIAL CORPORATION
By: /s/ Michael F. McCoy
Michael F. McCoy
President
By: /s/ Gerald W. Gerichs
Gerald W. Gerichs
Vice President, Secretary
and Treasurer
(Principal Financial Officer)
Date: February 12, 1998
12
Index to Exhibits
Page
No.
Exhibit No. Description In this Filing
10-Z (1) Agreement, dated March 28, 1997, between the Company
and RTM Financial Services, Inc.
27 (1) Financial Data Schedule
(1) Filed with this report on Form 10-QSB