U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Filed Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter year ended Commission File Number
June 30, 1998 1-13752
SMITH-MIDLAND CORPORATION
(Name of Small Business
Issuer As Specified In Its Charter)
Delaware 54-1727060
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Route 28, P.O. Box 300, Midland, Virginia 22728
--------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
(540) 439-3266
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ____
-------
As of August 15, 1998, the Company had outstanding 3,044,798 shares
of Common Stock, $.01 par value per share.
SMITH-MIDLAND CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets; 2
June 30, 1998 (Unaudited);
and December 31, 1997 (Unaudited)
Consolidated Statements of Operations 3
(Unaudited); Three months ended
June 30, 1998 and 1997
Consolidated Statements of Operations 4
(Unaudited); Six months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows 5
(Unaudited); Three months ended
June 30, 1998 and 1997
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I - Financial Information
Item 1. Financial Statements
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
Assets 1998 1997
------- --------
Current assets:
Cash and cash equivalents $276,096 $ 288,310
Accounts receivable:
Trade - billed, less allowances for doubtful accounts of
$247,878 and $231,304 3,402,736 3,254,993
Trade - unbilled 433,822 410,158
Inventories:
Raw materials 518,979 486,583
Finished goods 1,140,822 942,427
Prepaid expenses and other assets 279,724 69,801
Total current assets 6,052,179 5,452,272
Property and equipment, net 1,660,802 1,531,062
----------- -----------
Other assets:
Cash - restricted 1,066,762 196,977
Note receivable, officer 648,446 632,472
Other 173,314 79,443
-------------- -------------
Total other
assets 1,888,522 908,892
- --------- -------------- -------------
Total Assets $9,601,503 $7,892,226
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of notes payable $ 50,280 $2,199,228
Accounts payable -- trade 2,102,146 1,744,127
Accrued expenses and other liabilities 645,498 570,693
Customer deposits 449,912 450,474
------------ ------------
Total current liabilities 3,247,836 4,964,522
Notes payable -- less current maturities 4,017,147 759,440
Notes payable -- related parties 109,348 115,598
------------ ------------
Total Liabilities 7,374,331 5,839,560
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000 shares,
none outstanding -- --
Common stock, $.01 par value, authorized 8,000,000 shares,
issued and outstanding 3,044,798 and 3,044,798 30,857 30,857
Additional capital 3,450,085 3,450,085
Treasury Stock (102,300) (102,300)
Retained earnings (deficit) (1,151,470) (1,325,976)
----------- ------------
Total Stockholders' Equity 2,227,172 2,052,666
----------- ------------
Total Liabilities and Stockholders' Equity $9,601,503 $7,892,226
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30,
1998 1997
------------ -----------
Revenue $3,401,412 $3,537,513
Cost of goods sold 2,643,833 2,596,299
---------- ---------
Gross profit 757,579 941,214
----------- ----------
Operating expenses:
General and administrative expenses 368,696 577,409
Selling expenses 171,866 116,306
----------- ------------
Total operating expenses 540,562 693,715
----------- -------------
Operating income 217,017 247,499
----------- ------------
Other income (expense):
Royalties 23,994 44,525
Interest expense (136,172) (93,219)
Interest income 15,825 24,811
Other (9,078) (19,306)
---------- ----------
Total other income (expense) (105,431) (43,189)
Income (loss) before income taxes 111,586 204,310
Income tax expense (benefit) -- --
----------- -----------
Net income (loss) $ 111,586 $ 204,310
========== ===========
Net income (loss) per share $ .04 $ .07
============= ===========
Weighted average common shares outstanding 3,044,798 3,044,798
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Six Months Ended
June 30,
1998 1997
------------ -----------
Revenue $ 6,428,072 $5,618,303
Cost of goods sold 4,858,896 4,149,837
---------- ---------
Gross profit 1,569,176 1,468,466
------------- -----------
Operating expenses:
General and administrative expenses 936,507 1,054,087
Selling expenses 321,282 291,872
----------- ------------
Total operating expenses 1,257,789 1,345,959
---------- ------------
Operating income 311,387 122,507
----------- ------------
Other income (expense):
Royalties 62,445 80,164
Interest expense (230,229) (197,233)
Interest income 26,998 26,453
Other 3,905 11,144
----------- -----------
Total other income (expense) (136,881) (79,472)
Income before income taxes 174,506 43,035
Income tax expense (benefit) -- --
------------ ------------
Net income $ 174,506 $ 43,035
============ ============
Net income (loss) per share $ .06 $ .01
============= ============
Weighted average common shares outstanding 3,044,798 3,044,798
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1998 1997
----------- ----------
Cash flows from operating activities:
Cash received from customers $ 6,318,548 $4,929,504
Cash paid to suppliers and employees (6,058,687) (4,632,418)
Interest paid (230,229) (197,233)
Other 14,929 15,437
-------------- --------------
Net cash provided (absorbed) by operating activities 44,561 115,290
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (289,499) (275,620)
Decrease (increase) in officer note receivable -- 2,000
Decrease (increase) in related party Receivables (6,250) --
Decrease (increase) in restricted
cash (869,785) --
Net cash absorbed by investing activities (1,165,534) (273,620)
Cash flows from financing activities:
Proceeds from bank borrowings 4,037,167 166,700
Repayments of bank borrowings (2,928,408) (329,011)
Net cash provided (absorbed) by financing activities 1,108,759 (162,311)
----------- ------------
Net increase (decrease) in cash and cash equivalents (12,214) (320,641)
Cash and cash equivalents at beginning of period 288,310 438,079
------------ ----------
Cash and cash equivalents at end of period $ 276,096 $ 117,438
============ ===========
Reconciliation of net income (loss) to net cash provided (absorbed) by operating
activities:
Net income (loss) $ 174,506 $ 43,035
Adjustments to reconcile net income (loss) to net cash
provided (absorbed) by operating activities:
Depreciation and amortization 159,759 216,074
Decrease (increase) in other assets (93,871) (19,013)
Decrease (increase) in:
Accounts receivable - billed (147,743) (780,301)
Accounts receivable - unbilled (23,664) (326,995)
Inventories (230,791) 19,703
Prepaid expenses and other assets (225,897) 57,731
Increase (decrease) in:
Accounts payable - trade 358,019 378,001
Accrued expenses and other liabilities 74,805 188,722
Customer deposits (562) 338,333
---------- -----------
Net cash provided (absorbed) by operating activities $ 44,561 $ 115,290
============= =========
The accompanying notes are an integral part of these consolidated financial
statement
5
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Basis of Presentation
As permitted by the rules of the Securities and Exchange Commission (the
"Commission") applicable to quarterly reports on Form 10-QSB, these notes are
condensed and do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the consolidated financial
statements and related notes included in the Smith-Midland Corporation's Annual
Report on Form 10-KSB, for the year ended December 31, 1997.
In the opinion of management of Smith-Midland Corporation (the "Company"),
the accompanying financial statements reflect all adjustments which were of a
normal recurring nature necessary for a fair presentation of the Company's
results of operations for the three- and six-month periods ended June 30, 1998
and 1997.
The results disclosed in the consolidated statements of operations are not
necessarily indicative of the results to be expected for any future periods.
Principles of Consolidation
The Company's accompanying consolidated financial statements include the
accounts of Smith-Midland Corporation, a Delaware corporation and its wholly
owned subsidiaries: Smith-Midland Corporation, a Virginia corporation; Easi-Set
Industries, Inc., a Virginia corporation; Smith-Carolina Corporation, a North
Carolina corporation; Concrete Safety Systems, Inc., a Virginia corporation; and
Midland Advertising & Design, Inc., a Virginia corporation. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the 1998 presentation.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
(FIFO) method, or market.
6
Property and Equipment
Property and equipment, net is stated at depreciated cost. Expenditures for
ordinary maintenance and repairs are charged to income as incurred. Costs of
betterments, renewals, and major replacements are capitalized. At the time
properties are retired or otherwise disposed of, the related cost and allowance
for depreciation are eliminated from the accounts and any gain or loss on
disposition is reflected in income.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Years
Buildings............................................. 10-33
Trucks and automotive equipment....................... 3-10
Shop machinery and equipment.......................... 3-10
Land improvements..................................... 10-30
Office equipment...................................... 3-10
Income Taxes
The provision for income taxes is based on earnings reported in the
financial statements. A deferred income tax asset or liability is determined by
applying currently enacted tax laws and rates to the expected reversal of the
cumulative temporary differences between the carrying value of assets and
liabilities for financial statement and income tax purposes. Deferred income tax
expense is measured by the change in the deferred income tax asset or liability
during the year.
Effective January 1, 1993, the Company adopted SFAS 109 "Accounting for
Income Taxes." The adoption of SFAS 109 did not have a material effect on the
consolidated financial statements as the deferred tax asset related to the
Company's net operating loss carry forward has been reserved in its entirety. No
provision for income taxes has been made for the three- and six-month periods
ended June 30, 1998 and 1997, as the Company does not expect to incur income tax
expense for fiscal year 1998 and did not incur income tax expense in fiscal year
1997.
Revenue Recognition
The Company primarily recognizes revenue on the sale of its standard
precast concrete products at shipment date, including revenue derived from any
projects to be completed under short-term contracts. Installation services for
precast concrete products, leasing and royalties are recognized as revenue as
they are earned on an accrual basis. Licensing fees are recognized under the
accrual method unless collectibility is in doubt, in which event revenue is
recognized as cash is received. Certain sales of soundwall and SlenderwallTM
concrete products are recognized upon completion of production and customer site
inspections. Provisions for estimated losses on contracts are made in the period
in which such losses are determined.
7
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Estimates
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Net Income (Loss) Per Share
Net Income (Loss) per share is calculated based on net income and the
weighted average number of shares of common stock outstanding during the period.
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company generates revenues primarily from the sale, shipping,
licensing, leasing and installation of precast concrete products for the
construction, utility and farming industries. The Company's operating strategy
has involved producing innovative and proprietary products, including
SlenderwallTM, a patent-pending, lightweight, energy efficient concrete and
steel exterior wall panel for use in building construction; J-J HooksTM Highway
Safety Barrier, a patented, positive-connected highway safety barrier; Sierra
Wall, a sound barrier primarily for roadside use; and transportable concrete
buildings. In addition, the Company produces utility vaults, farm products such
as cattleguards, and water and feed troughs, and custom order precast concrete
products with various architectural surfaces.
This Form 10-QSB contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements and the results for the
three and six months ended June 30, 1998 are not necessarily indicative of the
results for the Company's operations for the year ending December 31, 1998.
Factors that might cause such a difference include, but are not limited to,
product demand, the impact of competitive products and pricing, capacity and
supply constraints or difficulties, general business and economic conditions,
the effect of the Companies accounting policies and other risks detailed in the
Company's Annual Report, Form 10-KSB and other filings with the Securities and
Exchange Commission.
Results of Operations
Three months ended June 30, 1998 compared to the three months ended June 30,
1997
For the three months ended June 30, 1998, the Company had total revenue of
$3,401,412 compared to total revenue of $3,537,513 for the three months ended
June 30, 1997, a decrease of $136,101 or 4%. Total product sales were $2,986,406
for the three months ended June 30, 1998 compared to $3,163,570 for the same
period in 1997, a decrease of $177,164 or 6%. The decrease resulted from the
unusually high volume in soundwall sales enjoyed in 1997 during the same period.
Soundwall sales in the second quarter of 1997 were approximately $1,694,300. vs.
$1,482,400 for the same period this year. Shipping and installation revenue was
$535,153 for the three months ended June 30, 1998 and $373,943 for the same
period in 1997, an increase of $161,210, or 43%. The increase was attributable
to the high shipping volume of stored materials primarily soundwall
manufactured, invoiced, and paid for in prior periods.
9
Total cost of goods sold for the three months ended June 30, 1998 was
$2,643,833, an increase of $47,534, or 2% from $2,596,299 for the three months
ended June 30, 1997. The increase was primarily the result of the learning curve
associated with the shift to manufacturing our Slenderwall(TM) product. The
production of this architectural precast panel product has placed new demands on
our production and engineering departments calling for tighter controls and the
development of new innovative techniques and production processes. This is an on
going necessary investment in our future and we are meeting these challenges
daily while trying to contain the costs. Total cost of goods sold, as a
percentage of total revenue, increased to 78% for the three months ended June
30, 1998, from 73% for the three months ended June 30, 1997 primarily due to the
same reason just stated. Management anticipates that these increased costs will
continue for the balance of the year. The construction of, and move into, an
additional manufacturing facility at the Midland, Virginia, plant will
perpetuate some of these costs. When this facility is up and operational there
should be new economies and efficiencies that will help to offset the costs of
this current learning curve.
For the three months ended June 30, 1998, the Company's general and
administrative expenses decreased $208,713 to $368,696 from $577,409 during the
same period in 1997. The 36% decrease was attributed in part, to a vacancy in
the controller position since April resulting in reduced salary and related
expenses and in part to reduced legal, professional, and consulting fees this
year vs. last year during this period. The Company is searching for a new
controller so those expenses will soon return.
Selling expenses for the three months ended June 30, 1998 increased $55,560
to $171,866 from $116,306 for the three months ended June 30, 1997, resulting
from increased cost of marketing the Slenderwall(TM) product, and increases in
wage and commission expense.
The Company's operating income for the three months ended June 30, 1998 was
$217,017, compared to operating income of $247,499 for the three months ended
June 30, 1997, a decrease of $30,482. The reduced operating income resulted
primarily from the decreased revenue and increased cost of goods sold explained
above.
Royalty income totaled $23,994 for the three months ended June 30, 1998,
compared to $44,525 for the same three months in 1997. The decrease of $20,531,
or 46%, was mostly due to a credit given reversing previously invoiced royalties
of approximately $15,500.00.
Interest expense was $136,172 for the three months ended June 30, 1998,
compared to $93,219 for the three months ended June 30, 1997. The increase of
$42,953, or 46%, was primarily due to the pay off of leases as a result of our
debt restructuring which is discussed in the "Liquidity and Capital Resources"
section of this report. (See page 13)
Net income was $111,586 for the three months ended June 30, 1998,
compared to net income of $204,310 for the same period in 1997. Net income per
share for the current three month period was $.04 compared to net income
per share of $.07 for the three months ended June 30, 1997.
10
Six months ended June 30, 1998 compared to the six months ended June 30, 1997
For the six months ended June 30, 1998, the Company had total revenue of
$6,428,072 compared to total revenue of $5,618,303 for the six months ended June
30, 1997, an increase of $809,769 or 14%. Total product sales were $5,554,378
for the six months ended June 30, 1998 compared to $4,950,903 for the same
period in 1997, an increase of $603,475 or 12%. The increase resulted from
management's effort to keep the sales backlog at a level that will insure
consistent factory utilization and profitability. This effort, coupled with a
good first quarter revenue resulted in an improved six month benchmark. Shipping
and installation revenue was $873,694 for the six months ended June 30, 1998 and
$667,400 for the same period in 1997, an increase of $206,294, or 31%. The
increase is attributable to strong shipping activity in both the first and
second quarters of this year and the increase in 1998 sales volume over 1997.
Total cost of goods sold for the six months ended June 30, 1998 was
$4,858,896, an increase of $709,059, or 17% from $4,149,837 for the six months
ended June 30, 1997. The increase was primarily the result of increased revenue
and increased cost of goods sold as a percentage of revenue. Total cost of goods
sold, as a percentage of total revenue, increased to 76% for the six months
ended June 30, 1998, from 74% for the six months ended June 30, 1997 primarily
due to the increased cost experienced this quarter, as explained in the
quarterly results section of this report above.
For the six months ended June 30, 1998, the Company's general and
administrative expenses decreased $117,580 to $936,507, from $1,054,087 during
the same period in 1997. The decrease was attributed to the decreased second
quarter expenses explained above, offset slightly by increases in general and
administrative expenses in the first quarter of this year.
Selling expenses for the six months ended June 30, 1998 increased $29,410
to $321,282 from $291,872 for the six months ended June 30, 1997, resulting from
increased wage and commissions expense and increases in advertising and
marketing expenses.
The Company's operating income for the six months ended June 30, 1998 was
$311,387, compared to operating income of $122,507 for the six months ended June
30, 1997, an increase of $188,880, or 154%. The improved operating income
resulted primarily from a 3.1% positive first quarter in 1998 vs. a loss in the
first quarter of 1997, coupled with a 6.4% positive second quarter.
Royalty income totaled $62,445 for the six months ended June 30, 1998,
compared to $80,164 for the same six months in 1997. The decrease of $17,719, is
largely due to a credit given for previously invoiced royalties of approximately
$15,500.
Interest expense was $230,229 for the six months ended June 30, 1998,
compared to $197,233 for the six months ended June 30, 1997. The increase of
$32,996, or 17%, was primarily due to the pay off of leases as part of our debt
11
restructuring detailed in the "Liquidity and Capital Resources" section of this
report. (See page 13)
Net income was $174,506 for the six months ended June 30, 1998, compared to
net income of $43,035 for the same period in 1997. Net income per share for the
current six month period was $.06 compared to net income per share of $.01 for
the six months ended June 30, 1997.
12
Liquidity and Capital Resources
The Company has financed its capital expenditures, operating requirements
and growth to date primarily with proceeds from its initial public offering
("IPO") and subsequent over-allotment, bank and other borrowings, and the sale
of stock to and loans from its principal stockholders.
The Company had $4,176,775 of indebtedness at June 30, 1998, of which
$50,280 was scheduled to mature within twelve months. The Company has
successfully restructured all of its debt with the exception of one small auto
loan, into one note with The First National Bank of New England, headquartered
in Hartford, Connecticut. The Company closed on this loan on June 25, 1998. The
Company obtained a twenty three year term at 1.5% above prime on this note
secured by equipment and real estate. The term of the note dramatically improved
our current debt ratios with current debt decreasing from $2,330,091 to $50,280,
and the term improves our cash flow. In addition to paying off all existing debt
of approximately $3,000,000, we received approximately $1,000,000, for plant
expansion and new equipment. The loan is guaranteed in part by the U.S.
Department of Agriculture Rural Business-Cooperative Service's loan guarantee.
The Company was also granted a $500,000, operating line of credit by First
National Bank of New England. This line will be used to assist day to day
operating needs.
Other Comments
The Company has formed a team to address the effect of the year 2000 on the
Company's data processing systems and operations. The Company has not completed
its assessment, but expects that the costs incurred in the preparation for the
year 2000 will not have a significant impact on the Company's cash flow or
results of operations. The Company is currently planning to send questionnaires
to its suppliers and customers to ensure that they are taking steps to be year
2000 compliant. However, if the Company and third parties upon which it relies
are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure this does not occur,
the Company plans to devote all resources required to resolve any significant
year 2000 issues in a timely manner.
13
The Company performs a portion of its concrete pouring and curing processes
on uncovered, outdoor manufacturing areas. During the winter months, cold or
adverse weather causes a slowdown or cessation of these outdoor production
activities, thereby reducing the Company's production capacity. However, The
Company is in the process of building an additional manufacturing facility at
its Midland, Virginia, location that will bring these operations inside and out
of the weather correcting this problem. In addition, the Company services the
construction industry primarily in areas of the United States where construction
activity is inhibited by adverse weather during the winter. As a result, the
Company traditionally experiences reduced revenues from December through March
and realizes the substantial part of its revenues during the other months of the
year. The Company typically experiences lower profits, or losses, during the
winter months, and must have sufficient working capital to fund its operations
at a reduced level until the spring construction season. However, as of the date
of this filing, the Company's backlog is approximately $6.1 million, of
approximately which $2.2 million represents firm contracts for Slenderwall(TM)
and architectural pre-cast concrete products. The majority of the projects
relating to this backlog are contracted to be constructed in 1998.
Management believes that the Company's operations have not been materially
affected by inflation.
14
PART II - Other Information
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
A. The following Exhibits are filed herewith:
Exhibit No. Title
1 First National Bank of New England Loan Agreement
2 First National Bank of New England Loan Note
27 Financial Data Schedule
B. Report on Form 8-K. None.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMITH-MIDLAND CORPORATION
Date: August 15, 1998 By: /s/ Rodney I. Smith
-----------------------
Rodney I. Smith
Chairman of the Board,
Chief Executive Officer and President
(principal executive officer)
Date: August 15, 1998 By: /s/ Robert V. McElhinney
----------------------------
Robert V. McElhinney
Vice President of Finance,
Chief Financial Officer
(principal financial officer)
16