U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
June 30, 1999 1-13752
SMITH-MIDLAND CORPORATION
(EXACT NAME OF SMALL BUSINESS
ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 54-1727060
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
Route 28, P.O. Box 300, Midland, Virginia 22728
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(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 10,1999, the Company had outstanding 3,044,798 shares of
Common Stock, $.01 par value per share.
<PAGE>
SMITH-MIDLAND CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited); 3
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations 4
(Unaudited); Three months ended
June 30, 1999 and 1998
Consolidated Statements of Operations 5
(Unaudited); Six months ended
June 30, 1999 and 1998
Consolidated Statements of Cash Flows 6
(Unaudited); Six months ended
June 30, 1999 and 1998
Notes to Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------ -------- ------------
<S> <C>
Current assets:
Cash and cash equivalents $ 352,448 $ 207,661
Accounts receivable:
Trade - billed, less allowances for doubtful accounts of
$279,822 and $262,056 4,082,046 3,824,012
Trade - unbilled 420,041 199,108
Inventories:
Raw materials 467,162 522,468
Finished goods 1,031,743 989,745
Prepaid expenses and other assets 118,079 116,034
----------- ----------
Total current assets 6,471,519 5,859,028
----------- -----------
Property and equipment, net 2,693,047 2,449,566
----------- -----------
Other assets:
Cash - restricted 0 387,462
Note receivable, officer 645,163 624,387
Other 387,632 246,058
----------- ------------
Total other assets 1,032,795 1,257,907
----------- ------------
TOTAL ASSETS $10,197,361 $ 9,566,501
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 635,594 $ 573,104
Accounts payable - trade 2,327,873 2,177,884
Accrued expenses and other liabilities 1,407,480 1,115,118
Customer deposits 253,413 306,255
------------ ------------
Total current liabilities 4,624,360 4,172,361
Notes payable - less current maturities 3,995,020 4,020,661
Notes payable - related parties 101,438 104,696
------------ ------------
TOTAL LIABILITIES 8,720,818 8,297,718
----------- ---------
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 3,085,718 shares, outstanding 3,044,798 shares 30,857 30,857
Additional capital 3,450,085 3,450,085
Treasury Stock (102,300) (102,300)
Retained earnings (deficit) (1,902,099) (2,109,859)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,476,543 1,268,783
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,197,361 $9,566,501
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
1999 1998
------------ -----------
Revenue $ 4,322,912 $3,557,951
Cost of goods sold 3,460,733 2,833,239
------------- -----------
Gross profit 862,179 724,712
------------- -----------
Operating expenses:
General and administrative expenses 533,022 400,238
Selling expenses 120,950 171,868
------------- -----------
Total operating expenses 653,972 572,106
------------- -----------
Operating income 208,207 152,606
------------- -----------
Other income (expense):
Royalties 57,920 23,994
Interest expense (134,817) (200,307)
Interest income 4,541 15,825
Other 43,788 9,052
------------- ----------
Total other income (expense) (28,568) (169,540)
------------- ----------
Income (loss) before income taxes 179,639 (16,934)
Income tax expense (benefit) -- --
-------------- ----------
Net income (loss) $ 179,639 $ (16,934)
============== ==========
Basic and diluted earnings 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
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SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
Revenue $7,781,436 $6,584,611
Cost of goods sold 6,196,159 5,048,302
---------- ---------
Gross profit 1,585,277 1,536,309
---------- ---------
Operating expenses:
General and administrative expenses 1,015,180 968,049
Selling expenses 280,725 321,284
---------- ----------
Total operating expenses 1,295,905 1,289,333
---------- ----------
Operating income 289,372 246,976
---------- ----------
Other income (expense):
Royalties 108,489 62,445
Interest expense (253,389) (294,364)
Interest income 24,066 26,998
Other 39,222 3,931
---------- ----------
Total other income (expense) (81,612) (200,990)
---------- ----------
Income before income taxes 207,760 45,986
Income tax expense (benefit) -- --
---------- ----------
Net income $ 207,760 $ 45,986
========== ===========
Basic and diluted earnings per share $ .07 $ .02
========== ===========
Weighted average common shares outstanding 3,044,798 3,044,798
========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
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SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
<S> <C>
Cash flows from operating activities:
Cash received from customers $ 7,358,116 $ 6,368,551
Cash paid to suppliers and employees (7,019,557) (6,195,590)
Interest paid (253,389) (294,364)
Other 42,512 14,955
------------- ------------
Net cash provided (absorbed) by operating activities 127,682 (106,448)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (403,948) (232,992)
Decrease (increase) in officer note receivable -- --
Increase in related party receivables (3,258) (6,165)
------------- ------------
Net cash absorbed by investing activities (407,206) (239,157)
------------- ------------
Cash flows from financing activities:
Proceeds from bank borrowings 75,000 4,000,000
Repayments of bank borrowings (38,151) (2,928,408)
------------- ------------
Net cash provided by financing activities 36,849 1,071,592
------------- ------------
Decrease (increase) in cash - restricted 387,462 (832,618)
------------- ------------
Net increase (decrease) in cash and cash equivalents 144,787 (106,631)
Cash and cash equivalents at beginning of period 207,661 288,310
------------- ------------
Cash and cash equivalents at end of period $ 352,448 $ 181,679
============ ============
Reconciliation of net income (loss) to net cash
provided (absorbed) by operating activities:
Net income $ 207,760 $ 45,986
Adjustments to reconcile net income to net cash
provided (absorbed) by operating activities:
Depreciation and amortization 160,467 159,759
Increase in other assets (162,350) (161,659)
Decrease (increase) in:
Accounts receivable - billed (258,034) (97,743)
Accounts receivable - unbilled (220,933) (115,124)
Inventories 13,308 (79,185)
Prepaid expenses and other assets (2,045) (88,815)
Increase (decrease) in:
Accounts payable - trade 149,989 358,131
Accrued expenses and other liabilities 292,362 (62,160)
Customer deposits (52,842) (65,638)
------------- ------------
Net cash provided (absorbed) by operating activities $ 127,682 $ (106,448)
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
6
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SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
BASIS OF PRESENTATION
As permitted by the rules of the Securities and Exchange 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, 1998.
In the opinion of the management of Smith-Midland Corporation (the
"Company"), the accompanying financial statements reflect all adjustments of a
normal recurring nature which were necessary for a fair presentation of the
Company's results of operations for the three- and six-month periods ended June
30, 1999 and 1998.
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 1999 presentation.
INVENTORIES
Inventories are stated at the lower of cost, using the first-in,
first-out (FIFO) method, or market.
7
<PAGE>
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
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.
No provision for income taxes has been made for the three- and
six-month periods ended June 30, 1999 and 1998, as the Company does not expect
to incur income tax expense for 1999 and did not incur income tax expense during
1998.
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.
8
<PAGE>
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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilutive effect of securities that could share in earnings of an entity. At June
30, 1999 there was no material dilutive effect on earnings (loss) per share.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
GENERAL
The Company generates revenues primarily from the sale, licensing, leasing,
shipping 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 Slenderwall(TM), a
patent-pending, lightweight, energy efficient concrete and steel exterior wall
panel for use in building construction; J-J Hooks(TM) 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.
In 1998, the Company began work on a contract to renovate the Bradley Hall
Building at Rutgers University (the "Bradley Hall project"). The Bradley Hall
project, which is expected to be completed in the third quarter of 1999,
involves the design, production and installation of Slenderwall panels by the
Company. While executing the Bradley Hall project, the original structure was
found to be not structurally sufficient to support the installation of the
Slenderwall panels as originally designed. This lead to cost overruns relating
to re-design of the panels, production of the panels with additional steel and
reinforcing, and installation costs. Management estimates that the cost overruns
over the course of the entire project will total approximately $1.47 million and
estimates that the total loss on the job before recovery of any claims by the
Company will be approximately $1.37 million including approximately $280,000 of
estimated losses recognized in the first six months of 1999. The Company plans
to file claims in 1999, for which notification has been made, in the amount of
$1.49 million. As of December 31, 1998, $400,000 of the contract claim had been
included in sales and accounts receivable. During the quarter ended June 30,
1999, an additional $97,000 of the contract claim was included in sales and
accounts receivable. There can be no assurance that the loss will not exceed the
$1.37 million estimate or that the Company will be able to collect any of its
claim.
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, 1999 are not necessarily indicative of the
results for the Company's operations for the year ending December 31, 1999.
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 Company's accounting policies and other risks detailed in the
Company's Annual Report on Form 10-KSB and other filings with the Securities and
Exchange Commission.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1998
For the three months ended June 30, 1999, the Company had total revenue of
$4,322,912 compared to total revenue of $3,557,951 for the three months ended
June 30, 1998, an increase of $764,961, or 22%. Total product sales were
$3,419,718 for the three months ended June 30, 1999 compared to $3,142,943 for
the same period in 1998, an increase of $276,775, or 9%. Shipping and
installation revenue was $903,194 for the three months ended June 30, 1999 and
$415,008 for the same period in 1998, an increase of $488,186, or 118%. The
increase was attributable to higher installation revenue which was partially
offset by lower shipping revenue in the 1999 period compared to the same period
in 1998.
Total cost of goods sold for the three months ended June 30, 1999 was
$3,460,733, an increase of $627,494, or 22% from $2,833,239 for the three months
ended June 30, 1998. The increase was primarily the result of an increase in the
volume of production, a significant increase in sales of products requiring
installation, and a decrease in the profitability of shipping and installation
services in the 1999 period. Total cost of goods sold was 80% of total revenue
for the three months ended June 30, 1999 and for the three months ended June
30, 1998.
For the three months ended June 30, 1999, the Company's general and
administrative expenses increased $132,784 to $533,022 from $400,238 during the
same period in 1998. The 33% increase is attributed in part to increased legal
fees, professional fees and insurance during the 1999 period when compared to
the 1998 period.
Selling expenses for the three months ended June 30, 1999 decreased
$50,918, or 30%, to $120,950 from $171,868 for the three months ended June 30,
1998, resulting from reduced staffing and salary expenses and reduced
advertising expenses.
The Company's operating income for the three months ended June 30, 1999 was
$208,207, compared to operating income of $152,606 for the three months ended
June 30, 1998, an increase of $55,601, or 36%. The increased operating income
resulted primarily from increased sales and reduced selling expenses offset, in
part, by higher general and administrative expenses as discussed above.
Royalty income totaled $57,920 for the three months ended June 30, 1999,
compared to $23,994 for the same three months in 1998. The increase of $33,926,
or 141%, was primarily due to increased license fees and building royalties
offset somewhat by reduced barrier royalties in the 1999 period as compared to
the 1998 period.
Interest expense was $134,817 for the three months ended June 30, 1999,
compared to $200,307 for the three months ended June 30, 1998. The decrease of
$65,490, or 33%, was primarily due to lower interest rates during the 1999
11
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period and non-recurring lease buyout expenses and miscellaneous fees associated
with the Company's debt restructuring in June 1998 (see "Liquidity and Capital
Resources").
The net profit was $179,639 for the three months ended June 30, 1999,
compared to a net loss of $16,934 for the same period in 1998. The basic and
diluted net profit per share for the current three month period was $.06
compared to basic and diluted loss per share of $.01 for the three months ended
June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
For the six months ended June 30, 1999, the Company had total revenue of
$7,781,436 compared to total revenue of $6,584,611 for the six months ended June
30, 1998, an increase of $1,196,825 or 18%. Total product sales were $6,089,207
for the six months ended June 30, 1999, compared to $5,710,915 for the same
period in 1998, an increase of $378,292 or 7%. Sales of Easi-Set Precast
Buildings, Slenderwall and miscellaneous architectural products all more than
doubled compared with sales of these products for the first six months of 1998.
These increases were partially offset by a 73% reduction in Soundwall sales.
Shipping and installation revenue was $1,692,229 for the six months ended June
30, 1999 and $873,696 for the same period in 1998, an increase of $818,533, or
94%. The increase was attributable to increased sales of products requiring
installation offset, somewhat, by lower shipping revenue in the 1999 period, as
compared to the 1998 period.
Total cost of goods sold for the six months ended June 30, 1999 was
$6,196,159, an increase of $1,147,857, or 23%, from $5,048,302 for the six
months ended June 30, 1998. The increase was primarily the result of increased
installation costs associated with the increased sales of products requiring
installation. Total cost of goods sold, as a percentage of total revenue,
increased to 80% for the six months ended June 30, 1999, from 77% for the six
months ended June 30, 1998 primarily due to a larger increase in installation
costs than the increase in installation revenue during the period.
For the six months ended June 30, 1999, the Company's general and
administrative expenses increased $47,131, or 5%, to $1,015,180, or 13% of
revenue, from $968,049, or 15% of total revenue, for the same period in 1998.
The increase in expenses is primarily related to increases in legal and
professional fees offset to some extent by reductions in provisions for bad
debts and employee relocation expenses.
Selling expenses for the six months ended June 30, 1999 decreased $40,559,
or 13%, to $280,725 from $321,284 for the six months ended June 30, 1998. This
decrease was primarily the result of staffing reductions and decreased salary
and commissions expenses, and reduced engineering fees and other expenses
related to the contract bidding process.
The Company's operating income for the six months ended June 30, 1999 was
$289,372, compared to operating income of $246,976 for the six months ended June
30, 1998, an increase of $42,396, or 17%. The improved operating income resulted
primarily from increased sales offset in part by reduced gross profit margins as
discussed above.
12
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Royalty income totaled $108,489 for the six months ended June 30, 1999,
compared to $62,445 for the same six months in 1998. The increase of $46,044 was
due to both increased royalty fees earned on the production of Easi-Set(R)
precast buildings and increased licensee fees.
Interest expense was $253,389 for the six months ended June 30, 1999,
compared to $294,364 for the six months ended June 30, 1998. The decrease of
$40,975, or 14%, was primarily due to lower interest rates during the 1999
period and non-recurring lease buyout expenses and miscellaneous fees associated
with the Company's debt restructuring in June 1998 (see "Liquidity and Capital
Resources").
Other income was $39,222 for the six months ended June 30, 1999 compared to
$3,931 for the six months ended June 30, 1998, an increase of $35,291. The
increase is attributable to the net effect of increases in barrier rental income
and use tax expense and a decrease in advertising co-op fee income.
Net income was $207,760 for the six months ended June 30, 1999, compared to
net income of $45,986 for the same period in 1998. The basic and diluted
earnings per share for the current six month period was $.07 compared to $.02
per share for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its capital expenditures, operating requirements
and growth to date primarily with proceeds from operations, its initial public
offering ("IPO") and bank and other borrowings. The Company had $4,732,052 of
indebtedness at June 30, 1999, of which $635,594 was scheduled to mature within
twelve months.
In June 1998, the Company successfully restructured substantially all of
its debt into one $4,000,000 note with First International Bank ("FIB"),
formerly the First National Bank of New England. The Company closed on this loan
on June 25, 1998. The Company obtained a twenty three year term on this note at
1.5% above prime, secured by equipment and real estate. The term of the note
improved the Company's current debt ratio and debt service. In addition to
paying off current debt of approximately $3.0 million, the Company received
approximately $832,000 in restricted funds, to be used only for plant expansion
and new equipment. Such funds were fully expended by June 30, 1999. The loan is
guaranteed, in part, by the U.S. Department of Agriculture Rural
Business-Cooperative Service. Under the terms of the note, the Company's
unfinanced fixed asset expenditures are limited to $300,000 per year
for a five year period. In addition, FIB will permit chattel mortgages on
purchased equipment not to exceed $200,000 on an annual basis so long as the
Company is not in default. The Company was also granted a $500,000 operating
line of credit by FIB. This commercial revolving promissory note, which carries
a variable interest rate of 1% above prime, was recently renewed and is now
scheduled to terminate on May 1, 2000.
Capital spending totaled $403,948 in the six month period ended June 30,
1999, which included $387,462 in restricted funds from the June 1998 FIB debt
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restructuring. Capital spending increased 73% from $232,992 in the comparable
period of the prior year, primarily for the completion of a 16,000 square foot
plant addition to the Company's facility in Midland, Virginia. This plant
addition was financed primarily with restricted funds received in 1998 as part
of the $4,000,000 FIB loan as mentioned above. Planned capital expenditures for
1999 are limited as stated above by the FIB loan agreement. The only significant
cash commitment for capital expenditures planned for 1999 is a project to
complete construction of an engineering building at a estimated cost of $90,000
which is contingent upon successful completion of additional equity financing.
As a result of the Company's substantial debt burden, the Company is
especially sensitive to changes in the prevailing interest rates. Fluctuations
in such interest rates may materially and adversely affect the Company's ability
to finance its operations either by increasing the Company's cost to service its
current debt, or by creating a more burdensome refinancing environment, if
interest rates should increase.
The Company's cash flow from operations is affected by production schedules
set by contractors, which generally provide for payment 45 to 75 days after the
products are produced. This payment schedule has resulted in liquidity problems
for the Company because it must bear the cost of production for its products
long before it receives payment. In addition the Company's cash flow has been
significantly effected by the loss on the Bradley Hall project. Due to the
significant costs required to continue the Bradley Hall project and to fund
ongoing commitments, the Company entered into a working agreement with the
general contractor of the project to finance certain costs, at cost plus 10%,
through completion of the project. During the six months ended June 30, 1999,
the general contractor on the project temporarily assumed responsibility for
installation and other expenses in connection with the project totaling $843,436
including the 10% surcharge. The schedule for repayment of these liabilities by
the Company to the general contractor has not yet been finalized. In the event
cash flow from operations and existing credit facilities are not adequate to
support operations, the Company is currently investigating alternative sources
of both short-term and long-term financing, for which there can be no assurance
of obtaining.
OTHER COMMENTS
The Company 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 in the process of replacing all of its purchasing,
inventory and accounting systems and expects to activate the new systems prior
to January 1, 2000. The new systems are expected to improve the accuracy and
timeliness of internal reporting and the Company has taken the necessary steps
to ensure that the new systems are year 2000 compliant. The Company is using
standard off-the-shelf software and does not plan to customize the software in
any way. 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 on 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
14
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significant year 2000 issues in a timely manner.
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.
The Company has been notified by NASDAQ that it may delist the Company's
securities from the Nasdaq SmallCap Market. As of the date of this filing, the
Company was not in compliance with all applicable listing requirements and the
Company believes that it may have difficulty meeting all the current
requirements. In particular, the minimum bid price requirement ($1) and the net
tangible asset requirement (minimum of $2,000,000) are not currently being met.
The Company has been granted a temporary exception from these standards subject
to the Company meeting certain conditions on or before each of August 16th,
August 20th, September 30th and October 15th, 1999. The exception will expire on
October 15, 1999. In the event that the Company is deemed to have met the terms
of the exception, the Company's securities shall continue to be listed on the
Nasdaq SmallCap Market. The Company believes that it can meet these conditions,
however, there can be no assurance that it will do so. If at some future date
the Company's securities should cease to be listed on The Nasdaq SmallCap
Market, they may continue to be listed on the OTC-Bulletin Board. For the
duration of the exception, the Company's Nasdaq symbol for the common stock will
be SMIDC and the symbol for the Company's publicly traded warrants will be
SMIWC.
Management believes that the Company's operations have not been materially
affected by inflation.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
In late 1995, the Company filed four separate informal claims with the
Maryland State Contractor Board of Appeals. These claims totaled approximately
$502,000 for damages and costs incurred as a result of specification, policy and
operating changes to contracts primarily instituted by the State of Maryland,
including the then newly issued "Noise Barrier Acceptance Criteria," all of
which were undertaken after the award of the contracts and after unit production
in accordance with the contracts was virtually complete. In 1996, the Company
filed additional claims against the State of Maryland related to the same
contracts in the amount of $578,500 which brought the amount of the total claims
to $1,080,500. In early 1996, the Company received several counterclaims from
the State of Maryland. The Company has considered the counterclaims in
estimating the recoverability of its claims and certain trade accounts
receivable and approximately $270,100 of the total contract claims is included
in trade accounts receivable at December 31, 1998. The Company collected
$185,000 of the outstanding claims during the first quarter of 1999 and expects
to collect the remaining balance during 1999, although there can be no assurance
of such collections.
In late 1998 the Company filed suit in the circuit court of Lake
County, Illinois against Trapani Construction Company ("Trapani") & L. J.
Sheridan & Company, as agent for the owner, for the enforcement of a mechanic's
lien and the recovery of approximately $186,500 representing the balance due on
a contract entered into by the Company to manufacture and install Slenderwall
Panels at the Hawthorn Place Medical Center II in Libertyville, Illinois. Work
on that building has been completed, approved and accepted by Trapani and the
owner. Trapani withheld payment on this project because the Company refused to
proceed with a renovation project to reclad Medical Center I, a second building
at the same site which was part of the original contract, without a change order
to cover incremental costs anticipated as a result of alleged inaccurate
specifications supplied by Trapani. The Company believes that there is a high
probability of collection of a major portion of the balance due, but there can
be no assurance in this regard.
The Company is not presently involved in any other litigation of a
material nature.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 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.
-----------------
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
A. The following Exhibit is filed herewith:
Exhibit No. Title
---------- -----
27 Financial Data Schedule
B. Reports on Form 8-K. None.
17
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMITH-MIDLAND CORPORATION
Date: August 16, 1999 By: /s/ Rodney I. Smith
-----------------------
Rodney I. Smith
Chairman of the Board,
Chief Executive Officer and President
(principal executive officer)
Date: August 16, 1999 By: /s/ Theodore D. Pennington
------------------------------
Theodore D. Pennington
Vice President, Finance and
Chief Financial Officer
(principal financial officer)
18
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