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 June 30, 2004
Commission File Number 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.) |
5119 Catlett Road, P.O. Box 300, Midland, Virginia 22728
(Address of Principal Executive Offices)
(540) 439-3266
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
As of August 20, 2003, the Company had outstanding 4,449,548 shares of Common Stock, $.01 par value per share.
Transitional Small Business Disclosure Format: Yes ¨ No x
INDEX
2
PART I - Financial Information
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
| June 30, 2004 |
December 31, 2003 |
|||||||
| Unaudited | Audited | |||||||
| Assets |
||||||||
| Current assets |
||||||||
| Cash |
$ | 560,043 | $ | 699,645 | ||||
| Accounts receivable |
||||||||
| Trade – billed (less allowance for doubtful accounts of $247,329 and $231,600) |
4,991,002 | 4,201,835 | ||||||
| Trade – unbilled |
538,543 | 22,812 | ||||||
| Inventories |
||||||||
| Raw materials |
768,857 | 655,517 | ||||||
| Finished goods |
1,287,876 | 1,807,132 | ||||||
| Income tax receivable |
433,169 | 433,169 | ||||||
| Prepaid expenses and other assets |
350,999 | 242,607 | ||||||
| Total currents assets |
8,930,489 | 8,062,717 | ||||||
| Property and equipment, net |
3,114,684 | 3,258,083 | ||||||
| Other assets |
||||||||
| Notes receivable, officer |
309,832 | 363,070 | ||||||
| Claims and accounts receivable |
41,238 | 676,203 | ||||||
| Other |
185,221 | 190,573 | ||||||
| Total other assets |
536,291 | 1,229,846 | ||||||
| Total assets |
$ | 12,581,464 | $ | 12,550,646 | ||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities |
||||||||
| Line of Credit |
$ | 499,591 | $ | 600,000 | ||||
| Accounts payable – trade |
2,707,249 | 2,568,012 | ||||||
| Accrued expenses and other liabilities |
852,335 | 498,921 | ||||||
| Current maturities of notes payable |
439,682 | 445,226 | ||||||
| Notes payable to related party |
17,609 | 26,668 | ||||||
| Customer deposits |
490,790 | 88,940 | ||||||
| Total current liabilities |
5,007,256 | 4,227,767 | ||||||
| Reserve for contract loss |
0 | 1,001,682 | ||||||
| Notes payable – less current maturities |
3,839,480 | 3,970,263 | ||||||
| Total liabilities |
8,846,736 | 9,199,712 | ||||||
| Stockholders’ equity |
||||||||
| Preferred stock, $.01 par value; authorized 1,000,000 shares, none outstanding |
||||||||
| Common stock, $.01 par value; authorized 8,000,000 shares; 4,449,548 and 4,449,548 issued and outstanding |
44,495 | 44,495 | ||||||
| Additional paid-in capital |
4,189,388 | 4,189,388 | ||||||
| Retained earnings (deficit) |
(396,855 | ) | (780,649 | ) | ||||
| Treasury stock, at cost, 40,920 shares |
(102,300 | ) | (102,300 | ) | ||||
| Total stockholders’ equity |
3,734,728 | 3,350,934 | ||||||
| Total liabilities and stockholders’ equity |
$ | 12,581,464 | $ | 12,550,646 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Revenue |
||||||||
| Product sales and leasing |
$ | 5,338,909 | $ | 5,161,922 | ||||
| Royalties |
130,669 | 113,441 | ||||||
| Total Revenue |
5,469,578 | 5,275,363 | ||||||
| Cost of goods sold |
3,904,871 | 3,661,463 | ||||||
| Gross profit |
1,564,707 | 1,613,900 | ||||||
| Operating expenses: |
||||||||
| General and administrative expenses |
709,842 | 654,730 | ||||||
| Selling expenses |
347,446 | 471,416 | ||||||
| Total operating expenses |
1,057,288 | 1,126,146 | ||||||
| Operating income (loss) |
507,419 | 487,754 | ||||||
| Other income (expense): |
||||||||
| Interest expense |
(83,161 | ) | (68,361 | ) | ||||
| Interest income |
57 | 0 | ||||||
| Other, net |
1,304 | (135,780 | ) | |||||
| Total other income (expense) |
(81,800 | ) | (204,141 | ) | ||||
| Income (loss) before income taxes |
425,619 | 283,613 | ||||||
| Income tax expense (benefit) |
0 | 107,773 | ||||||
| Net income (loss) |
425,619 | 175,840 | ||||||
| Basic earnings (loss) per share |
$ | .10 | $ | .04 | ||||
| Diluted earnings (loss) per share |
$ | .09 | $ | .04 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| Six Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Revenue |
||||||||
| Product sales and leasing |
$ | 10,395,497 | $ | 9,525,459 | ||||
| Royalties |
266,871 | 240,045 | ||||||
| Total Revenue |
10,662,368 | 9,765,504 | ||||||
| Cost of goods sold |
7,928,158 | 7,398,678 | ||||||
| Gross profit |
2,734,210 | 2,366,826 | ||||||
| Operating expenses: |
||||||||
| General and administrative expenses |
1,447,599 | 1,477,068 | ||||||
| Selling expenses |
746,006 | 828,615 | ||||||
| Total operating expenses |
2,193,605 | 2,305,683 | ||||||
| Operating income (loss) |
540,605 | 61,143 | ||||||
| Other income (expense): |
||||||||
| Interest expense |
(159,395 | ) | (132,727 | ) | ||||
| Interest income |
429 | 2,235 | ||||||
| Other, net |
2,156 | (95,885 | ) | |||||
| Total other income (expense) |
(156,810 | ) | (226,377 | ) | ||||
| Income (loss) before income taxes |
383,795 | (165,234 | ) | |||||
| Income tax expense (benefit) |
0 | (62,789 | ) | |||||
| Net income (loss) |
383,795 | (102,445 | ) | |||||
| Basic earnings (loss) per share |
$ | .09 | $ | (.02 | ) | |||
| Diluted earnings (loss) per share |
$ | .08 | $ | (.02 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
| Six months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Cash received from customers |
$ | 9,759,319 | $ | 9,877,220 | ||||
| Cash paid to suppliers and employees |
(9,501,954 | ) | (9,794,139 | ) | ||||
| Income taxes paid, net |
0 | (539,870 | ) | |||||
| Interest paid |
(159,395 | ) | (132,727 | ) | ||||
| Other |
242,858 | 252,514 | ||||||
| Net cash provided (absorbed) by operating activities |
340,828 | (337,002 | ) | |||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(96,875 | ) | (275,007 | ) | ||||
| Proceeds from sale of fixed assets |
0 | 11,250 | ||||||
| (Increase) decrease in officer note receivable |
53,238 | 50,224 | ||||||
| Net cash provided (absorbed) by investing activities |
(43,637 | ) | (213,533 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from borrowings |
0 | 332,526 | ||||||
| Repayments of borrowings |
(427,733 | ) | (175,655 | ) | ||||
| Repayments on borrowings – related parties, net |
(9,060 | ) | (8,679 | ) | ||||
| Proceeds from options/warrants exercised |
0 | 10,905 | ||||||
| Net cash provided (absorbed) by financing activities |
(436,793 | ) | 159,097 | |||||
| Net increase (decrease) in cash and cash equivalents |
(139,602 | ) | (391,438 | ) | ||||
| Cash and cash equivalents at beginning of period |
699,645 | 1,223,756 | ||||||
| Cash and cash equivalents at end of period |
$ | 560,043 | $ | 832,318 | ||||
| Reconciliation of net income (loss) to net cash provided (absorbed by operating activities: |
||||||||
| Net income (loss) |
$ | 383,795 | $ | (102,445 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided (absorbed) by operating activities: |
||||||||
| Depreciation and amortization |
240,275 | 231,138 | ||||||
| Gain on disposal of fixed assets |
0 | (5,254 | ) | |||||
| Decrease (increase) in: |
||||||||
| Accounts receivable – billed |
(789,167 | ) | (163,119 | ) | ||||
| Accounts receivable – unbilled |
(515,731 | ) | 274,834 | |||||
| Inventories |
405,916 | (482,308 | ) | |||||
| Prepaid expenses and other assets |
722,922 | 359,671 | ||||||
| Increase (decrease) in: |
||||||||
| Accounts payable – trade |
139,238 | 164,821 | ||||||
| Accrued expenses and other liabilities |
353,413 | (131,962 | ) | |||||
| Accrued income taxes |
0 | (539,870 | ) | |||||
| Customer deposits |
401,848 | 57,491 | ||||||
| Reserve for Contract Losses |
(1,001,681 | ) | 0 | |||||
| Net cash provided (absorbed) by operating activities |
$ | 340,828 | $ | (337,002 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
6
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(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, 2003.
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, 2004 and 2003.
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 2004 presentation.
7
Inventories
Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) method.
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 federal income taxes was made for the three and six-month periods ending June 30, 2004 due to net operating loss carry forward from 2003. The deferred tax benefit of the net operating loss has been reserved for in its entirety.
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 collectability is in doubt, in which event revenue is recognized as cash is received. Certain sales of Soundwall, architectural precast panels and Slenderwall™ 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
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 Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilutive effect of securities that could share in earnings of an entity. Earnings per share was calculated as follows:
| Three months ended June 30, | ||||||
| 2004 |
2003 | |||||
| Net income (loss) |
$ | 425,619 | $ | 175,840 | ||
| Average shares outstanding for basic earnings per share |
4,449,548 | 4,437,677 | ||||
| Dilutive effect of stock options and warrants |
270,000 | 9,988 | ||||
| Average Shares Outstanding for Diluted Earnings per Share |
4,719,548 | 4,447,665 | ||||
| Basic earnings (loss) per share |
$ | .10 | $ | .04 | ||
| Diluted earnings (loss) per share |
$ | .09 | $ | .04 | ||
| Six months ended June 30, |
|||||||
| 2004 |
2003 |
||||||
| Net income (loss) |
$ | 383,795 | $ | (102,445 | ) | ||
| Average shares outstanding for basic earnings per share |
4,449,548 | 4,435,315 | |||||
| Dilutive effect of stock options and warrants |
270,000 | 47,868 | |||||
| Average Shares Outstanding for Diluted Earnings per Share |
4,719,548 | 4,483,183 | |||||
| Basic earnings (loss) per share |
$ | .09 | $ | (.02 | ) | ||
| Diluted earnings (loss) per share |
$ | .08 | $ | (.02 | ) | ||
Stock Options
The Company has elected to use the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, for stock options granted to the Company’s employees. This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the option equals or exceeds the fair market value of the stock at the date of grant.
9
The following table summarizes options outstanding:
| Three Months Ended June 30, 2004 | ||||||
| Shares |
Weighted Average exercise price | |||||
| Options outstanding at beginning of period |
607,075 | $ | .88 | |||
| Granted |
— | — | ||||
| Forfeited |
(25,000 | ) | $ | .83 | ||
| Exercised |
— | — | ||||
| Options outstanding at end of period |
582,075 | $ | .88 | |||
| Options exercisable at end of period |
429,748 | $ | .85 | |||
Item 2. Management’s Discussion and Analysis or Plan of Operation
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™, a patented, lightweight, energy efficient concrete and steel exterior wall panel for use in building construction; J-J Hooks™ Highway Safety Barrier, a patented, positive-connected highway safety barrier; Sierra Wall, a sound barrier primarily for roadside use; and Easi-Set® transportable concrete buildings. In addition, the Company produces custom order precast concrete products with various architectural surfaces, typically used in commercial building construction, as well as utility vaults, farm products such as cattleguards, and water and feed troughs.
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, 2004 are not necessarily indicative of the results for the Company’s operations for the year ending December 31, 2004. 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.
Results of Operations
Three months ended June 30, 2004 compared to the three months ended June 30, 2003
During the three months ended June 30, 2004, the Company recorded several adjustments that are not representative of ongoing operations. The primary adjustment was recorded as a reduction to cost of sales for $295,478, resulting from the settlement of the Bradley Hall Project case. See Part II, Item 1 of this form 10-QSB for information as to reported legal proceedings.
10
For the three months ended June 30, 2004, the Company had total revenue of $5,469,578 compared to total revenue of $5,275,363 for the three months ended June 30, 2003, an increase of $194,215, or 4%. Total product sales were $4,250,982 for the three months ended June 30, 2004 compared to $4,386,645 for the same period in 2003, a decrease of $135,663, or 3%. The lower product sales were a result of reduced sales of Slenderwall™ and architectural products, which was partly compensated for by increased Soundwall sales. Shipping and installation revenue was $792,465 for the three months ended June 30, 2004 and $521,661 for the same period in 2003, an increase of $270,804 or 52%, mostly due to the increase in the installation of architectural products manufactured in the first quarter 2004.
Total cost of goods sold for the three months ended June 30, 2004 was $3,904,871, an increase of $243,408, or 7%, from $3,661,463 for the three months ended June 30, 2003. Cost of goods sold as a percentage of total revenue increased from 69% for the three months ended June 30, 2003 to 71% for the three months ended June 30, 2004. The majority of the increase was due to the increased costs for raw materials such as steel and cement, which was partially offset by tighter controls over direct labor. The effect of these increased costs were offset by the Company’s settlement of the Bradley Hall Project case, which generated a $295,478 reduction to cost of goods sold. See Part II, Item 1 of this form 10-QSB for information as to reported legal proceedings. The Company also incurred shipping and installation expense of $905,908 for the three months ended June 30, 2004 and $614,335 for the same period in 2003, an increase of $291,573 or 48%, which is related primarily to the increase in shipping and installation activity.
For the three months ended June 30, 2004, the Company’s general and administrative expenses increased $55,112 to $709,842 from $654,730 during the same period in 2003. The increase was due primarily to additional costs related to the purchase and installation for its new accounting software and increases in other employee-related expenses.
Selling expenses for the three months ended June 30, 2004 decreased $123,970, or 26%, to $347,446 from $471,416 for the three months ended June 30, 2003, primarily due to reductions in sales department labor and related expenses.
The Company’s operating income for the three months ended June 30, 2004 was $507,419 compared to operating income of $487,754 for the three months ended June 30, 2003, an increase of $19,665, or 4%. The increased operating income was primarily the result of stronger controls over direct labor, reduced selling expenses, the net effect of the Bradley Hall Project settlement, offset by increases in costs for raw materials.
Interest expense was $83,161 for the three months ended June 30, 2004, compared to $68,361 for the three months ended June 30, 2003. The increase of $14,800, or 22%, was due primarily to increased outstanding balance on the line of credit and additional promissory notes that were entered into between June 30, 2003 and 2004.
Other expense (net) was $1,304 for the three months ended June 30, 2004 compared to other expense (net) of $(135,780) for the three months ended June 30, 2003, an increase of $137,084.
11
The net income was $425,619 for the three months ended June 30, 2004, compared to a net income of $175,840 for the same period in 2003. The basic and diluted net loss per share for the current three month period was $.10 and $.09 compared to basic and diluted net earnings per share of $.04 and $.04 for the three months ended June 30, 2003.
Six months ended June 30, 2004 compared to the six months ended June 30, 2003
During the six months ended June 30, 2004, the Company recorded several adjustments that are not representative of ongoing operations. The primary adjustment was recorded as a reduction to cost of sales for $295,478, resulting from the settlement of the Bradley Hall Project case, as discussed above.
For the six months ended June 30, 2004, the Company had total revenue of $10,662,368 compared to total revenue of $9,765,504 for the six months ended June 30, 2003, an increase of $896,864, or 9%. Total product sales were $8,790,848 for the six months ended June 30, 2004 compared to $7,789,230 for the same period in 2003, an increase of $1,001,618, or 13%. The higher product sales were related to improved management of the production process, including streamlining production personnel responsibilities, which resulted in increased production. Additionally, improved economic conditions resulted in increased sales of the Company’s newer, innovative products such as Slenderwall™, Easi-Set buildings, as well as, architectural and Soundwall products. Royalty income was also up due to the addition of two new Easi-Set licensees added during the period. Shipping and installation revenue was $1,445,389 for the six months ended June 30, 2004 and $1,593,458 for the same period in 2003, a decrease of $148,069, or 9%. The revenue decrease was attributable to a decrease in installation activity primarily on the commercial building projects.
Total cost of goods sold for the six months ended June 30, 2004 was $7,928,158, an increase of $529,480, or 7%, from $7,398,678 for the six months ended June 30, 2003. The majority of the increase was due to the increased sales activity, offset by the effect of the Bradley Hall Project settlement. Cost of goods sold as a percentage of total revenue decreased to 74% for the six months ended June 30, 2004, from 76% for the six months ended June 30, 2003. The decrease in cost of goods sold as a percentage of sales is primarily due to the effect of the Bradley Hall Project settlement. The Company also incurred shipping and installation expense of $1,759,700 for the six months ended June 30, 2004 and $1,928,209 for the same period in 2003, a decrease of $168,509 or 9%, which is related primarily to the decrease in shipping and installation activity in the first three months of 2004.
For the six months ended June 30, 2004, the Company’s general and administrative expenses decreased $29,469 to $1,447,599 from $1,477,068 during the same period in 2003, or 2%.
Selling expenses for the six months ended June 30, 2004 decreased $82,609, or 10%, to $746,006 from $828,615 for the same period in 2003, resulting primarily from reduced advertising and marketing for Easi-Set and Slenderwall™ products and certain personnel changes.
The Company’s operating income for the six months ended June 30, 2004 was $540,605 compared to operating income of $61,143 for the six months ended June 30, 2003. The increased
12
operating income was primarily the result of extra emphasis from management to control expenses and improve efficiencies across all areas of the Company. Also, the one-time affect of the “Bradley Hall Project” settlement accounted for $295,478 of the increase in operating income.
Interest expense was $159,395 for the six months ended June 30, 2004, compared to $132,727 for the six months ended June 30, 2003. The increase of $26,668, or 20%, was due primarily to increased outstanding balance on the line of credit and additional promissory notes that were entered into between June 30 2003 and 2004.
Other (expense) income (net) was $2,156 for the six months ended June 30, 2004 compared to other (expense) income (net) of $(95,885) for the six months ended June 30, 2003, a decrease of $98,041.
The net income was $383,795 for the six months ended June 30, 2004, compared to a net loss of $102,445 for the same period in 2003. The basic and diluted net income per share for the current six month period was $.09 and $.08 compared to basic and diluted net loss per share of $(.02) and $(.02) for the six months ended June 30, 2003.
Liquidity and Capital Resources
The Company has financed its capital expenditures, operating requirements and growth to date primarily with proceeds from operations, and bank and other borrowings. The Company had $4,846,709 of indebtedness at June 30 2004, of which $989,205 was scheduled to mature within twelve months.
Schedule of Contractual Obligations:
Payments due by period
| Total |
Less than 1 year |
1-3 years |
4-5 years |
After 5 years | |||||||||||
| Long-term debt and capital leases |
$ | 4,778,753 | $ | 939,274 | $ | 819,344 | $ | 348,283 | $ | 2,671,852 | |||||
| Debt to Related Parties |
17,609 | 17,609 | 0 | 0 | 0 | ||||||||||
| Operating leases |
50,347 | 32,322 | 16,505 | 1,520 | 0 | ||||||||||
| Total contractual cash obligations |
$ | 4,846,709 | $ | 989,205 | $ | 835,849 | $ | 349,803 | $ | 2,671,852 | |||||
The Company has a $3,517,309 note with First International Bank (“FIB”), formerly the First National Bank of New England, headquartered in Hartford, Connecticut. The note had an original term of twenty-three years beginning on June 25, 1998 with an interest rate of 1.5% above prime, secured by equipment and real estate. The loan is guaranteed in part by the U.S. Department of
13
Agriculture Rural Business-Cooperative Service’s loan guarantee. Under the terms of the note, 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 also has a $1,000,000 line of credit, under which there were $499,591 in borrowings at June 30, 2004. This is evidenced by commercial revolving promissory note, which carries a variable interest rate of 1% above prime and had an original maturity date of April 1, 2004, which the bank extended to October 1, 2004. In view of conversations between the Company and the lender, the Company believes that the lender may not further extend the due date. The Company is in the process of seeking to secure new financing to replace this line of credit. However, the Company’s poor performance in 2003 as well as changes in financial markets and increasing interest rates may negatively affect the Company’s ability to secure a new line of credit at an interest rate comparable to the existing line of credit. If the line of credit is not extended and a new line of credit is not secured, the Company would be obligated to repay the line of credit in full, which would adversely effect the Company’s liquidity position.
At June 30, 2004, the Company had cash totaling $560,043 compared to cash totaling $699,645 at December 31, 2003. During the period, the financing activities absorbed $436,793 (net) in cash primarily due to $300,000 payment on the line of credit; used $43,637 in its investing activities, primarily for the purchase of new equipment. The Company’s operating activities provided cash of $340,828 (net), which was primarily from the effect of the Bradley Hall Project settlement and an increase in customer deposits.
Capital spending totaled $96,875 in the six month period ended June 30, 2004 versus $275,007 in the comparable period of the prior year, mainly because of routine equipment replacements and plant modernization. The Company plans to make additional capital expenditures for routine equipment replacement, productivity improvements and plant upgrades that are planned for 2004 based on the achievement of operating goals and the availability of funds.
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 the event cash flow from operations, collection of claims, and existing credit facilities are not adequate to support operations, the Company would be required to obtain alternative sources of both short-term and long-term financing, for which there can be no assurance of obtaining.
Significant Accounting Policies and Estimates
The Company’s significant accounting policies are more fully described in it’s Summary of Accounting Policies to the Company’s annual consolidated financial statements. The preparation of
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financial statements in conformity with accounting principles generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below, however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and as a result, actual results could differ from these estimates.
The Company evaluates the adequacy of its allowance for doubtful accounts at the end of each quarter. In performing this evaluation, the Company analyzes the payment history of its significant past due accounts, subsequent cash collections on these accounts and comparative accounts receivable aging statistics. Based on this information, along with consideration of the general strength of the economy, the Company develops what it considers to be a reasonable estimate of the uncollectible amounts included in accounts receivable. This estimate involves significant judgment by the management of the Company. Actual uncollectible amounts may differ from the Company’s estimate.
The Company estimates inventory markdowns based on customer orders sold below cost, to be shipped in the following period and on the amount of similar unsold inventory at period end. The Company analyzes recent sales and gross margins on unsold inventory in further estimating inventory markdowns. These specific markdowns are reflected in the cost of sales and the related gross margins at the conclusion of the appropriate sales period. This estimate involves significant judgment by the management of the Company. Actual gross margins on sales of excess inventory may differ from the Company’s estimate.
The Company 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 Slenderwall™ concrete products are recognized upon completion of units produced under long-term contracts. When necessary, provisions for estimated losses on these contracts are made in the period in which such losses are determined. Changes in job performance, conditions and contract settlements that affect profit are recognized in the period in which the changes occur. Unbilled trade accounts receivable represents revenue earned on units produced and not yet billed.
The Company has elected to use the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, for stock options granted to the Company’s employees. This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the option equals or exceeds the fair market value of the stock at the date of grant. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), establishes alternative methods of accounting for stock options. The
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Company’s Form 10-KSB for the period ended December 31, 2003 and the footnote entitled stock options in this Form 10-QSB shows the effect on earnings if the fair value method prescribed by SFAS 123 had been adopted.
Other Comments
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 spring construction season. The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company.
As of June 30, 2004 the Company’s backlog was significantly higher than it was at the same period in 2003. The majority of the projects relating to the backlog as of June 30, 2004 are scheduled to be constructed in 2004 and early 2005. The increase in the Company’s backlog from June 30, 2003 is due to improved economic conditions in the construction industry, which translates into more demand for our products. Also, the Company has seen significant increases in the sale of its Slenderwall™ product line, with two large projects planned for production later in 2004. However, the risk still exist that these improved economic conditions may not continue and future sales levels may be adversely affected.
During the three months ended June 30, 2004, the Company experienced significant increases in the cost of steel, including rebar and wire mesh used to reinforce its concrete products. It is expected that these increased costs will affect the gross profit for projects that went under contract in the fourth quarter of 2003 and are scheduled for production in July 2004 or later.
Management believes that the Company’s operations have not been materially affected by inflation.
Item 3. Controls and Procedures
Our principal executive and financial officers have concluded, based on their evaluation as of the end of the period covered by this Form 10-QSB, that our disclosure controls and procedures under Rule 13a-15 of the Securities Exchange Act of 1934 are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Reference is made to Item 3 of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003 for information as to reported legal proceedings.
With respect to the Bradley Hall Project case described in detail in Item 3 in the aforementioned 10-KSB, including a description of the tentative settlement of that matter, in March 2004, the settlement agreement so described was approved by the court and became final.
In May 2003, a lawsuit was commenced by Ramona and Donald Rothrock against Smith-Carolina Corporation (“SCC”), a subsidiary of the Company, and an employee of SCC, in the General Court of Justice, Superior Court Division, State of North Carolina. The plaintiffs allege personal injuries resulting from the alleged negligence of SCC and the named employee. It is alleged that such employee was operating a truck owned by SCC, that a trailer attached to the truck disengaged and that the trailer struck the plaintiffs’ car. Plaintiffs seek unspecified compensatory and punitive damages for alleged significant injuries. The parties have reached a tentative settlement for $3,500,000 to be paid to plaintiffs, all of which is covered by insurance. Such settlement is subject to a written agreement and approval by the court.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company has scheduled its Annual Meeting of Stockholders for September 9, 2004.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(1) The following exhibits are filed herewith:
| Exhibit No. |
||
| 31.1 | Section 302 Certification of Chief Executive Officer | |
| 31.2 | Section 302 Certification of Chief Financial Officer | |
| 32.1 | Section 906 Certification of Chief Executive Officer | |
| 32.2 | Section 906 Certification of Chief Financial Officer | |
(b) Reports on Form 8-K
None.
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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 23, 2004 |
By: | /s/ Rodney I. Smith | ||
| Rodney I. Smith | ||||
| Chairman of the Board, | ||||
| Chief Executive Officer and President | ||||
| (Principal Executive Officer) | ||||
| Date: August 23, 2004 |
By: | /s/ Lawrence R. Crews | ||
| Lawrence R. Crews | ||||
| Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
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