-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EcC0sShFu1itPvhUvAf4j6otCk+OEcLL70WQRYMHGBedSUu2cn4wg+moxTMyYvhx aV5w2r0Zrq9zseVqCiswnQ== 0000916641-99-000334.txt : 19990416 0000916641-99-000334.hdr.sgml : 19990416 ACCESSION NUMBER: 0000916641-99-000334 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH MIDLAND CORP CENTRAL INDEX KEY: 0000924719 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE PRODUCTS, EXCEPT BLOCK & BRICK [3272] IRS NUMBER: 541727060 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-13752 FILM NUMBER: 99595167 BUSINESS ADDRESS: STREET 1: ROUTE 28 STREET 2: P O BOX 300 CITY: MIDLAND STATE: VA ZIP: 22728 BUSINESS PHONE: 5404393266 MAIL ADDRESS: STREET 2: P.O. BOX 300 CITY: MIDLAND STATE: VA ZIP: 22728 10KSB 1 SMITH-MIDLAND CORPORATION 10KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1998 Commission File Number 1-13752 SMITH-MIDLAND CORPORATION (Name of Small Business Issuer in its Charter) Delaware 54-1727060 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 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) Securities Registered Pursuant to Section 12(b) of the Exchange Act: Name of Each Exchange on Title of Each Class Which Registered - ------------------- ------------------------- Common Stock, $.01 par value per share Boston Stock Exchange Redeemable Common Stock Purchase Warrants Boston Stock Exchange Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 par value per share (Title of Class) Redeemable Common Stock Purchase Warrants (Title of Class) 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ___ The Issuer's net sales and revenues for its most recent fiscal year were $14,434,178. The aggregate market value of the shares of Common Stock, held by non-affiliates, based upon the average of the closing bid and asked prices for such stock on March 26, 1999, was approximately $1,787,808. As of March 26, 1999, the Company had outstanding 3,144,798 shares of Common Stock, $.01 par value per share. ii PART I FORWARD-LOOKING STATEMENTS This Annual Report and related documents include "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or operating) or achievements expressed or implied by such forward looking statements not to occur or be realized. Such forward looking statements generally are based upon the Company's best estimates of future results, performance or achievement, based upon current conditions and the most recent results of operations. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "continue," or similar terms, variations of those terms or the negative of those terms. Potential risks and uncertainties include, among other things, such factors as: o our high level of indebtedness and ability to satisfy the same, o our recent significant loss under a material contract, o our limited recent history of profitable operations and our recent significant loss for the three months ended December 31, 1998, resulting in a loss for the year, o the continued availability of financing in the amounts, at the times and on the terms required, to support our future business and capital projects, o the extent to which we are successful in developing, acquiring, licensing or securing patents for proprietary products, o changes in economic conditions specific to any one or more of our markets (such as the availability of public funds and grants for construction), o changes in general economic conditions (such as interest rate changes), o adverse weather which inhibits the demand for our products, o our compliance with governmental regulations, o the outcome of pending and future litigation, o unforeseen operational difficulties and financial losses due to year 2000 computer problems, o the possible delisting of our Common Stock from NASDAQ due to the continuing trading of the stock price below $1.00 per share and the decrease of our Net Tangible Assets below $2,000,000 and o the other factors and information disclosed and discussed in other sections of this report. Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3 ITEM 1. BUSINESS GENERAL Smith-Midland Corporation (the "Company") invents, develops, manufactures, markets, leases, licenses, sells, and installs a broad array of precast concrete products for use primarily in the construction, transportation and utilities industries. The Company's customers are primarily general contractors and federal, state and local transportation authorities located in the Mid-Atlantic and Northeastern regions of the United States. 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 Easi-Set(R) transportable concrete buildings, also patented. In addition, the Company produces other generic highway sound barriers, utility vaults, farm products such as cattleguards, and water and feed troughs, and custom order precast concrete products with various architectural surfaces. The Company was incorporated in Delaware on August 2, 1994. Prior to a corporate reorganization completed in October 1994, the Company conducted its business primarily through Smith-Midland Virginia, which was incorporated in 1960 as Smith Cattleguard Company, a Virginia corporation, and which subsequently changed its name to Smith-Midland Corporation in 1985. The Company's principal offices are located at Route 28, Midland, Virginia 22728 and its telephone number is (540) 439-3266. As used in this report, unless the context otherwise requires, the term the "Company" refers to Smith-Midland Corporation and its subsidiaries. MARKET The Company's market primarily consists of general contractors performing public and private construction contracts, including the construction of commercial buildings; public and private roads and highways; airports; municipal utilities; and federal, state, and local transportation authorities, primarily located in the Mid-Atlantic and Northeastern states. The Company also licenses its proprietary products to precast concrete manufacturers nationwide and in Puerto Rico, Canada, Belgium, and Spain. The Company, in conjunction with the establishment of its Slenderwall(TM) exterior cladding system, intends to expand the market in which it currently competes. The Company believes that the annual market for exterior cladding in the Mid-Atlantic and Northeast region is approximately $500 million and that the nationwide annual market for exterior cladding products exceeds $2 billion based upon information obtained by an independent third party. The precast concrete products market is affected by the cyclical nature of the construction industry. In addition, the demand for construction varies depending upon weather conditions, the availability of financing at reasonable interest rates, overall fluctuations in the national and regional economies, past overbuilding, labor relations in the construction industry, and the availability of material and energy supplies. A substantial portion of the Company's business is derived from local, state, and federal building projects, which are further dependent upon budgets and, in many cases, voter-approved bonds. 4 . PRODUCTS Precast concrete products are cast at a manufacturing facility and delivered to a site for installation, as contrasted to ready-mix concrete, which is produced in a "batch plant," put into a mixer truck where it is mixed thoroughly and delivered to a construction site to be poured and set at the site. Precast concrete products are used primarily as parts of buildings or highway structures, and may be used architecturally, as in a decorative wall of a building, or structurally. Structural uses include building walls, frames, floors, or roofs. The Company currently manufactures and sells a wide variety of products for use in the construction, transportation and utility industries. SLENDERWALL(TM) LIGHTWEIGHT CONSTRUCTION PANELS Each Slenderwall(TM) system is a prefabricated, energy-efficient, lightweight exterior cladding system that is offered as a cost-effective alternative to the traditional, piecemeal construction of the exterior walls of buildings. The Company's Slenderwall system combines the essential components of a wall system into a single unit ready for interior dry wall mounting immediately upon installation. The base design of each Slenderwall panel consists of a galvanized or stainless steel stud frame with an exterior sheath of approximately two-inch thick, steel-reinforced, high-density, precast concrete, with various available architectural surfaces. The exterior concrete sheath is attached to the interior frame by strategically placed epoxy coated steel connectors that suspend the exterior concrete approximately one-half inch away from the steel frame. Slenderwall panels are approximately one-half the weight of brick walls of equivalent size, permanence and durability. This lighter weight translates into reduced construction costs resulting from less onerous structural and foundation requirements as well as lower shipping costs. Additional savings result from Slenderwall's reduced installation time and ease of erection, and from the use of smaller cranes for installation. The Company custom designs and manufactures each Slenderwall exterior cladding system. The exterior of the Slenderwall systems can be produced in a variety of attractive architectural finishes, such as concrete, exposed stone, granite or thin brick. Management has received a positive reaction to Slenderwall systems in the marketplace for use in new construction and replacement projects because it is a cost-effective, efficient, and attractive wall system. As of March 26, 1999 the Company has a backlog for Slenderwall systems totaling approximately $900,000, compared to $2,343,000 at March 25, 1998. EASI-SET SIERRA WALL(TM) The Easi-Set Sierra Wall(TM)(the "Sierra Wall") combines the strength and durability of precast concrete with a variety of finishes to provide an effective and attractive sound and sight barrier for use around residential, industrial, and commercial properties and alongside highways. With additional reinforcement, the Sierra Wall can also be used as a retaining wall to retain earth in both highway and residential construction. The Sierra Wall is typically constructed of four inch thick, steel-reinforced concrete panels that are 5 securely joined at an integral column by a tongue and groove connection system. This tongue and groove connection system makes the Sierra Wall easy to install and move if boundaries change or highways are relocated after the completion of a project. The Company custom designs and manufactures each Sierra Wall to conform to the specifications provided by the contractor. The width, height, strength, and exterior finish of each wall varies depending on the terrain and application. In addition, the Company offers increased noise abatement benefits through the use of DuriSol(R), an optional, durable and patented sound-absorbing, material that can be cast onto the exterior of the Sierra Wall. In January 1996, the Company entered into a licensing agreement with DuriSol, Inc. of Ontario, Canada, ("DuriSol") permitting the Company to utilize the DuriSol(R) sound-absorbing technology until January 20, 1999. Under the Company's licensing agreement with DuriSol, the Company has an exclusive license to use DuriSol in Virginia and a right of first refusal for any new proprietary products developed by DuriSol. The Company pays a royalty to DuriSol equal to $.25 per square foot of product manufactured using DuriSol. Effective January 1, 1999, this agreement was extended for five years ending December 31, 2003. The Sierra Wall is used primarily for highway projects as a noise barrier as well as for residential purposes, such as privacy walls between homes, security walls or windbreaks, and for industrial or commercial purposes, such as to screen and protect shopping centers, industrial operations, institutions or highways. The variety of available finishes enables the Company to blend the Sierra Wall with local architecture, creating an attractive as well as functional barrier. EASI-SET J-J HOOKS(TM) HIGHWAY SAFETY BARRIER The Easi-Set J-J Hooks(TM) highway safety barrier (the "J-J Hooks Barrier") is a crash tested and patented, positively connected, safety barrier that the Company sells, rents, delivers, installs and licenses for use on roadways to separate lanes of traffic, either temporarily for construction work zone purposes or permanently for traffic control. Barriers are deemed to be positively connected when the connectors on each end of the barrier sections are interlocked with one another. The J-J Hooks Barriers interlock without the use of a separate locking device. The primary advantage of a positive connection is that a barrier with such a connection can withstand vehicle crashes at higher speeds without separating. The Federal Highway Administration (the "FHWA") now requiress that states use only positively connected barriers which meet NCHRP350 crash test requirements.. The proprietary feature of the J-J Hooks Barrier is the design of its positive connection. Protruding from each end of a J-J Hooks Barrier section is a fabricated bent steel connector, rolled in toward the end of the barrier (it resembles the letter "J" when viewed from directly above). The connector protruding from each end of the barrier is rolled identically so that when one end of a barrier faces the end of another, the resulting "hooks" face each other. To connect one section of a J-J Hooks Barrier to another, a contractor merely positions the hook of an elevated section of the barrier above the hook of a set section and lowers the elevated section into place. The positive connection is automatically engaged. 6 The Company believes that the J-J Hooks Barrier connection design is superior to those of earlier highway safety barriers that were positively connected through the "eye and pin" technique. Barriers incorporating this technique have eyes or rings protruding from each end of the barrier, which must be aligned during the setting process. Once set, a crew inserts pins through the eyes and bolts the barrier sections together. Compared to this technique, the J-J Hooks Barrier is easier and faster to install, and remove, requires a smaller crew and eliminates the need for loose hardware to make the connection. In November 1990, the FHWA approved the J-J Hooks Barrier for use on federally-aided highway projects following the successful completion of crash testing based on National Cooperative Highway Research Program criteria. The J-J Hooks Barrier has also been approved for use in state funded projects by 32 states, plus Washington, D.C. and Puerto Rico. The Company is in various stages of the application process in 17 states and believes that approval in most of the states will be granted; however no assurance can be given that approval will be received from any or all of the remaining states or that such approval will result in the J.J. Hooks Barrier being used in such states. In addition, the J-J Hooks Barrier has been approved by the appropriate authorities for use in the countries of Spain, Belgium, Germany and Chile. EASI-SET PRECAST BUILDING AND EASI-SPAN(TM) The Easi-Set Precast Building is a transportable, prefabricated, single-story, concrete utility building designed to be adaptable to a variety of uses ranging from housing communications operations, traffic control systems, mechanical and electrical stations, to inventory or supply storage, restroom facilities or kiosks. The Easi-Set Precast Building is available in a variety of exterior finishes and in five standard sizes, or it can be custom sized. The roof and floor of each Easi-Set Precast Building are manufactured using the Company's patented post-tensioned system, which helps seal the buildings against moisture. As a freestanding unit, the Easi-Set Precast Building requires no poured foundations or footings and can be easily installed within a few hours. After installation the building can be moved, if desired, and reinstalled in a new location. The Company recently introduced Easi-Span(TM), a line of expandable precast concrete buildings. Easi-Span(TM) is identical to and incorporates the technology of the Easi-Set Precast Building, but is available in larger sizes and, through its modular construction, can be combined in varied configurations to permit expansion capabilities. The Company has sold its Easi-Set and Easi-Span Precast Buildings for the following uses: o COMMUNICATIONS OPERATIONS -- to house fiber optics regenerators, switching stations and microwave transmission shelters, cellular phone sites, and cable television repeater stations. o GOVERNMENT APPLICATIONS -- to federal, state and local authorities for uses such as weather and pollution monitoring stations; military storage, housing and operations; park vending enclosures; rest rooms; kiosks; traffic control systems; school maintenance and athletic storage; airport lighting control and transmitter housing; and law enforcement evidence and ammunition storage. 7 o UTILITIES INSTALLATIONS -- for electrical switching stations and transformer housing, gas control shelters and valve enclosures, water and sewage pumping stations, and storage of contaminated substances or flammable materials which require spill containment. o COMMERCIAL AND INDUSTRIAL LOCATIONS -- for electrical and mechanical housing, cemetery maintenance storage, golf course vending enclosures, mechanical rooms, restrooms, emergency generator shelters, gate houses, automobile garages, hazardous materials storage, food or bottle storage, animal shelters, and range houses. EASI-SET UTILITY VAULT The Company produces a line of precast concrete underground utility vaults ranging in size from 36 to 702 cubic feet. Each Easi-Set utility vault normally comes with a manhole opening on the top for ingress and egress and openings around the perimeter, in accordance with the customer's specifications, to access water and gas pipes, electrical power lines, telecommunications cables, or other such media of transfer. The utility vaults may be used to house equipment such as cable, telephone or traffic signal equipment, and for underground storage. The Company also manufactures custom-built utility vaults for special needs. SOURCES OF SUPPLY All of the raw materials necessary for the manufacture of the Company's products are available from multiple sources. To date, the Company has not experienced significant delays in obtaining materials and believes that it will continue to be able to obtain required materials from a number of suppliers at commercially reasonable prices. LICENSING The Company presently grants licenses, through it's wholly-owned subsidiary Easi-Set Industries, for the manufacturing and distribution rights of certain proprietary products, such as the J-J Hooks Barrier and Easi-Set and Easi-Span Precast Buildings, and certain non-proprietary products, such as the Company's cattleguards, and water and feed troughs. Generally, licenses are granted for defined geographic regions, and depending on the size, character and location of the territory granted, the Company receives an initial one-time license acquisition and training fee ranging from approximately $20,000 to $50,000. License royalties vary depending on the product licensed, but the range is typically between 4% to 6% of the sales of the licensed product. In addition, Easi-Set Precast Building licensees normally pay the Company a flat monthly fee for co-op advertising and promotion programs through which the Company produces and distributes advertising materials and promotes the licensed products. The Company has entered into 25 licensing agreements in the United States, and has established at least one licensee in each of Puerto Rico, Canada, Belgium and Spain and sub-licensees in Chile. 8 The Company is currently negotiating several new license arrangements and, although no assurance can be given, expects to increase its licensing activities. In addition, the Company is developing a licensing program for its Slenderwall exterior cladding system. MARKETING AND SALES The Company uses an in-house sales force and, to a lesser extent, independent sales representatives to market its precast concrete products through trade show attendance, sales presentations, advertisements in trade publications, and direct mail to end users. The Company has also established a cooperative advertising program in which the Company and its Easi-Set and Easi-Span licensees combine resources to promote certain precast concrete products. Licensees pay a flat monthly fee and the Company pays any additional amounts required to advertise the products across the country. Although the Company advertises nationally, the Company's marketing efforts are concentrated on the region within a 250 mile radius from its facilities, which includes most of Virginia, Delaware, Maryland, North Carolina, South Carolina, and parts of Pennsylvania, New York, New Jersey and West Virginia. The Company's sales result primarily from the submission of estimates or proposals to general contractors who then include the estimates in their overall bids to various government agencies, and other end users that solicit construction contracts through a competitive bidding process. In general, these contractors solicit and obtain their construction contracts by submitting the most attractive bid to the party desiring the construction. The Company's role in the bidding process is to provide estimates to the contractors desiring to include the Company's products or services in the contractor's bid. If a contractor who accepts the Company's bid is selected to perform the construction, the Company provides the agreed upon products or services. In many instances, the Company provides estimates to more than one of the contractors bidding on a single project. The Company occasionally negotiates with and sells directly to end users. COMPETITION The precast concrete industry is highly competitive and consists of a few large companies and many small to mid-size companies, several of which have substantially greater financial and other resources than the Company. Nationally, the precast concrete market is dominated by several large companies. However, due to the weight and costs of delivery of precast concrete products, competition in the industry tends to be limited by geographical location and distance from the construction site and is fragmented with numerous manufacturers in a large local area. The Company believes that the principal competitive factors for its products are price, durability, ease of use and installation, speed of manufacture and delivery time, ability to customize, FHWA and state approval, and customer service. The Company believes that its plants in both Midland, Virginia and Reidsville, North Carolina compete favorably with respect to each of these factors in the Northeast and Mid-Atlantic regions of the United States. Finally, the Company believes it offers a broad range of products that are unique and technologically superior to competing products. 9 PATENTS AND PROPRIETARY INFORMATION The Company holds U.S. and Canadian patents for the J-J Hooks Barrier and the Easi-Set Precast Building, and a U.S. patent for the Slenderwall exterior cladding system. The European patent for J-J Hooks Barrier was allowed in December 1997 and has been registered in eleven European countries. The earliest of the issued patents considered material to the Company's business expires in 2001 and a new patent was allowed March 2, 1999 which expires in 2017. The Company also owns three U.S. registered trademarks (Easi-Set with logo symbol (R), Smith Cattleguard(R), and Smith-Midland Excellence in Precast Concrete(R)), one Canadian registered trademark (Easi-Set(R)) and licenses the rights to another (DuriSol(R)). The Company licenses the technology used in DuriSol(R) products pursuant to an agreement that expires on December 31, 2003. While the Company intends to vigorously enforce its patent rights against infringement by third parties, no assurance can be given that the patents or the Company's patent rights will be enforceable or provide the Company with meaningful protection from competitors or that its patent applications will be allowed. Even if a competitor's products were to infringe patents held by the Company, enforcing the patent rights in an enforcement action would be very costly, and would divert funds and resources that otherwise could be used in the Company's operations. No assurance can be given that the Company would be successful in enforcing such rights, that the Company's products or processes do not infringe the patent or intellectual property rights of a third party, or that if the Company is not successful in a suit involving patents or other intellectual property rights of a third party, that a license for such technology would be available on commercially reasonable terms, if at all. GOVERNMENT REGULATION The Company frequently supplies products and services pursuant to agreements with general contractors who have entered into contracts with federal or state governmental agencies. The successful completion of the Company's obligations under such contracts is often subject to the satisfactory inspection or approval of such products and services by a representative of the contracting agency. Although the Company endeavors to satisfy the requirements of each such contract to which it is a party, no assurance can be given that the necessary approval of its products and services will be granted on a timely basis or at all and that the Company will receive any payments due to it. Any failure to obtain such approval and payment may have a material adverse effect on the Company's business. The Company's operations are subject to extensive and stringent governmental regulations including regulations related to the Occupational Safety and Health Act (OSHA) and environmental protection. The Company believes that it is substantially in compliance with all applicable regulations. The cost of maintaining such compliance is not considered by the Company to be significant. The Company's employees in its manufacturing division operate complicated machinery that may cause substantial injury or death upon malfunction or improper operation. The Company's manufacturing facilities are subject to the workplace safety rules and regulations of OSHA. The Company believes that it is in compliance with the requirements of OSHA. 10 During the normal course of its operations, the Company uses and disposes of materials, such as solvents and lubricants used in equipment maintenance, that are classified as hazardous by government agencies that regulate environmental quality. The Company attempts to minimize the generation of such waste as much as possible, and to recycle such waste where possible. Remaining wastes are disposed of in permitted disposal sites in accordance with applicable regulations. A Phase I Environmental Site Assessment of the Company's Midland facility was completed in January, 1997. Only two minor recommendations were made as a result of the survey. These were addressed and corrected. In the event that the Company is unable to comply with the OSHA or environmental requirements, the Company could be subject to substantial sanctions, including restrictions on its business operations, monetary liability and criminal sanctions, any of which could have a material adverse effect upon the Company's business. EMPLOYEES As of March 26, 1999, the Company had 136 full-time and 5 part-time employees, 114 of which are located at the Company's Midland facility, and 27 of which are located at the Company's facility located in Reidsville, North Carolina. Of the 141 employees, 8 are executive officers or managers, 7 are responsible for sales and marketing, 114 are in manufacturing, and 12 are administrative personnel. None of the Company's employees is represented by labor organizations and the Company is not aware of any activities seeking such organization. The Company considers its relationships with its employees to be satisfactory. ITEM 2. DESCRIPTION OF PROPERTIES FACILITIES The Company operates two manufacturing facilities. The primary manufacturing operations are conducted in a 44,000 square foot manufacturing plant on approximately 22 acres of land in Midland, Virginia, of which approximately 19 acres are owned by the Company and three acres are leased from Rodney I. Smith, the Company's President, at an annual rental rate of $6,000. This area houses two concrete mixers, and one concrete blender. The plant also includes two evironmentally controlled casting areas two batch plants, a form fabrication shop, a welding and metal fabrication facility, a carpentry shop, and a quality control center. The Company's Midland facility also includes a large storage yard for inventory and stored materials. The Company completed a 16,000 square foot manufacturing building on its Midland property during the first quarter of 1999 and, in view of the additional capacity, discontinued performing a portion of its concrete pouring and curing processes on uncovered, outdoor manufacturing areas. Such outdoor processing was adversely affected by wet or cold weather and bringing these operations under roof significantly increased production capacity and efficiency. In addition, the Company carries out administration, research and development, sales and marketing, and licensing operations in a 4,500 square 11 foot office building located on its Midland property. The Company also owns 19 acres of undeveloped industrial property in Midland, not adjacent to the manufacturing facility. The Company's second manufacturing facility is located in Reidsville, North Carolina on five acres of owned land and includes an 8,000 square foot manufacturing plant and administrative offices. The Company believes that its present facilities are adequate for its current needs. Substantially all of the Company's facilities and equipment were used as collateral for a $4,000,000 twenty three year note which resulted from a restructuring of the Company's debt in June 1998 (see Liquidity and Capital Resources). ITEM 3. 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. (See footnote six in the accompanying consolidated financial statements). 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998, through the solicitation of proxies or otherwise. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "SMID" and on the Boston Stock Exchange ("BSE") under the symbol "SMC" since December 13, 1995. As of March 26, 1999, there were approximately 65 record holders of the Company's Common Stock. Management believes there are approximately 500 beneficial owners of the Company's Common Stock. The following table sets forth the high and low sale prices for the Company's Common Stock as reported by NASDAQ for the periods indicated. Such quotations represent interdealer quotations without adjustment for retail markups, markdowns or commissions and may not represent actual transactions. Sale High Low 1997 First Quarter $ 2 1/8 $ 15/16 Second Quarter $ 1 3/8 $ 11/16 Third Quarter $ 1 1/2 $ 9/16 Fourth Quarter $ 1 3/6 $ 3/4 1998 First Quarter $ 1 11/16 $ 3/4 Second Quarter $ 1 11/16 $ 1 Third Quarter $ 1 1/4 $ 1 1/16 Fourth Quarter $ 1 1/16 $ 5/8 The Company has recently been notified by NASDAQ that its securities are currently being reviewed for compliance with the Nasdaq SmallCap Market eligibility requirements. As of March 26, 1999, the Company was not in compliance with all current applicable requirements and the Company believes that it will have difficulty meeting all the current requirements. In particular, the minimum bid price ($1) requirement and the net asset requirement (minimum of $2,000,000) are not currently being met. By June 2, 1999, the Company must either meet such requirements or request a hearing (which will stay delisting beyond June 2, 1999). DIVIDENDS The Company has not paid dividends on its Common Stock since its inception and has no intention of paying any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. The Company's current loan agreement with First International Bank prohibits the payment of dividends to stockholders without the bank's prior written consent, except for dividends paid in shares of the Company's Common Stock. 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this report. 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 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 food 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"). This project, which is expected to be completed in mid-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 $1.2 million and estimates that the total loss on the job before recovery on any claims by the Company will be approximately $1.0 million, which loss has been accrued in its entirety as of December 31, 1998. In 1999, the Company plans to file claims, for which notification had been made, in the amount of $1.2 million. As of December 31, 1998, $400,000 of the contract claim has been included in sales and accounts receivable. There can be no assurance that the loss will not exceed the $1.1 million estimate or that the Company will be able to collect any of its claim. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 The Company's operations for 1998 resulted in a loss of $(783,883), or $(0.26) per share, representing a decrease in net income of $(1,047,686) when compared to net income in 1997 of $263,803, or $0.09 per share. For 1998, the Company had total revenue of $14,434,178 compared to total revenue of $12,004,897 in 1997, an increase of $2,429,281, or 20%. Total product sales increased 23% to $12,415,252 in 1998, compared to $10,102,121 in 1997. 14 This increase in product sales is primarily attributed to a change in product mix to a higher percentage of Slenderwall and other architectural products, which are higher priced products, and to volume increases. Unit prices have not changed significantly. Shipping and installation revenue increased to $2,018,926 in 1998 from $1,902,776 in 1997, an increase of $116,150, or 6%, primarily attributed to an increase in the number and size of installation contracts. Royalty revenue increased slightly from $262,257 in 1997 to $264,178 in 1998. The increase was principally attributed to an increase in royalty fees earned on production of Easi-Set(R) precast buildings. Total cost of goods sold for 1998 was $12,015,760 compared to $9,090,998 in 1997, an increase of $2,924,762. Total cost of goods sold as a percentage of total revenue increased from 76% in 1997 to 83% in 1998. The percentage increase was primarily attributed to cost overruns on the Bradley Hall project (see "General" in this Section). General and administrative expenses increased $321,428, or 17%, to $2,236,938 in 1998 from $1,915,510 in 1997. The increase was primarily the result of an increase in expenses relating to increased costs of hiring and relocation of staff, professional fees and an increase in the provisions for bad debts. Selling and marketing expenses in 1998 were comparable to 1997. Selling and marketing expenses totaled $678,871 in 1998 compared with $680,489 in 1997. Interest expense and loan fees increased to $541,161 in 1998 from $372,118 in 1997, an increase of $169,043, or 45%. The increase was primarily due to two factors related to the Company's debt refinancing in 1998 (see "Liquidity and Capital Resources"). First, the Company incurred expense as a result of the early retirement of several capital leases. Second, the Company increased its total debt outstanding by approximately $1.6 million during 1998. These two factors were offset, somewhat, by a reduction in the Company's weighted average interest rate on its debt outstanding. As a result of cumulative net operating loss ("NOL") carryforwards of approximately $2,750,000 available to the Company as of January 1, 1998, no income tax expense was recorded for 1998. The Company does not expect to incur income tax expense for 1999 due to the NOL carryforwards. 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 $4,698,461 of indebtedness at December 31, 1998, of which $573,104 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, headquartered in Hartford, Connecticut. 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 dramatically improved the Company's current debt ratio and debt service. Current debt decreased from 15 $2,199,228 at December 31, 1997 to $573,104 at December 31, 1998. In addition to paying off existing 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. The loan is guaranteed in part by the U.S. Department of Agriculture Rural Business-Cooperative Service's loan guarantee. 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 and which was originally scheduled to terminate on May 1, 1999, was recently extended for sixty days. The Company expects to refinance, extend and/or term the line of credit upon its extended maturity date. At December 31, 1998, the Company had cash totaling $207,661 and restricted cash balances in the amount of $387,462, compared to total cash of $288,310 and restricted cash in the amount of $196,977, at December 31, 1997. During 1998, the Company used $284,756 in cash (net) to fund its operating activities and $1,229,604 in its investing activities, primarily for the funding of a 16,000 square foot plant addition (see "Item 2. Description of Properties - Facilities"). The Company's financing activities provided $1,624,196 primarily as a result of the refinancing discussed above. Capital spending increased to $1,237,689 in 1998, from $524,232 in 1997, as the Company implemented programs to improve manufacturing efficiencies as well as overall plant capacity and yard storage capacity. Planned capital expenditures for 1999 are limited, as stated above, by the FIB loan agreement. Approximately $387,000 of restricted cash was held at December 31, 1998 for construction and equipment expenditures. The majority of the restricted funds were used early in 1999 to complete the new production facility (see "Item 2. Description of Properties - Facilities"). No other significant cash committments are expected in 1999. As a result of the Company's debt burden, the Company is especially sensitive to changes in the prevailing interest rates. Increases 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. Management intends to refinance this debt as it becomes due. Although management has shown the ability to refinance and/or extend its debt in prior years, no assurance can be given that the Company will be successful in its efforts to extend or refinance its current indebtedness should that become necessary, or that if it is successful in those efforts, that such extension or refinancing will be on terms favorable to the Company. If the Company is not able to extend or refinance the indebtedness, the Company may be subject to having its assets foreclosed upon by certain lenders which would have a material adverse effect on the Company's business. 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 before it receives payment. In addition, the Company's cash flow has been significantly effected by the loss on the Bradley Hall project. Although no assurance can be given, the Company believes that anticipated cash flow from operations and existing credit facilities will be sufficient to finance the Company's operations for at least the next 12 months. 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 short-term financing, for which there can be no assurance of obtaining. 16 The Company has formed a team to address the affect of the year 2000 on the Company's systems and operations. The Company expects that 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 plans to be fully Y2K compliant by the fourth quarter of 1999. SEASONALITY 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 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 failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company. INFLATION To date, management believes that the Company's operations have not been materially affected by inflation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, The Financial Accounting Standards Board issued Statement of financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Presently the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. 17 ITEM 7. FINANCIAL STATEMENTS The following financial statements are filed as part of this report:
Page Report of Independent Certified Public Accountants............................. F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997................... F-3 Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 ......... ....................................................F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998 and 1997..................................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 ............................................................... F-7 Summary of Significant Accounting Policies..................................... F-9 Notes to Consolidated Financial Statements .................................... F-12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 18 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTOR OR EXECUTIVE NAME AGE OFFICER SINCE POSITION Rodney I. Smith 60 1970 Chief Executive Officer, President And Chairman of the Board of Directors Ashley B. Smith 36 1994 Vice President of Sales and Marketing and Director Wesley A. Taylor 51 1994 Vice President of Administration and Director Andrew Kavounis 73 1995 Director Theodore D. Pennington 61 1998 Vice President, Finance and Chief Financial Officer
BACKGROUND The following is a brief summary of the background of each Director and executive officer of the Company: RODNEY I. SMITH. CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER AND PRESIDENT. Rodney I. Smith co-founded the Company in 1960 and became its President and Chief Executive Officer in 1965. He has served on the Board of Directors and has been its Chairman since 1970. Mr. Smith is the principal developer and inventor of the Company's proprietary and patented products. Mr. Smith is the past President of the National Precast Concrete Association. Mr. Smith has served on the Board of Trustees of Bridgewater College in Bridgewater, Virginia, since 1986. ASHLEY B. SMITH. VICE PRESIDENT OF SALES AND MARKETING AND DIRECTOR. Ashley B. Smith has served as Vice President of Sales and Marketing of the Company since 1990 and as a Director since December 1994. Mr. Smith holds a Bachelor of Science degree in Business Administration from Bridgewater College. Mr. Ashley B. Smith is the son of Mr. Rodney I. Smith. WESLEY A. TAYLOR. VICE PRESIDENT OF ADMINISTRATION AND DIRECTOR. Wesley A. Taylor has served as Vice President of Administration of the Company since 1989 and as a Director since December 1994, and previously held positions as Controller and Director of Personnel and Administration. Mr. Taylor holds a Bachelor of Arts degree from Northwestern State University. 19 ANDREW KAVOUNIS. DIRECTOR. Andrew Kavounis has served as a Director of the Company since December 1995. Mr. Kavounis was President of Core Development Co., Inc., a privately held construction and development concern from 1991 until he retired in 1995. From 1989 to 1991, Mr. Kavounis was the Executive Vice President of the Leadership Group, a Maryland based builder and developer. Prior to that time, Mr. Kavounis spent 37 years as an executive at assorted construction and development companies, which included a position as the National Vice President of Ryland Homes, a privately held company, in which capacity he was directly responsible for the construction of 17,000 homes annually, nationwide. Mr. Kavounis received a Bachelor of Science degree in Chemical Engineering from Presbyterian College, a Bachelor of Science degree in Civil and Mechanical Engineering from Wofford College, and a Master's degree in Business Administration from the University of South Carolina. THEODORE D. PENNINGTON. VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER. Mr. Pennington has served as Vice President, Finance and Chief Financial Officer of the Company since September 1998. Prior to joining the Company, Mr. Pennington was a financial consultant serving clients in the telecommunications and financial services industries. From September 1996 through December 1997, Mr. Pennington was Vice President, Finance and Administration, Chief Financial Officer and Secretary for Codon Pharmaceuticals Corporation. Mr. Pennington also served as Vice President, Finance and Administration for Cryomedical Sciences, Inc. from 1990 through 1995 and as Secretary from 1992 through 1995. Mr. Pennington holds a Master of Business Administration degree in finance from the University of Hartford, a Master of Business Administration Degree in industrial management from the Wharton School of the University of Pennsylvania, and a Bachelor of Science Degree in mechanical engineering from Lafayette College SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires executive officers and Directors and persons who beneficially own more than ten percent (10%) of the Company's Common Stock to file initial reports of ownership on Form 3 and reports of changes in ownership on Form 4 with the Securities and Exchange Commission (the "Commission") and any national securities exchange on which the Corporation's securities are registered. Executive officers, Directors and greater than ten percent (10%) beneficial owners are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the executive officers and Directors, the Company believes that all Section 16(a) filing requirements applicable to its executive officers, Directors and greater than ten per cent (10%) beneficial owners were satisfied, except for the Form 3 and Form 4 filings due for the following transactions, which filings are currently being prepared: Form 4 for Andrew Kavounis for the Nov. 5, 1997 grant of non-qualified stock options, Form 4 for Bernard Patriacca for the Nov. 5, 1997 grant of non-qualified stock options, Form 4 for Rodney I. Smith for the July 31, 1998 grant of non-qualified stock options, 20 Form 4 for Rodney I. Smith for the August 4, 1998 grant of non-qualified stock options, Form 4 for Ashley Smith for the November 5, 1997 grant of incentive stock options, Form 4 for Ashley Smith for the August 4, 1998 grant of incentive stock options, Form 4 for Wesley A. Taylor for the November 5, 1997 grant of incentive stock options, Form 4 for Wesley A. Taylor for the August 4, 1998 grant of incentive stock options, Form 3 for Thomas Deserable due upon appointment as Chief Operating Officer of Smith-Midland Virginia and for the August 4, 1998 grant of incentive stock options. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth the compensation paid by the Company for services rendered for the last three completed fiscal years to the executive officers of the Company and its subsidiaries whose cash compensation exceeded $100,000 during 1998:
- --------------------- ------------------------------------- ------------------------------------- Annual Compensation Long Term Compensation - --------------------- ------------------------------------- ------------------------------------- - --------------------- ------------------------------------- ------------------ ------------------ Awards Payouts - --------------------- ------------------------------------- ------------------ ------------------ - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- (a) (b) (c) (d) (e) (f) (g) (h) (i) - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- Securities Other Under- All Name and Annual Restricted lying Other Principal Compen- Stock Options/ LTIP Compen- Position Year Salary Bonus sation Awards SARs Payouts sation $ $ $ $ (#) $ $ - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- Rodney I. Smith 1998 175,000 54,500 - - 20,000 - - President, Chief 1997 170,503 81,500 - - - - - Executive Officer 1996 175,000 - - - - - - and Chairman of the Board. - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- - --------------------- --------- -------- --------- -------- --------- -------- --------- -------- Thomas J. Deserable 1998 45,867 - 65,508(1) - 2,000 - - Former Chief 1997 - - - - - - - Operating Officer, 1996 - - - - - - - Smith-Midland Corporation (Virginia) through 3/16/99 - --------------------- --------- -------- --------- -------- --------- -------- --------- --------
(1) Mr. Deserable received $65,508 in consulting fees prior to commencing employment as Chief Operating Officer of Smith-Midland Corporation (Virginia), the primary subsidiary of the Company. COMPENSATION OF DIRECTORS All non-employee Directors receive $500 per meeting as compensation for their services as Directors and are reimbursed for expenses incurred in connection with the performance of their duties. All employee Directors, except Rodney I Smith, receive $250 per meeting as compensation for their services and are reimbursed for expenses incurred in connection with the performance of their duties. Rodney I. Smith receives no compensation as a Director. 21 OPTION GRANTS IN LAST FISCAL YEAR The following table summarizes option grants during 1998 to the named executive officers:
Number of % of Total Securities Options Underlying Granted to Exercise Options Employees in or Base Expiration Name Granted (#) Fiscal Year Price ($/Sh) Date ---- ----------- -------------- ------------- ----------- Rodney I. Smith........... 20,000 32.27% 1.00 7/31/06 Thomas J. Deserable...... 2,000 3.23% 1.00 7/31/06
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
Number of Shares Shares Underlying Value of Unexercised Acquired Unexercised Options In-the-Money Options on Value at Fiscal Year End (#) at Fiscal Year-End ($)(1) Exercise Realized ------------------------ -------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ---- --------- -------- --------------------------- ---------------------------- Rodney I. Smith........ --- --- 0 20,000 0 --- Thomas J. Deserable.... --- --- 0 2,000 0 --- - --------
(1) Value is based on the closing sales price of the Company's Common Stock on December 31, 1998 ($1.00), the last trading day of 1998, less the option exercise price ($1.00). EMPLOYMENT AGREEMENT The Company has entered into an employment agreement with Mr. Rodney I. Smith, which provides for an annual base salary of $175,000. The present term of the agreement continues until December 31, 1999, and is thereafter automatically renewed for successive one year periods unless Mr. Smith or the Company gives the other party three months prior written notice of non-renewal. Bonuses and salary increases may be granted by the Compensation Committee of the Board of Directors, as it so determines from time to time. Mr. Smith has voluntarily reduced his annual base salary by 22.5% to $135,625 temporarily, effective March 8, 1999. Mr. Smith also is entitled to receive benefits offered to the Company's employees generally. If terminated without cause, Mr. Smith is entitled to receive as severance pay an amount equal to twenty-four (24) months of his base salary, less taxes, other required withholdings and any amounts owed to the Company, payable in accordance with the Company's standard payroll procedures. In addition, the employment agreement precludes Mr. Smith from competing with the Company during his employment and for at least one year thereafter, and from disclosing confidential information. The Company is the owner of and the beneficiary of three key person life insurance policies on Mr. Smith totaling $1,400,000. 22 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of March 26, 1998, certain information concerning ownership of the Company's Common Stock by (i) each person known by the Company to own of record or be the beneficial owner of more than five percent (5%) of the Company's Common Stock, (ii) each of the Company's Directors and Executive Officers, and (iii) all Directors and Executive Officers as a group. Except as otherwise indicated, the Stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. NUMBER OF SHARES NAME AND ADDRESS OF PERCENTAGE OF PERCENTAGE BENEFICIAL OWNER(1) BENEFICALLY OWNED(2) OF CLASS - ------------------- -------------------- ----------- Rodney I. Smith (3)(4)(5) 843,298 27.70 Robert M. Rubin (6) 230,000 7.55 Ashley B. Smith (3)(4)(7) 94,717 3.11 Wesley A. Taylor (8) 4,700 * Andrew Kavounis (9) 2,000 * Theodore D. Pennington 1,000 * All directors and executive officers as a group (5 persons) (2)(3)(4)(5)(6)(7)(8)(9) 945,715 30.94 - ---------------------------------- * Less than 1% (1) The address for each of Messrs. Rodney I. Smith, Ashley B. Smith, Taylor, Kavounis, and Pennington is c/o Smith-Midland Corporation, P.O. Box 300, 5119 Catlett Road, Midland, Virginia 22728. The address for Mr. Rubin is 6060 Kings Gate Circle, Dealany Beach, Florida 33486. (2) Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of Common Stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. (3) Rodney I. Smith and Ashley B. Smith are father and son, respectively. Each of Rodney I. Smith and Ashley B. Smith disclaims beneficial ownership of the other's shares of Common Stock. (4) Does not include an aggregate of 98,958 shares of Common Stock held by Jeremy Smith, Matthew Smith, and Roderick Smith, sons of Rodney I. Smith, and brothers of Ashley B. Smith, and 112,713 shares held by Merry Robin Bachetti, sister of Rodney I. Smith and aunt of Ashley B. Smith, for which each of Rodney I. Smith and Ashley B. Smith disclaims beneficial ownership. 23 (5) Includes the 100,000 shares of Common Stock that have been deposited into an irrevocable trust (the "Trust") for the benefit of Hazel Smith, the income beneficiary of the Trust and former wife of Rodney I. Smith, and Mr. Smith's children. Mr. Smith is the trustee of the Trust and, as such, may vote the shares as he deems fit. Includes the 230,000 shares of Common Stock held by Mr. Robert M. Rubin which Mr. Smith holds an irrevocable proxy to vote as Mr. Smith deems fit, subject to certain limitations. This proxy expires on the first to occur of (i) ten years from the date of the proxy or (ii) the sale by Mr. Rubin of the shares of Common Stock subject to the proxy. The 230,000 shares of Common Stock held by Mr. Rubin were accounted for in calculating both Mr. Smith's and Mr. Rubin's beneficial ownership. (6) Mr. Rodney I. Smith holds an irrevocable proxy to vote the 230,000 shares of Common Stock held by Mr. Rubin. This proxy expires on the first to occur of (i) ten years from the date of the proxy or (ii) the sale by Mr. Rubin of the shares of Common Stock subject to the proxy. The 230,000 shares of Common Stock held by Mr. Rubin were accounted for in calculating both Mr. Smith's and Mr. Rubin's beneficial ownership. (7) Includes options to purchase 5,100 shares of Common Stock of the C Company exercisable at $1.00 per share. (8) Includes options to purchase 4,700 shares of Common Stock of the Company exercisable at $1.00 per share. (9) Includes options to purchase 2,000 shares of Common Stock of the Company exercisable at $1.00 per share. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. At December 31, 1998, the Company owned an unsecured note for approximately $624,387 receivable from Mr. Rodney I. Smith, the Company's President and majority shareholder, with a seven year term accruing interest at a rate of 6% per annum. During 1996, $102,300 of the note was reduced for the Company's purchase of 40,920 common shares from Mr. Smith. On December 31, 1997, the terms of the note were changed to call for annual payments of $45,948 beginning on December 31, 1998 and continuing through maturity on December 31, 2002. Total interest income on this note was approximately $37,600 and $39,500 for the years ended December 31, 1998 and 1997, respectively. 24 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS. (1) The following exhibits are filed herewith: Exhibit No. - ------- 27 Financial Data Schedule (2) The following exhibits were filed as part of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998 and are incorporated herein by reference: Exhibit No. Title - ------- ----- 1 First National Bank of New England Loan Agreement 2 First National Bank of New England Loan Note (3) The following exhibits were filed as part of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997and are incorporated herein by reference:. Exhibit No. Title - ------- ----- 10c Promissory Note from Rodney I. Smith to the Company, dated as of December 31, 1997. (4) The following exhibits were filed as part of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 and are incorporated herein by reference. 25 Exhibit No. Title - ------- ----- 10a License Agreement by and between the Company and DuriSol, Inc., dated January 22, 1996. 21 List of Subsidiaries of the Company. (5) The following exhibits were filed as part of the Company's Form SB-2 Registration Statement (No. 33-89312) declared effective by the Commission on December 13, 1995 and are incorporated herein by reference: Exhibit No. Title - ------- ----- 3a Certificate of Incorporation, as amended. 3b Bylaws, as amended. 4b Specimen Common Stock Certificate. 4c Form of Public Warrant Agreement, including Specimen Redeemable Common Stock Purchase Warrant. 4d Form of Warrant Agreement between the Company, Network 1 Financial Securities Inc. and First Hanover Securities, Inc., including Form of Underwriter's Warrant Certificate. 10a Employment Agreement between the Company and Rodney I. Smith. 10r Lease Agreement between the Company and Rodney I. Smith. 10t Collateral Assignment of Letters Patent between the Company and Rodney I. Smith. 10u Form of License Agreement between the Company and its Licensee. 10w 1994 Stock Option Plan. (B) REPORTS ON FORM 8-K The Company did not file any Current Reports on Form 8-K during the fourth quarter of 1998. 26 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SMITH-MIDLAND CORPORATION Date: April 14, 1999 By: /s/ Rodney I. Smith -------------------------- Rodney I. Smith, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Name Capacity Date - ---- -------- ---- /s/ Rodney I. Smith Chairman of the Board, April 14, 1999 - --------------------- Chief Executive Officer Rodney I. Smith and President (principal executive officer) /s/ Theodore D. Pennington Vice President, Finance April 14, 1999 - -------------------------- and Chief Financial Theodore D. Pennington Officer(principal finance and accounting officer) /s/ Wes Taylor Vice President of April 14, 1999 - --------------- Administration and Wes Taylor Director /s/ Ashley Smith Vice President of Sales April 14, 1999 - ---------------- and Marketing and Director Ashley Smith /s/ Andrew Kavounis Director April 14, 1999 - ------------------- Andrew Kavounis 27 Smith-Midland Corporation and Subsidiaries Consolidated Financial Statements Years Ended December 31, 1998 and 1997 Smith-Midland Corporation and Subsidiaries Contents Report of Independent Certified Public Accountants F - 2 Consolidated Financial Statements Balance Sheets F - 3 Statements of Operations F - 5 Statements of Stockholders' Equity F - 6 Statements of Cash Flows F - 7 Summary of Significant Accounting Policies F - 9 Notes to Financial Statements F - 12 F-1 Report of Independent Certified Public Accountants To the Board of Directors Smith-Midland Corporation Midland, Virginia We have audited the accompanying consolidated balance sheets of Smith-Midland Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Smith-Midland Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Richmond, Virginia April 12, 1999 F-2 December 31, 1998 1997 - -------------------------------------------------------------------------------- Assets (Note 2) Current assets Cash $ 207,661 $ 288,310 Accounts receivable (Note 6) Trade - billed, (less allowance for doubtful accounts of $262,000 - 1998 and $231,000 - 1997) 3,824,012 3,254,993 Trade - unbilled 199,108 410,158 Inventories Raw materials 522,468 486,583 Finished goods 989,745 942,427 Prepaid expenses and other assets 116,034 69,801 - -------------------------------------------------------------------------------- Total current assets 5,859,028 5,452,272 - -------------------------------------------------------------------------------- Property and equipment, net (Notes 1 and 2) 2,449,566 1,531,062 - -------------------------------------------------------------------------------- Other assets Cash - restricted (Notes 2 and 6) 387,462 196,977 Note receivable, officer (Note 3) 624,387 632,472 Other 246,058 79,443 - -------------------------------------------------------------------------------- Total other assets 1,257,907 908,892 - -------------------------------------------------------------------------------- $9,566,501 $7,892,226 ================================================================================ F-3 Smith-Midland Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1998 1997 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Current maturities of notes payable (Note 2) $ 573,104 $2,199,228 Accounts payable - trade 2,177,884 1,744,127 Accrued expenses and other liabilities (Note 6) 1,115,118 570,693 Customer deposits 306,255 450,474 - -------------------------------------------------------------------------------- Total current liabilities 4,172,361 4,964,522 Notes payable - less current maturities (Note 2) 4,020,661 759,440 Notes payable - related parties (Note 3) 104,696 115,598 - -------------------------------------------------------------------------------- Total liabilities 8,297,718 5,839,560 - -------------------------------------------------------------------------------- Commitments and contingencies (Notes 5 and 6) - -------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $.01 par value; authorized 1,000,000 shares, none outstanding - - Common stock, $.01 par value; authorized 8,000,000 shares; 3,085,718 issued, 3,044,798 outstanding 30,857 30,857 Additional capital 3,450,085 3,450,085 Accumulated deficit (2,109,859) (1,325,976) - -------------------------------------------------------------------------------- 1,371,083 2,154,966 Treasury stock, at cost, 40,920 shares (102,300) (102,300) - -------------------------------------------------------------------------------- Total stockholders' equity 1,268,783 2,052,666 - -------------------------------------------------------------------------------- $9,566,501 $7,892,226 ================================================================================ See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-4 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Operations Year Ended December 31, 1998 1997 - -------------------------------------------------------------------------------- Revenue $14,434,178 $12,004,897 Cost of goods sold 12,015,760 9,090,998 - -------------------------------------------------------------------------------- Gross profit 2,418,418 2,913,899 - -------------------------------------------------------------------------------- Operating expenses General and administrative expenses 2,236,938 1,915,510 Selling expenses 678,871 680,489 - -------------------------------------------------------------------------------- Total operating expenses 2,915,809 2,595,999 - -------------------------------------------------------------------------------- Operating income (loss) (497,391) 317,900 - -------------------------------------------------------------------------------- Other income (expense) Royalties 264,178 262,257 Interest expense and loan fees (541,161) (372,118) Interest income (Note 3) 63,616 45,795 Other, net (73,125) 9,969 - -------------------------------------------------------------------------------- Total other income (expense) (286,492) (54,097) - -------------------------------------------------------------------------------- Net income (loss) $ (783,883) $ 263,803 ================================================================================ Basic and diluted income (loss) per share $ (.26) $ .09 ================================================================================ Weighted average common shares outstanding 3,044,798 3,044,798 ================================================================================ See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-5 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity
Additional Common Paid-In Accumulated Treasury Stock Capital Deficit Stock Total - ------------------------------------------------------------------------------------------- Balance, December 31, 1996 $30,857 $3,450,085 $(1,589,779) $(102,300) $1,788,863 Net income - - 263,803 - 263,803 - ------------------------------------------------------------------------------------------- Balance, December 31, 1997 30,857 3,450,085 (1,325,976) (102,300) 2,052,666 Net loss - - (783,883) - (783,883) - ------------------------------------------------------------------------------------------- Balance, December 31, 1998 $30,857 $3,450,085 $(2,109,859) $(102,300) $1,268,783 ===========================================================================================
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-6 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, 1998 1997 - -------------------------------------------------------------------------------------- Cash Flows From Operating Activities Cash received from customers $14,203,657 $11,670,478 Cash paid to suppliers and employees (13,955,985) (10,876,160) Interest paid (540,695) (372,118) Other 8,267 103,804 - -------------------------------------------------------------------------------------- Net cash provided (absorbed) by operating activities (284,756) 526,004 - -------------------------------------------------------------------------------------- Cash Flows From Investing Activities Purchases of property and equipment (1,237,689) (524,232) Repayments (advances) on officer note receivable 8,085 26,528 - -------------------------------------------------------------------------------------- Net cash absorbed by investing activities (1,229,604) (497,704) - -------------------------------------------------------------------------------------- Cash Flows From Financing Activities Proceeds from borrowings 4,642,275 192,565 Repayments of borrowings (3,007,177) (368,274) Repayments on borrowings - related parties, net (10,902) - - -------------------------------------------------------------------------------------- Net cash provided (absorbed) by financing activities 1,624,196 (175,709) - -------------------------------------------------------------------------------------- Increase in cash - restricted (190,485) (2,360) - -------------------------------------------------------------------------------------- Net decrease in cash (80,649) (149,769) Cash, beginning of year 288,310 438,079 - -------------------------------------------------------------------------------------- Cash, end of year $ 207,661 $ 288,310 ======================================================================================
continued... F-7 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year Ended December 31, 1998 1997 - -------------------------------------------------------------------------------------- Reconciliation of net income (loss) to net cash provided (absorbed) by operating activities Net income (loss) $ (783,883) $ 263,803 Adjustments to reconcile net income (loss) to net cash provided (absorbed) by operating activities Depreciation and amortization 319,185 374,041 (Increase) decrease in Accounts receivable - billed (569,019) (549,668) Accounts receivable - unbilled 211,050 (296,859) Inventories (83,203) 102,030 Prepaid expenses and other assets (212,848) 23,399 Increase (decrease) in Accounts payable - trade 433,757 304,193 Accrued expenses and other liabilities 544,425 55,214 Customer deposits (144,220) 249,851 - -------------------------------------------------------------------------------------- Net cash provided (absorbed) by operating activities $ (284,756) $ 526,004 ======================================================================================
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-8 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies Nature of Business The Company develops, manufactures, licenses, sells and installs precast concrete products for the construction, transportation and utilities industries primarily in the Mid-Atlantic region. Principles of The accompanying consolidated financial statements include Consolidation the accounts of Smith-Midland Corporation and its wholly- owned subsidiaries (the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market. Property and Property and equipment is stated at cost. Expenditures Equipment 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 10-15 Office equipment 3-10 Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-9 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) Revenue Recognition 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 which affect profit are recognized in the period in which the changes occur. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated. Unbilled trade accounts receivable represents revenue earned on units produced and not yet billed. Risks and The Company sells products to highway contractors Uncertainties operating under government funded highway programs and other customers and extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure to credit losses and maintains allowances for anticipated losses. Due to inclement weather, the Company may experience reduced revenues from December through February and may realize the substantial part of its revenues during the other months of the year. Fair Value The estimated fair value of financial instruments of Financial approximates their carrying amounts as of December 31, Instruments 1998 and 1997. The estimated fair value of long term debt is based on current rates offered to the Company for debt of the same maturities. Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 during the reporting period. Actual results could differ from those estimates. F-10 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) Earnings (Loss) Earnings per share is based on the weighted average number per share of shares of common stock and dilutive common stock equivalents outstanding. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in earnings of an entity. Basic and diluted earnings per share are the same in 1998 and 1997 because the impact of dilutive securities is anti-dilutive. Long-Lived Assets Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of." SFAS 121 requires that long-lived assets and certain intangibles to be held and used by an entity be reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. In addition, SFAS 121 requires long-lived assets and certain intangibles to be disposed of to be reported at the lower of carrying amount or fair value less costs to sell. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable based on undiscounted estimated future operating cash flows. As of December 31, 1998, the Company has determined no impairment has occurred. Recent Accounting In June 1998, the Financial Accounting Standards Board Pronouncements issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. F-11 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements
1. Property and Property and equipment consist of the following: Equipment December 31, 1998 1997 --------------------------------------------------------------- Land and land improvements $ 568,660 $ 435,110 Buildings 1,012,840 955,386 Machinery and equipment 5,325,917 4,772,713 Rental equipment 39,240 39,240 Construction in progress 562,092 68,612 --------------------------------------------------------------- 7,508,749 6,271,061 Less: accumulated depreciation 5,059,183 4,739,999 --------------------------------------------------------------- $2,449,566 $1,531,062 ===============================================================
At December 31, 1998, the Company had a manufacturing plant and an engineering building in progress. The manufacturing plant was completed in the first quarter of 1999. The total cost of the facilities is currently estimated to be $738,000. 2. Notes Payable Notes payable consist of the following:
December 31, 1998 1997 ----------------------------------------------------------------------- Note payable to Riggs Bank, maturing July 8, 1998 with monthly principal payments of $2,000 plus interest, at a rate of prime plus 1.5%, collateralized by accounts receivable. $ - $935,000 Note payable to John Schied, maturing May 21, 1998; with monthly payments of $1,169 of principal and interest, at a rate of 10%; collateralized by certain vehicles. - 5,699 Note payable to First International Bank, formerly First National Bank of New England, maturing June 2021; with monthly payments of $37,087 of principal and interest, at a rate of prime plus 1.5% (9.75% at December 31, 1998); collateralized by principally all assets of the Company. 3,979,245 - F-12 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Notes Payable December 31, 1998 1997 (continued) ----------------------------------------------------------------------- Note payable to Security Bank maturing July 13, 1999; monthly payments of $4,280 of principal and interest, at a rate of prime plus 3%; collateralized by a first deed of trust on certain land. $ - $ 83,115 Note payable to Midland Loan Service maturing March 1, 1999; with varying monthly payments of principal and interest at a rate of 14%; collateralized by plant buildings. - 103,918 Note payable to State Bank of Remington, maturing December 22, 2000; with monthly payments of $5,788 of principal and interest, at a rate of 10.75%; collateralized by equipment and vehicles. - 180,300 Note payable to State Bank of Remington, maturing February 11, 1999; with monthly payments of interest, at a rate of 6.85%; collateralized by a certificate of deposit. - 185,689 Line of credit with First International Bank, maturing May 30, 1999; interest payable monthly at prime plus 1% (8.75% at December 31, 1998); secured by accounts receivable and inventory 425,000 - F-13 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Notes Payable December 31, 1998 1997 (continued) ----------------------------------------------------------------------- Notes payable to Myers' trusts, each of four maturing June 26, 1998; with monthly payments of $3,241 each of principal and interest at a rate of 12%; collateralized by a third deed of trust on land, inventory and accounts receivable. $ - $623,252 Notes payable to Branch Banking and Trust maturing November 5, 1998; with monthly payments of $2,000 of principal and interest at a rate of 8%; collateralized by accounts receivable, inventory and equipment of Smith-Carolina Corporation. - 83,064 Note payable to Obrey Messick, maturing May 31, 2001; with monthly payments of $1,461 of principal and interest, at a rate of 10%; collateralized by equipment. - 50,559 Notes payable to Obrey Messick, maturing December 1, 2002; with monthly payments of $582 of principal and interest at a rate of 10%; collateralized by equipment. - 27,383 Notes payable to State Bank of Remington, maturing June 21, 1998; with varying monthly payments of principal and interest at a rate of 9.26%; collateralized by machinery. - 17,574 Notes payable to Orix Leasing, maturing July 2002, with monthly payments of $1,640 of principal and interest at 13%; collateralized by equipment. - 82,815 F-14 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Notes Payable December 31, 1998 1997 (continued) ----------------------------------------------------------------------- Notes payable to Poland Brothers Farm, maturing August 2009, with monthly payments of $598 of principal and interest at a rate of 10%; collateralized by land. $ - $ 49,268 Notes payable to United Leasing, maturing June 29, 1999, with monthly payments of $2,987 of principal and interest at a rate of 21.7%; collateralized by equipment. - 39,974 Notes payable to United Leasing, maturing October 4, 2000, with monthly payments of $9,039 of principal and interest at a rate of 19.7%; collateralized by equipment, machinery, and a second deed of trust on land. - 209,502 Installment notes and capitalized leases collateralized by certain machinery and equipment maturing at various dates, primarily August 2001 through October 2003, with interest rates at 7.25% through 8.25%. 169,520 147,227 Unsecured note payable due on demand, with interest rate at 14%. 20,000 134,329 ---------------------------------------------------------------------- 4,593,765 2,958,668 Less current maturities 573,104 2,199,228 ---------------------------------------------------------------------- $4,020,661 $ 759,440 ======================================================================
F-15 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Notes Payable During 1998, the Company restructured substantially all (continued) its debt with First International Bank (formerly the First National Bank of New England). The Company obtained a $4,000,000 twenty-three year term note at prime plus 1.5% and paid off existing debt at that time of approximately $3,000,000. The remaining proceeds are being used for plant expansion and the purchase of equipment. The loan is guaranteed in part by the U.S. Department of Agriculture Rural Business - Cooperative Services. The Company was also granted a $500,000 operating line of credit. The loan agreement includes certain provisions, affirmative and negative covenants, including tangible capital and debt to net worth ratio, which were met by the Company at December 31, 1998. The $500,000 line of credit is due contractually within the next fiscal year. Management has shown the ability to refinance and/or extend its debt in prior years, and intends to extend and/or refinance this debt as it becomes due in 1999. The aggregate amounts of notes payable maturing in each of the next five years and thereafter are as follows: Year Ending December 31, Amount ------------------------------------------- 1999 $ 573,104 2000 103,674 2001 106,933 2002 99,662 2003 and thereafter 3,710,392 ------------------------------------------- $4,593,765 =========================================== 3. Related Party The Company currently leases three and one half acres of Transactions its Midland, Virginia property from its President, on a month-to-month basis, as additional storage space for the Company's finished work product. The lease agreement calls for minimum annual rent of $6,000. Notes payable - related parties are unsecured, with no fixed maturity date (but no earlier than January 1, 2000) and bear interest at 10%. Total interest expense on these notes was $10,500 and $11,500 for the years ended December 31, 1998 and 1997, respectively. F-16 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Related Party The Company has an unsecured note receivable from its Transactions President and majority stockholder with a seven- year term (continued) bearing interest at 6%. The terms of the note call for annual payments of $45,948 beginning on December 31, 1998, and continuing through maturity on December 31, 2002. Total interest income on this note was approximately $37,600 and $39,500 for the years ended December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997, the Company was the beneficiary of individual life insurance policies on the life of the President with a total cash surrender value of approximately $148,000 and $139,000, respectively. Borrowings of approximately $116,724 and $117,514 were outstanding against the cash surrender value at December 31, 1998 and 1997. 4. Income Taxes The provision for income taxes differs from the amount determined by applying the federal statutory tax rate to pre-tax income as a result of the following:
Year Ended December 31, 1998 1997 ------------------------------------------------------------------------------ Amount Percent Amount Percent ------------------------------------------------------------------------------ Income taxes at statutory rate $(273,000) (34)% $ 89,700 34% Increase (decrease) in taxes resulting from: Utilization of net operating loss carryforward - - (97,800) (37) Increase in valuation allowance 261,000 30 - - Other 12,000 4 8,100 3 ------------------------------------------------------------------------------ $ - - % $ - -% ==============================================================================
F-17 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Income Taxes Deferred tax assets (liabilities) are as follows: (continued)
December 31, 1998 1997 ------------------------------------------------------------------- Depreciation $ (44,600) $ (4,400) Allowance for doubtful accounts 102,000 92,500 Vacation accrued 41,000 68,300 Operating loss carryforwards 1,072,000 753,000 ------------------------------------------------------------------- Net deferred tax asset 1,170,400 909,400 Deferred tax asset valuation allowance (1,170,400) (909,400) ------------------------------------------------------------------- $ - $ - ===================================================================
At December 31, 1998, the Company had approximately $2,750,000 of cumulative net operating loss carryforwards with expiration dates through December 31, 2018. 5. Employee Benefit The Company has a 401(k) retirement plan (the "Plan") Plans substantially all employees. Participants may contribute up to 10% of their compensation to the Plan. The Company contributes 25% of the participant's contribution, up to 1% of the participant's compensation, as a matching contribution. Total contributions for the years ended December 31, 1998 and 1997 were $6,465 and $3,908, respectively. The Company has a profit sharing plan which provides for employee bonuses based upon the Company's results of operations. No payments were made during the years ended December 31, 1998 and 1997. 6. Commitments a) The Company has an employment agreement with its and President which expires December 31, 1999 pursuant to Contingencies which he will be paid an annual salary of $175,000. The President is also entitled to receive benefits offered to the Company's other employees, and certain severance benefits if the Company terminates the employment agreement without cause. In addition, the employment agreement precludes the President from disclosing confidential information and from competing with the Company during each year of his employment and for at least one year thereafter. F-18 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments b) On August 5, 1994, the Board of Directors and and Stockholders of the Company adopted the 1994 Stock Option Contingencies Plan (the "1994 Plan") which allows the Company to grant (continued) options to employees, officers, directors and consultants to purchase shares of the Company's Common Stock. Options granted under the plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the Company, while Non-qualified options may be issued to non-employee directors, consultants, and others, as well as to employees of the Company. The maximum aggregate number of shares which may be granted shall not exceed 280,000 shares of the Company's Common Stock.
Weighted Average Vested Exercise Available Options and Price For Grant Outstanding Exercisable ----------------------------------------------------------------------------- Balance, December 31, 1996 $3.60 260,000 20,000 20,000 Granted 1.00 (37,450) 37,450 - Forfeited 1.00 3,000 (3,000) - Vested - - - 12,483 ---------------------------------------------------------------------------- Balance, December 31, 1997 - 225,550 54,450 32,483 Granted 1.00 (61,975) 61,975 - Forfeited 1.00 5,000 (5,000) - Vested - - - 12,483 ---------------------------------------------------------------------------- Balance, December 31, 1998 $1.44 168,575 111,425 44,966 ============================================================================
F-19 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments In October 1995, the Financial Accounting Standards Board and issued Statement of Financial Accounting Standards No. Contingencies 123, Accounting for Stock-Based Compensation ("SFAS 123"). (continued) SFAS 123 establishes alternative methods of accounting and disclosure for employee stock-based compensation arrangements. 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. If the provisions of SFAS 123 had been adopted, the effect on 1998 and 1997 earnings (loss) would have been as follows:
1998 1997 ----------------------------------------------------------------------- Net earnings (loss): Reported $(783,883) $263,803 Proforma (816,010) 246,021 Basic and diluted earnings (loss) per share: Reported $ (0.26) $ 0.09 Proforma (0.27) 0.08
For purposes of computing the proforma amounts indicated above, the fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 50%, risk-free interest rate of 5.27% and expected lives of five to six years. Substantially all options become vested and exercisable evenly over a five year period. The weighted average fair value of options granted during the years ended December 31, 1998 and 1997 was $.52 and $.47, respectively. F-20 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments c) In 1999, the Company plans to file claims, for which and notification has been made to the general contractor, in Contingencies the amount of approximately $1,200,000 for damages and (continued) cost overruns incurred as a result of engineering and design flaws on a project to renovate a building at Rutgers University ("Rutgers"). Specifically, after the Company commenced the Rutgers project, the Company found that the original structure was not structurally sufficient to support the panels as originally designed. The cost overruns relate to re-designing of panels, producing panels with additional steel and reinforcement criteria, and erection of the panels to the structure. The contract began in 1998 and has a current expected completion date of June 15, 1999. Management estimates the total loss on the contract, to be approximately $1,100,000, before recognition of additional revenues related to the claim. Approximately $326,000 of the total estimated loss was incurred in 1998. A $764,000 provision for additional loss on the contract was accrued as of December 31, 1998 representing 1999 losses, and is included in "accrued expenses and other liabilities" and "contract costs" in the accompanying financial statements. Due to the significant costs required to continue the project and to fund ongoing commitments, the Company entered into a working agreement with the general contractor to finance certain costs, at cost plus 10% through the estimated completion date. The Company has hired an attorney, who has given an opinion that a legal basis exists for the claim, to pursue collection of the claim. All conditions for claim recognition have been satisfied, and approximately $400,000 of the potential $1,200,000 contract claim is included in trade accounts receivable, as such amounts are probable (subject to negotiations and legal proceedings), at December 31, 1998, respectively. No assurance can be made that the total loss on the contract will not exceed $1,200,000 or that any amount of the claim can be collected. d) In late 1995, the Company filed four separate informal claims totalling $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 newly issued "Noise Barrier Acceptance Criteria", which occurred after the award of the contracts and after unit production in accordance with the contracts was virtually complete. These claims were increased to approximately $1,081,000 at December 31, 1996. F-21 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments Specifically, the state of Maryland adjusted its noise and barrier acceptance criteria over a period of several Contingencies months during 1995 with the latest version dated October (continued) 13, 1995. According to the Company, these changes were significantly different than contract provisions and historical acceptance criteria upon which the jobs were bid and for which the Company was contracted. The Company incurred significant costs to rework panels and in certain instances construct new panels to comply with the new standards. Additionally, the Company lost production time and revenue on other contracts due to the time devoted to address the criteria changes. The Company has continued to pursue collection on the claims filed and hired an attorney who specializes in this area. According to the Company's attorney, there is substantial likelihood the State Highway Administration (SHA) will compensate the prime contractors for SHA's improper actions, and the Company will receive additional compensation. All conditions for claim recognition has been satisfied, and approximately $270,000 of the total contract claims is included in trade accounts receivable, as such amounts are probable, at December 31, 1998. The Company received $185,000 of these contract claims during 1999 as settlement for all but one claim for which the Company has received, but not accepted, an offer for settlement. e) The Company owed prior benefit plan participants approximately $14,000 and $205,000 at December 31, 1998 and 1997, respectively, related to the Company's terminated retirement plan, which is included in accrued expenses and other liabilities. At December 31, 1997, the Company had a certificate of deposit with a balance of approximately $197,000, which had also been pledged as collateral on a $186,000 loan, to fund the plan obligation with all interest earned allocated to the participants. During 1998, the Company redeemed the certificate of deposit and paid the plan participants approximately $191,000 in benefits owed. f) The Company is self insured for heath care claims for eligible active employees. The Company carries stop loss insurance which limits the amount for individual claims and total claims in any one year. The Company provides a liability for estimated claims incurred but not reported. F-22 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments and g) On March 2, 1999, the Company received notification Contingencies from the NASDAQ SmallCap Market ("NASDAQ") that the (continued) Company had failed to meet certain market criteria, and may be subject to delisting if compliance cannot be achieved. Specifically, the Company's Common Stock had fallen below the minimum standard of $1.00 per share. According to NASDAQ, the Company's Common Stock must trade above $1.00 per share for at least ten consecutive days within the 90 day period ended June 2, 1999 to comply with the minimum bid price requirement. F-23 EX-27 2 EXHIBIT 27
5 YEAR DEC-31-1998 DEC-31-1998 207,661 0 4,285,120 262,000 1,512,213 5,859,028 7,508,749 5,059,183 9,566,501 4,172,361 4,125,357 0 0 30,857 1,340,226 9,566,501 12,415,252 14,434,178 9,958,800 12,015,760 2,915,809 0 541,161 (783,883) 0 (783,883) 0 0 0 (783,883) (.26) (.26)
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