U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 1-13752
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SMITH-MIDLAND CORPORATION
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(Name of Small Business Issuer in its Charter)
Delaware 54-1727060
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5119 Catlett Road
P.O. Box 300, Midland, Virginia 22728
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(Address of Principal Executive Offices) (ZIP Code)
Web Site: http://www.Mvisibilty.com/Smithmid
(540) 439-3266
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(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.01 par value per share Boston Stock Exchange
Redeemable Common Stock Purchase Warrants Boston Stock Exchange
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
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(Title of Class)
Redeemable Common Stock Purchase Warrants
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(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. _X_
The Issuer's revenues for its most recent fiscal year are $11,410,510.
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 April 14, 1997, was approximately $2,129,872. As of March 21, 1997
the Company had outstanding 3,044,798 shares of Common Stock, $.01 par value per
share.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part of Form 10-KSB
Annual Report in which
Document Document is Incorporated
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Definitive Proxy Statement for the Registrant's Annual Part III
Meeting of Stockholders for the fiscal year ended
December 31, 1996, to be filed pursuant to Regulation 14A.
ii
PART I
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
transportable, prefabricated concrete buildings. In addition, the Company
produces utility vaults, farm products such as cattleguards, water troughs and
food troughs, and custom order precast concrete products with various
architectural surfaces.
The Company completed an initial public offering ("IPO") of its Common
Stock in December 1995, from which the Company received net proceeds of
approximately $2,600,000. In January 1996, the underwriters of the IPO executed
their over allotment option in full, from which the Company received an
additional $396,000 of net proceeds.
MARKET
The Company's market primarily consists of general contractors
performing public and private construction contracts, including the construction
of residential housing; 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 as well as in Puerto Rico, Canada,
Belgium, Portugal 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.
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.
3
PRODUCTS
Precast concrete products are cast and set 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(TM) 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(TM)
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(TM) 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(TM) reduced installation time and
ease of erection, and from the use of smaller cranes for installation.
The Company custom designs and manufactures each Slenderwall(TM)
exterior cladding system. The exterior of the Slenderwall(TM) 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(TM) 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 February 28, 1997 the Company has a backlog
for Slenderwall(TM) systems totaling approximately $1,724,000. The Company also
has submitted for approval pending proposals for more than $14 million of
Slenderwall(TM) systems, although no assurance can be given that any of these
proposals will result in binding purchase orders. The Company believes, although
no assurance can be given, that the Slenderwall(TM) system has the potential to
generate a greater percentage of the Company's revenues.
4
Easi-Set(R) Sierra Wall
The Easi-Set(R) Sierra Wall (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
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 on to 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(R) in Virginia, a right of first refusal for
any new proprietary products developed by DuriSol, and the Company pays a
royalty to DuriSol equal to $.25 per square foot of product produced using
DuriSol(R).
The Sierra Wall is used 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(R) J-J Hooks(TM) Highway Safety Barrier
The Easi-Set(R) J-J Hooks(TM) highway safety barrier (the "J-J
Hooks(TM) Barrier") is a patented, positively connected, safety barrier that the
Company sells, rents, delivers and installs for use on roadways to separate
lanes of traffic, either temporarily for construction 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
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 recommends that states use only positively
connected barriers.
5
The proprietary quality of the J-J Hooks(TM) Barrier is the design of
its positive connection. Protruding from each end of a J-J Hooks(TM) Barrier
section is a portion of a flat sheet of galvanized steel, rolled in toward the
end of the barrier (it resembles the letter "J" when viewed from directly
above). The sheet 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(TM) 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.
The Company believes that the J-J Hooks(TM) 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(TM) Barrier is easier and faster to install, and remove, requires a
smaller crew, and eliminates the need for loose hardware.
In November 1990, the FHWA approved the J-J Hooks(TM) 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(TM) Barrier has also been approved for use in state-funded projects by 30
states, plus Washington, D.C. and Puerto Rico. The Company is in various stages
of the application process in the remaining 20 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(TM) Barrier being used in such states. In
addition, the appropriate authorities have approved the J-J Hooks(TM) Barrier
for use in the countries of Spain, Belgium, Chili, and Germany.
Easi-Set(R) Precast Building and Easi-Span(TM)
The Easi-Set(R) Precast Building (the "Easi-Set(R) 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, and electrical switching
stations, to inventory or supply storage, restroom facilities or kiosks. The
Easi-Set(R) Precast Building is available in a variety of exterior finishes and
in two standard sizes or it can be custom sized. The roof and floor of each
Easi-Set(R) Precast Building are manufactured using the Company's patented
post-tensioned system, which helps seal the buildings against moisture, and
reduces the possibility of water leaking into the interior. As a freestanding
unit, the Easi-Set(R) 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(R) Precast
6
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(R) Precast Building and Easi-Span(TM)
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.
o UtilitiesInstallations -- for electrical switching stations and
transformer housing, gas control shelters and valve enclosures,
water and sewage pumping stations, and storage of contaminated
substances.
o Commercial and Industrial Locations -- for electrical and
mechanical housing, cemetery maintenance storage, golf course
vending enclosures and rest rooms, emergency generator shelters,
gate houses, automobile garages, hazardous materials storage, food
or bottle storage, animal shelters, and range houses.
Easi-Set(R) 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(R) 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.
7
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(TM) Barrier, the Easi-Set(R)
Precast Building and the Slenderwall(TM) precast exterior architectural panel
system and certain non-proprietary products, such as the Company's cattleguard
products and water troughs 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 $15,000 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(R) Building licensees normally pay the Company a flat monthly fee for
"co-op advertising and promotion program through which the Company produces and
distributes advertising materials and promotes the licensed products.
The Company has entered into 21 licensing agreements in the United
States, two in Canada and has established one licensee in each of Puerto Rico,
Belgium, Chile and Spain. For the fiscal year ended December 31, 1996 the
Company received approximately $239,000 in licensing fees and royalties from
these agreements, compared to approximately $194,000 for the fiscal year ended
December 31, 1995.
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 continuing to develop the licensing
program for the J-J Hooks(TM) Barrier in Europe where the barrier has
successfully completed crash testing requirements to meet the applicable
European standards.
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 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
8
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 that it offers a broad range of products that are
unique and technologically superior to competitive products.
PATENTS AND PROPRIETARY INFORMATION
The Company holds U.S. patents for the J-J Hooks(TM) Barrier and the
Easi-Set(R) Precast Building, and has filed a patent application for the
Slenderwall(TM) exterior cladding system, which is pending in the U.S. and
Canada, and the J-J Hooks(TM) Barrier, which is pending in the European Economic
Community Market. The earliest of the issued patents considered material to the
Company's business expires in 2009. The Company also owns one U.S. registered
trademark and licenses the rights to another: Easi-Set(R) and DuriSol(R),
respectively. The Company licenses the technology used in DuriSol(R) products
pursuant to an agreement that expires on December 31, 1998.
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
9
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. 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.
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.
10
EMPLOYEES
As of March 18, 1997, the Company had 137 full-time employees, 108 of
which are located at the Company's Midland facility, and 29 of which are located
at the Company's facility located in Reidsville, North Carolina. Of the 137
employees, seven are executive officers or managers, six are responsible for
sales and marketing, 102 are in manufacturing, and fourteen 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 28,000 square foot manufacturing
plant on approximately 17 acres of land in Midland, Virginia, of which
approximately 14 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 an environmentally controlled casting area, two batch plants, a form
fabrication shop, a welding and metal fabrication facility, a carpentry shop,
and a quality control center. In addition, the Company conducts outdoor concrete
pouring and curing operations. The Company's Midland facility also includes a
large storage yard for inventory and stored materials.
In addition, the Company carries out administration, research and
development, marketing and sales, and licensing operations in a 4,500 square
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 plant.
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.
Although the Company believes that its present facilities are adequate
for its current needs, the Company also believes that it could benefit from
increased plant capacity at its Midland property and is currently exploring
options to expand its manufacturing facilities.
ITEM 3. LEGAL PROCEEDINGS
In late 1995, the Company filed four separate informal claims totaling
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
11
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. All amounts due to each party are currently in dispute.
The Company has considered the counterclaims in estimating the recoverability of
its claims and certain trade accounts receivable at December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 fiscal year ended December 31, 1996, through the
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since December 13, 1995 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 under the symbol "SMC".
As of April 7, 1997, there were approximately 35 record holders of the Company's
Common Stock. Management believes there are approximately 663 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
---- ---
1995
Fourth Quarter (from December 13, 1995) $5 3/8 $31/2
1996
First Quarter $6 17/32 $4 19/32
Second Quarter $6 5/8 $5 1/4
Third Quarter $6 5/8 $3 1/8
Fourth Quarter $3 5/8 $1
1997
First Quarter $2 1/8 $1
Second Quarter (through April 14, 1997) $1 3/8 $ 7/8
DIVIDENDS
The Company has not paid dividends on its Common Stock since its
inception and has no intention of paying 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 the earnings, capital requirements and financial position of the Company,
general economic conditions and other pertinent factors. The Company's current
loan agreement with Riggs Bank, N.A. 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 primarily for
the construction, utility and farming industries. The Company's operating
strategy has involved producing innovative and proprietary products, including
Slenderwall(TM) panels, 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, positively-connected highway safety barrier;
Sierra Wall, a sound barrier primarily for roadside use; and Easi-Set(R) Precast
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 ("FISCAL 1996") COMPARED TO
THE YEAR ENDED DECEMBER 31, 1995 ("FISCAL 1995")
For Fiscal 1996, the Company had total revenue of approximately
$11,411,000 compared to total revenue of approximately $11,158,000 for Fiscal
1995, an increase of approximately $253,000, or 2%. Total revenue from product
sales increased from approximately $9,561,000 in Fiscal 1995 to approximately
$10,147,000 in Fiscal 1996, an increase of approximately $586,000 or 6%. This
increase was primarily attributable to increased construction activity. Shipping
and installation revenue decreased from approximately $1,597,000 to
approximately $1,264,000, a decrease of approximately $333,000 or 21%. This
decrease was principally due to a lower level of installation services, which
were primarily offered as a convenience to customers to increase product sales.
Royalty income increased by approximately $45,000 or 23%, from
approximately $194,000 for Fiscal 1995 to approximately $239,000 for Fiscal
1996. The increase was primarily a result of an increase in royalty fees earned
on production of the J-J Hooks(TM) Barrier.
Total cost of goods sold for Fiscal 1996 totaled approximately
$8,525,000, representing a decrease of approximately $497,000, or 6%, from cost
of goods sold of approximately $9,022,000 for Fiscal 1995. Total cost of goods
sold as a percentage of total revenue decreased from approximately 81% for
Fiscal 1995 to approximately 75% for Fiscal 1996, primarily as a result of more
significant costs incurred in Fiscal 1995, for contract disputes for which the
Company has filed formal claims with the State of Maryland (the "Maryland
Claims").
14
The Company's general and administrative expenses increased from approximately
$2,060,000 in Fiscal 1995 to approximately $2,356,000 in Fiscal 1996,
representing an increase of approximately $296,000, or 14%. The increase was
primarily the result of increased payroll expenses and professional fees
associated with becoming a publicly traded company in December, 1995, staff time
and professional fees incurred in connection with filing the Maryland Claims,
increased expenditures related to the licensing activities conducted by Easi-Set
Industries, Inc., and increased costs related to the introduction of the
Slenderwall(TM) systems. Selling expenses increased from approximately $608,000
in Fiscal 1995 to approximately $672,000 for Fiscal 1996, an increase of
approximately $64,000, or 11%. The increase in selling expenses resulted
primarily from an increase in the Company's marketing of Slenderwall(TM)
systems.
The Company's operations for Fiscal 1996 resulted in a loss of
approximately $298,000, or $.10 per share, representing a decrease in loss of
approximately $1,231,000 when compared to a net loss for Fiscal 1995 of
approximately $1,529,000, or a loss of $.82 per share. The Company's decreased
loss was primarily attributed to an improved gross profit from operations, the
non-recurrence of unamortized debt issue costs, a decrease in federal tax
withholding penalties, and decreased interest expense, offset somewhat by
increased general and administrative expenses and increased selling expenses.
Interest expense decreased from approximately $587,000 for Fiscal 1995,
to approximately $469,000 for Fiscal 1996, a decrease of approximately $118,000,
or 20%. This decrease in interest expense was primarily due to a reduction in
both the weighted average interest rates paid to lenders and the average debt
outstanding during Fiscal 1996 when compared to Fiscal 1995.
Interest income increased approximately $21,000, or 45%, from
approximately $47,000 in Fiscal 1995 to approximately $68,000 in Fiscal 1996.
The increase in interest income was primarily attributed to interest charged in
Fiscal 1996 on a note receivable due from the President of the Company.
The Company incurred total other expenses, net of other income, of
approximately $8,000 for Fiscal 1996, compared to net total other expenses of
approximately $154,000 for Fiscal 1995. The decrease in other expense of
approximately $146,000, or 95%, was due primarily to a significant decrease in
federal tax withholding penalties incurred by the Company from late payments in
Fiscal 1995.
In Fiscal 1996, the Company had net income for federal income tax
purposes of approximately $9,000. At December 31, 1996, the Company had
approximately $1,976,000 of cumulative net operating losses available to offset
taxable income with expiration dates through December 31, 2011. Accordingly, no
income tax expense or benefit was recorded for Fiscal 1996. As a result of the
cumulative net operating loss carryforwards available to the Company, Management
does not expect to incur any income tax expense for fiscal 1997.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its capital expenditures, operating
requirements and growth to date primarily through it's initial public offering
("IPO") and subsequent overallotment, bank and other borrowings, and the sale of
stock to and loans from its principal stockholders.
For Fiscal 1996, cash of approximately $429,000 was absorbed by
operating activities. The use of cash during this period was primarily
attributable to a decrease in trade payables, and to fund an increase in
inventory and accounts receivable. In addition, the Company used cash of
approximately $411,000 for investing activities, primarily to purchase additions
to property and equipment. Approximately $534,000 of cash was provided to the
Company by financing activities, the major source of which was the overallotment
for the IPO and increased bank borrowings.
In July 1996, the Company entered into a loan agreement with Riggs
Bank, N.A. ("Riggs") to establish a $600,000 line of credit (the "Riggs Line").
The Riggs Line was subsequently increased to $800,000 in September 1996.
Interest on the Riggs Line currently accrues interest at Riggs' prime rate
(9.75% at December 31, 1996) plus 1.5% per annum. The Riggs Line is secured by
the Company's accounts receivable and any additional borrowings by the Company
in excess of $25,000 will require the prior consent of Riggs. As of December 31,
1996, the Company had borrowed all of the funds available under the Riggs Line.
Of the total proceeds of the Riggs Line, approximately $660,000 was used by the
Company to pay off other debt, and the remaining proceeds of approximately
$140,000 was used for working capital and general corporate purposes.
In December 1995, the Company completed its IPO of 1,000,000 shares of
common stock, $.01 par value per share (the "Common Stock"), and 1,000,000
Redeemable Common Stock Purchase Warrants (the "Redeemable Warrants"), at a
purchase price of $3.60 per share of Common Stock and Redeemable Warrant sold
together. The Company realized net proceeds from the IPO of approximately
$2,618,000. In January 1996, the Company completed an overallotment of an
additional 150,000 shares of Common Stock and 150,000 Redeemable Warrants for
net proceeds of approximately $396,000.
During Fiscal 1996, the Company's President and Chief Executive Officer
sold 40,920 shares of the Company's Common Stock to the Company in order to fund
payment of accrued interest and a portion of principal due on his note payable
to the Company. The transaction was valued at the then current market value of
the Company's Common Stock.
In October 1995, the Company completed a bridge financing consisting of
$500,000 principal amount of subordinated promissory notes bearing interest at
10% per annum (the "1995 Bridge Notes"). In November 1994, the Company completed
a bridge financing consisting of $325,000 principal amount of subordinated
promissory notes bearing interest at 10% per annum (the "1994 Bridge Notes").
For each three dollars and fifty cents ($3.50) of principal amount of 1995 and
1994 Bridge Notes, the Company issued one share of Common Stock and one Bridge
16
Warrant. Each Bridge Warrant was automatically converted into a
Redeemable Warrant upon the completion of the IPO. Both of the bridge financings
were repaid from the net proceeds of the IPO.
The Company had approximately $2,066,000 of notes payable at December
31, 1996 due during the next 12 months. This indebtedness is secured by the
assets of the Company and is substantially personally guaranteed by Rodney I.
Smith, the Company's President.
As a result of the Company's substantial debt burden, the Company is
especially sensitive to changes in the prevailing interest rates. Fluctuations
in such interest rates may materially and adversely affect the Company's ability
to finance its operations either by increasing the Company's cost to service its
current debt, or by creating a more burdensome refinancing environment, if
interest rates should increase. Management intends to extend and/or refinance
this debt as it becomes due. The Company is currently negotiating to consolidate
certain debt under more favorable long term conditions, although no assuarnce of
such consolidation can be given. In addition, the Company has agreed in
principal with the Trustee of the Myers' Trust debt, of which $718,650 was
outstanding at December 31, 1996, to extend the maturity dates of the notes
evidencing such debt from April 15, 1997 to dtaes ranging from July 26, 1997 to
November 26, 1997. 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, 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 did not generate a positive cash flow from operations in
Fiscal 1995 or Fiscal 1996. 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. 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. Although the Company does not have any current commitments for
significant capital expenditures, the Company plans to explore opportunities to
increase the Company's production capacity, although no assurance of such
expansion can be given.
The Company has recorded approximately $270,000 in accounts receivable,
or 25% of total claims filed against the State of Maryland of approximately
$1,080,000, which claims relate to providing goods and services to the State of
Maryland. These claims are currently the subject of litigation. See "Legal
Proceedings". The Company cannot determine with any certainty when a ruling will
be made. It is possible the Company will incur additional costs in connection
with this matter.
SEASONAL FACTORS
The Company performs a portion of its concrete pouring and curing
processes on uncovered, outdoor manufacturing areas. During the winter months,
cold or adverse weather
17
causes a slowdown or cessation of these outdoor production activities, thereby
severely reducing the Company's production capacity. In addition, the Company
services the construction industry primarily in areas of the United States where
construction activity is inhibited by adverse weather during the winter. As a
result, the Company 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
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 is
effective for financial statements, including interim periods, issued for
periods ending after December 15, 1997. SFAS 128 provides a different method for
calculating earnings per share than is currently used in accordance with APB 15,
"Earnings per Share." SFAS 128 provides for the calculation of Basic and Diluted
earnings per share. Basic earnings per share includes no dilution and 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, similar to fully diluted earnings per share. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The following financial statements are filed as part of this report:
<S> <C>
Page
----
Report of Independent Certified Public Accountants ..........................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 ................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 ..................................................................F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995 ..................................................................F-6
18
Consolidated Statements of Cash Flows for the years ended December
31, 1996 and 1995 ..........................................................................F-7
Summary of Significant Accounting Policies...................................................F-9
Notes to Consolidated Financial Statements ..................................................F-12
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 9 to 12 are incorporated herein by reference to the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
(1) The following exhibits are filed herewith:
Exhibit
No. Title
--- -----
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
September 30, 1996 and are incorporated herein by reference:
Exhibit
No. Title
--- -----
10a Loan Agreement by and among Riggs Bank N.A., the Company and
all of the Company's subsidiaries, dated as of July 22, 1996.
10b Promissory Note from the Company and all of its subsidiaries
to Riggs Bank N.A., dated as of July 22, 1996.
10c Amended and Restated Promissory Note from the Company and all
of its subsidiaries to Riggs Bank N.A., dated as of September
1996.
10d Promissory Note from Rodney I. Smith to the Company, dated as
of January 2, 1996.
19
(3) 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.
Exhibit
No. Title
--- -----
10a License Agreement by and between the Company and DuriSol,
Inc., dated January 22, 1996.
10c Purchase Agreement by and between the Company and the Federal
Aviation Administration, dated September 28, 1995.
21 List of Subsidiaries of the Company.
(4) 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.
10d Note between the Company and Fauquier National Bank, dated
January 10, 1992.
10e Loan Agreement, as amended, and Guarantee between the Company
and Security Bank, dated January 10, 1992.
10j Loan Agreement between the Company and the State Bank of
Remington, dated July 2, 1993.
20
Exhibit
No. Title
--- -----
10p One of four identical Collateral Note and Security Agreements
between the Company and the Myers Family Trusts, dated
February 26, 1993.
10q Deed of Trust between the Company and the Trustees of the
Myers Family Trusts, dated February 26, 1993.
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.
10x Promissory Note Issued by Rodney I. Smith to the Company in
January, 1995.
10y Form of Financial Advisory and Investment Banking Agreement
between the Company, Network 1 Financial Securities Inc. and
First Hanover Securities, Inc.
(b) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
last quarter of Fiscal 1996.
21
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, 1997 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.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Rodney I. Smith Chairman of the Board, April 14, 1997
- -------------------------- Chief Executive Officer
Rodney I. Smith and President (principal
executive officer)
/s/ Leonard N. Astfalk Vice President of Finance, April 14, 1997
- -------------------------- Chief Financial Officer
Leonard N. Astfalk (principal finance and
accounting officer)
/s/ Wesley A. Taylor Vice President of April 14, 1997
- -------------------------- Administration
Wesley A. Taylor and Director
/s/ Ashley B. Smith Vice President of Sales and April 14, 1997
- -------------------------- Marketing
Ashley B. Smith and Director
/s/ Andrew Kavounis Director April 14, 1997
- --------------------------
Andrew Kavounis
/s/ Bernard R. Patriacca Director April 14, 1997
- --------------------------
Bernard R. Patriacca
</TABLE>
22
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants ........................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 .............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 ................................................ F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996 and 1995 .......................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 ............................................... F-7
Summary of Significant Accounting Policies................................. F-9
Notes to Consolidated 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, 1996 and 1995, 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, 1996 and 1995, 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
March 20, 1997
F-2
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (Notes 2 and 6) $ 438,079 $ 938,089
Accounts receivable (Notes 2 and 6)
Trade - billed, less allowance for doubtful
accounts of $334,000 and $231,000 2,705,325 2,559,796
Trade - unbilled 113,299 101,873
Inventories (Note 2)
Raw materials 440,225 482,939
Finished goods 1,090,815 743,205
Prepaid expenses and other assets 92,383 159,490
- --------------------------------------------------------------------------------
Total current assets 4,880,126 4,985,392
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET (Notes 1 and 2) 1,380,871 1,430,286
- --------------------------------------------------------------------------------
OTHER ASSETS
Cash - restricted (Notes 2 and 6) 194,617 -
Note receivable, officer (Notes 3 and 7) 659,000 665,474
Other 80,260 76,103
- --------------------------------------------------------------------------------
Total other assets 933,877 741,577
- --------------------------------------------------------------------------------
$7,194,874 $7,157,255
- --------------------------------------------------------------------------------
</TABLE>
F-3
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable (Note 2) $2,066,253 $1,274,544
Accounts payable - trade 1,439,934 1,603,325
Accrued expenses and other liabilities
(Note 6) 515,479 597,480
Customer deposits 200,623 51,132
- --------------------------------------------------------------------------------
Total current liabilities 4,222,289 3,526,481
NOTES PAYABLE - LESS CURRENT MATURITIES (NOTE 2) 1,068,124 1,720,726
NOTES PAYABLE - RELATED PARTIES (NOTE 3) 115,598 116,753
- --------------------------------------------------------------------------------
Total liabilities 5,406,011 5,363,960
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 6)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 7)
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 and 2,935,718
issued, 3,044,798 and 2,935,718 outstanding 30,857 29,357
Additional capital 3,450,085 3,055,252
Retained deficit (1,589,779) (1,291,314)
- --------------------------------------------------------------------------------
1,891,163 1,793,295
Treasury stock, at cost, 40,920 shares (Note 7) (102,300) -
- --------------------------------------------------------------------------------
Total stockholders' equity 1,788,863 1,793,295
- --------------------------------------------------------------------------------
$7,194,874 $7,157,255
- --------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
================================================================================
YEAR ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $11,410,510 $11,157,576
COST OF GOODS SOLD 8,525,266 9,022,026
- --------------------------------------------------------------------------------
Gross profit 2,885,244 2,135,550
- --------------------------------------------------------------------------------
OPERATING EXPENSES
General and administrative expenses 2,355,725 2,059,993
Selling expenses 672,430 608,215
- --------------------------------------------------------------------------------
Total operating expenses 3,028,155 2,668,208
- --------------------------------------------------------------------------------
Operating loss (142,911) (532,658)
- --------------------------------------------------------------------------------
OTHER INCOME (expense)
Royalties 238,801 194,305
Interest expense and loan fees (468,820) (587,493)
Unamortized debt issue costs (Note 2) - (497,185)
Interest income 68,326 47,469
Gain on disposal of fixed assets 14,517 -
Other, net (8,378) (153,867)
- --------------------------------------------------------------------------------
Total other expense (155,554) (996,771)
- --------------------------------------------------------------------------------
NET LOSS $ (298,465) $(1,529,429)
- --------------------------------------------------------------------------------
LOSS PER SHARE $ (.10) $ (.82)
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,071,595 1,871,430
- --------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
=========================================================================================
Additional Retained
Common Paid-In Earnings Treasury
Stock Capital ( Deficit ) Stock Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $17,929 $ 91,930 $ 238,115 $ - $ 347,974
Issuance of promissory notes
and common stock (Note 7) 1,428 355,722 - - 357,150
Issuance of 1,000,000 shares
of common stock and
warrants (net of expenses
of $982,400) (Note 7) 10,000 2,607,600 - - 2,617,600
Net loss - - (1,529,429) - (1,529,429)
- -----------------------------------------------------------------------------------------
BALANCE, December 31, 1995 29,357 3,055,252 (1,291,314) - 1,793,295
Issuance of 150,000 shares
of common stock and warrants
(net of expenses of $143,667)
(Note 7) 1,500 394,833 - - 396,333
Purchase of 40,920 shares
of treasury stock (Note 7) - - - (102,300) (102,300)
Net loss - - (298,465) - (298,465)
- -----------------------------------------------------------------------------------------
BALANCE, December 31, 1996 $30,857 $3,450,085 $(1,589,779) $(102,300) $1,788,863
- -----------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
============================================================================================
YEAR ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 11,641,847 $ 10,635,928
Cash paid to suppliers and employees (11,634,441) (11,661,597)
Interest paid (453,939) (590,886)
Other 17,648 87,907
- --------------------------------------------------------------------------------------------
Net cash absorbed by operating activities (428,885) (1,528,648)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (371,785) (152,877)
Proceeds from sale of property and equipment 14,517 -
Cash disbursed on officer note receivable (53,526) (59,679)
- --------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (410,794) (212,556)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 1,543,606 1,035,870
Repayments of borrowings (1,404,498) (1,291,712)
Repayments on borrowings - related
parties, net (1,155) (2,979)
Proceeds from issuance of common stock, net 396,333 2,617,600
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 534,286 2,358,779
- --------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (305,393) 617,575
CASH, beginning of year 938,089 320,514
- --------------------------------------------------------------------------------------------
CASH, end of year $ 632,696 $ 938,089
- --------------------------------------------------------------------------------------------
</TABLE>
continued...
F-7
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
===========================================================================================
YEAR ENDED DECEMBER 31, 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
ABSORBED BY OPERATING ACTIVITIES
Net loss $(298,465) $(1,529,429)
Adjustments to reconcile net loss to net
cash absorbed by operating activities
Depreciation and amortization 421,200 371,672
Amortization of debt issue costs - 497,185
Interest on officer's note paid with stock (42,300) -
Gain on disposal of fixed assets (14,517) -
Decrease (increase) in other assets (4,157) 171,134
(Increase) decrease in
Accounts receivable - billed (145,529) (422,744)
Accounts receivable - unbilled (11,426) (11,744)
Inventories (304,896) 45,834
Prepaid expenses and other assets 67,107 (117,157)
Increase (decrease) in
Accounts payable - trade (163,392) (558,406)
Accrued expenses and other liabilities (82,001) 112,167
Customer deposits 149,491 (87,160)
- -------------------------------------------------------------------------------------------
Net cash absorbed by operating activities (428,885) $(1,528,648)
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF INVESTING AND
FINANCING ACTIVITIES
Common stock issued related to proceeds received
for promissory notes:
Long-term debt $ - $ (357,150)
Common stock - 1,428
Additional paid-in capital - 355,722
Treasury stock received in exchange for amount
due from officer note receivable $(102,300) $ -
- -------------------------------------------------------------------------------------------
</TABLE>
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
CONSOLIDATION include 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. 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 experiences
reduced revenues from December through February and
realizes the substantial part of its revenues during the
other months of the year.
FAIR VALUE The estimated fair value of financial instruments
OF FINANCIAL approximate their carrying amounts as of December 31,
INSTRUMENTS 1996 and 1995. The estimated fair value of long term
debt is based on current rates offered 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.
LOSS PER SHARE Loss per share is calculated using the weighted average
number of shares of common stock outstanding during the
period. Stock options and warranties have been excluded
from the computation of loss per share as their
inclusion would be anti-dilutive.
F-10
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
================================================================================
RECENT ACCOUNTING Effective January 1, 1996, the Company adopted Statement
PRONOUNCEMENTS 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." The statement
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison
of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by
the asset. If such assets are considered impaired, the
impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did
not have a material impact on the Company's financial
position, results of operations, or liquidity.
Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123
allows a company the option of continuing to follow
existing accounting principles for employee stock option
plans or to adopt the new principles set forth.
Generally, existing accounting principles do not require
a company to record compensation expense as long as it
issues stock options with an exercise price equal to the
market price of the stock at the grant date; however,
SFAS 123 requires the disclosure of compensation expense
regardless of the exercise price at the grant date. The
Company has determined that no compensation should be
disclosed for the stock options as the fair market value
of the stock is below the exercise price for the
options, the stock has not been actively traded and the
stock value has declined.
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 is effective
for financial statements, including interim periods,
issued for periods ending after December 15, 1997. SFAS
128 provides a different method for calculating earnings
per share than is currently used in accordance with APB
15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share.
Basic earnings per share includes no dilution and 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, similar to fully
diluted earnings per share. Management does not expect
the application of this pronouncement to have a material
effect on the financial statements of the Company.
RECLASSIFICATIONS Certain reclassifications have been made to the prior
years consolidated financial statements to conform to
the 1996 presentation.
F-11
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
1. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
December 31, 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 349,513 $ 349,445
Buildings 945,805 942,336
Machinery and equipment 4,389,745 4,406,582
Rental equipment 39,240 39,240
Construction in progress 1,558 8,335
--------------------------------------------------------------------------------
5,725,861 5,745,938
Less: accumulated depreciation 4,344,990 4,315,652
--------------------------------------------------------------------------------
$1,380,871 $1,430,286
--------------------------------------------------------------------------------
2. NOTES PAYABLE Notes payable consist of the following:
December 31, 1996 1995
--------------------------------------------------------------------------------
Note payable to Riggs Bank, maturing July 22,
1997; with monthly payments of $7,000 of
interest only, at a rate of prime plus 1.5%,
11.25% at December 31, 1996; collateralized by
accounts receivable. $800,000 $ -
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. 18,451 29,995
Note payable to Faquier National Bank maturing
December 1999; monthly payments of $4,625 of
principal and interest, at a rate of 12%;
collateralized by a first security interest in
furniture and fixtures and land. - 174,999
</TABLE>
F-12
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
<TABLE>
<CAPTION>
2. NOTES PAYABLE
(CONTINUED) December 31, 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C>
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%; 11.5%
at December 31, 1996; collateralized by a first
deed of trust on certain land. $117,091 $154,248
Note payable to Crestar Bank due on demand with
quarterly payments of interest only at a rate
of 8.5%, collateralized a certificate of
deposit of $210,000. - 180,300
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. 118,049 130,303
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. 225,000 -
Note payable to State Bank of Remington,
maturing January 24, 1998; with monthly
payments of $1,200 of principal and interest,
at a rate of 6.85%; collateralized by a
certificate of deposit. 180,300 -
Note payable to State Bank of Remington maturing
March 1, 1996; with monthly payments of $6,314
of principal and interest, at a rate of 10.75%;
collateralized by equipment and vehicles. - 59,166
Note payable to Gerard A. Engh, MD, maturing
April 30, 1996; with monthly payments of $4,333
of interest only at a rate of 13%;
collateralized by accounts receivable. - 400,000
</TABLE>
F-13
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
<TABLE>
<CAPTION>
2. NOTES PAYABLE
(CONTINUED) December 31, 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable to Myers' trusts, each of four
maturing April 15, 1997; with monthly payments
of $3,241 each of principal and interest at a
rate of 10%; collateralized by a third deed of
trust on land, inventory and accounts
receivable. $718,650 $889,183
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. 98,273 113,593
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. 62,383 -
Notes payable to Obrey Messick, maturing May 25,
1996; with monthly payments of $800 of
principal and interest at a rate of 10%;
collateralized by machinery. - 46,851
Notes payable to Obrey Messick, maturing
December 1, 1997; with monthly payments of $964
of principal and interest at a rate of 10%;
collateralized by equipment. - 20,886
Notes payable to Calvin Showalter, maturing June
28, 1997; with monthly payments of $1,268 of
principal and interest at a rate of 10%;
collateralized by equipment. 8,588 21,115
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. 36,941 51,297
</TABLE>
F-14
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
<TABLE>
<CAPTION>
2. NOTES PAYABLE
(CONTINUED) December 31, 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C>
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. $ 61,668 $ 79,148
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. 256,879 311,918
Installment notes and capitalized leases
collateralized by certain machinery, equipment
and stock maturing at various dates, primarily
June 1998 and July 2001, with interest rates
primarily at 10% and 11.5%. 166,077 11,780
Unsecured notes payable maturing at various
dates, primarily June 1997 and May 1998, with
interest rates primarily at 11.5% and 10%. 266,027 320,488
3,134,377 2,995,270
Less current maturities 2,066,253 1,274,544
$1,068,124 $1,720,726
--------------------------------------------------------------------------------
The Company has a substantial portion of its debt 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 certain debt as
it becomes due in 1997. Substantially all notes payable have been personally
guaranteed by the Company's President and majority stockholder.
</TABLE>
F-15
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
2. NOTES PAYABLE The aggregate amounts of notes payable maturing in each
(CONTINUED) of the next five years are as follows:
Year Ending December 31, Amount
-----------------------------------------------
1997 ................. $2,066,253
1998 ................. 526,746
1999 ................. 320,469
2000 ................. 194,952
2001 ................. 25,957
-----------------------------------------------
$3,134,377
-----------------------------------------------
Unamortized debt issue costs of $497,185 ($.27 per
share) represents additional interest cost from the
retirement of the 1994 and 1995 promissory notes (Note
7) and the related unamortized financing costs. The
funds used to retire the debt represented a portion of
the proceeds from the closing of the December 1995
initial public offering.
3. RELATED PARTY The Company currently leases three and a half acres of
TRANSACTIONS its Midland, Virginia property from its President, as
additional storage space for the Company's finished work
product. The lease term expired on December 31, 1995,
and is continued on a month-to-month basis, with a
minimum annual rent of $6,000.
Notes payable - related parties are unsecured, with no
fixed maturity date (but no earlier than January 1,
1998) and bear interest at 10%. Total interest expense
on these notes was $13,000 and $19,700 for the years
ended December 31, 1996 and 1995, respectively.
The Company held an unsecured note from its President
and majority stockholder with a balance of $192,000 at
December 31, 1995. The note bore interest at 7%. Total
interest income on this note was approximately $3,900
and $13,000 for the years ended December 31, 1996 and
1995, respectively. Also, the Company held an unsecured
non-interest bearing note from its President and
majority stockholder with a balance of $473,474 at
December 31, 1995. During 1996, the Company combined
these notes into a single seven year note bearing
interest at 6%. Also, during 1996, $102,300 of the note
was reduced for the Company's purchase of 40,920 common
shares from the stockholder (see Note 7). Total interest
income on this note was approximately $42,300 for the
year ended December 31, 1996.
F-16
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
3. RELATED PARTY As of December 31, 1996 and 1995, the Company was the
TRANSACTIONS beneficiary of individual life insurance policies on the
(CONTINUED) life of the President with a total cash surrender value
of approximately $135,000 and $128,000, respectively.
Borrowings of approximately $117,500 were outstanding
against the cash surrender value at December 31, 1996
and 1995.
4. INCOME TAXES Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ (92,900) $(138,700)
Allowance for doubtful accounts 133,600 92,500
Vacation accrued 54,600 35,400
Operating loss carryforwards 790,500 828,300
--------------------------------------------------------------------------------
Net deferred tax asset 885,800 817,500
Deferred tax asset valuation allowance (885,800) (817,500)
--------------------------------------------------------------------------------
$ - $ -
--------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the Company had approximately
$2,062,000 of cumulative net operating loss
carryforwards with expiration dates through December 31,
2011.
5. EMPLOYEE BENEFIT The Company has a 401(k) retirement plan (the "Plan")
PLANS covering 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, 1996 and
1995 were $3,750 and $2,080, respectively.
Also, 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, 1996 and 1995.
F-17
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
6. COMMITMENTS a) The Company leases certain equipment under
AND noncancelable operating leases expiring at various
CONTINGENCIES times. Minimum future obligations for operating
leases in effect at December 31, 1996 are as
follows:
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------
1997 .................... $4,700
1998 .................... 4,700
-------------------------------------------
$9,400
-------------------------------------------
Total rent expense amounted to approximately
$12,000 for the years ended December 31, 1996 and
1995.
b) The Company has an employment agreement with its
President which expires December 31, 1999 pursuant
to 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.
c) On August 5, 1994, the Board of Directors and
Stockholders of the Company adopted the 1994 Stock
Option Plan (the "1994 Plan") which allows the
Company to grant options to employees, officers,
directors and consultants to purchase shares of
the Company's Common Stock. The aggregate number
of shares of Stock for which options may be
granted shall not exceed 280,000 shares. Options
issued under the 1994 Plan may be either
"incentive stock options" within the meaning of
Section 422A of the United States Internal Revenue
Code of 1986, as amended, or non-qualified
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.
F-18
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
6. COMMITMENTS The 1994 Plan is administered by disinterested members
AND (as defined by Section 16b-3 of the Exchange Act) of the
CONTINGENCIES Board of Directors. These disinterested members of the
(CONTINUED) Board determine those individuals who shall receive
options, the time period during which the options may be
partially or fully exercised, the number of shares of
Common Stock that may be purchased under each option,
and the option price. The per share exercise price of
the Common Stock subject to options granted pursuant to
the 1994 Plan may not be less than the fair market value
of the Common Stock on the date the option is granted,
except that in the case of a grant to any person who
owns, directly or indirectly, at the time of the
granting of an incentive stock option, 10% or more of
the total combined voting power of all classes of stock
of the Company (a "10% Stockholder") shall not be
eligible to receive any incentive stock options under
the 1994 Plan unless the option price is at least 110%
of the fair market value of the Common Stock subject to
the option, determined on the date of grant.
Non-qualified options are not subject to this
limitation. The Company has granted options to purchase
20,000 shares under the 1994 Plan at an exercise price
of $3.60 per share which is equal to the price per share
of Common Stock sold in the Company's initial public
offering (Note 7). The options vested upon the effective
date of the Company's initial public offering. No
options have been exercised as of December 31, 1996.
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-19
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 .
Approximately $270,000 of the total contract claims is
included in trade accounts receivable at December 31,
1996 (Note 8).
e) The company owes prior benefit plan participants
approximately $211,000 and $257,000 at December 31, 1996
and 1995, respectively, related to the Company's
terminated retirement plan, which is included in accrued
expenses and other liabilities. At December 31, 1996,
the Company had a certificate of deposit with a balance
of approximately $195,000, which has also been pledged
as collateral on a $180,300 loan, to fund the plan
obligation with all interest earned allocated to the
participants.
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-20
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
7. STOCKHOLDERS' In October 1994, the Company completed a Private
EQUITY Placement offering of six and one half units of
securities to nonaffiliates of the Company. Each
complete unit consisted of the Company's eighteen month
promissory note in the principal amount of $50,000
bearing interest at an annual rate of 10% due on the
earlier of March 1, 1996 or the receipt of at least
$2,000,000 in proceeds from a private or public offering
of debt or equity securities, 14,286 shares of the
Company's common stock, and a warrant to purchase up to
an additional 14,286 shares of common stock at an
exercise price of $5.00 per share for a period of five
years, commencing on the closing date of the offering
(the "Bridge Notes"). The 92,859 shares issued were
assigned a value of $92,859 and the original issue
discounts related to the promissory notes were being
amortized over the life of each promissory note. No
value was assigned to the warrants as the amount was
nominal. The promissory notes were paid upon closing of
the December 1995 initial public offering and the
remaining unamortized discounts were charged to expense.
In October 1995, the Company entered into a loan
agreement (the "Loan Agreement") with Rodney Smith, the
Company's President and Chairman, Douglas Miller, the
Company's Chief Financial Officer at the time, Ashley
Smith, a vice-president and director of the Company,
East Coast Investment Partners, L.P. ("East Coast"), and
Merry Robin Bachetti (collectively, the "Lenders"). Each
of Mr. Rodney Smith, East Coast and Ms. Bachetti
beneficially owned more than five percent of the
Company's issued and outstanding Common Stock. Under the
Loan Agreement, the Lenders loaned the Company an
aggregate of $126,250 (the "Loan") that the Lenders
received as net proceeds from the sale of Common Stock
by the Lenders. The Loan accrued interest at ten percent
per annum and was due and payable on the earlier of
either (i) April 23, 1997 or (ii) the receipt by the
Company of gross proceeds of at least $2,000,000
pursuant to any financing. The proceeds of the Loan were
used by the Company to reduce outstanding federal and
state payroll taxes. The loans were paid upon closing of
the December 1995 initial public offering.
F-21
SMITH-MIDLAND CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
7. STOCKHOLDERS' In October 1995, the Company completed a Private
EQUITY Placement offering of ten units of securities to
(CONTINUED) nonaffiliates of the Company (three units of which were
closed in August 1995). Each unit consisted of the
Company's eighteen month promissory note in the
principal amount of $50,000 bearing interest at an
annual rate of 10% due on the earlier of February 7,
1997 or the receipt of at least $2,000,000 in proceeds
from a private or public offering of debt or equity
securities, 14,286 shares of the Company's common stock,
and a warrant to purchase up to an additional 14,286
shares of common stock at an exercise price of $5.00 per
share for a period of five years. The 142,860 shares
issued were assigned a value of $357,150 and the
original issue discounts (financing costs) of equal
amount were being amortized over the life of each
promissory note. No value was assigned to the warrants
as the amount would be nominal. The promissory notes
were paid upon closing of the December 1995 initial
public offering and the remaining unamortized discounts
were charged to expense.
In December 1995, the Company completed an initial
public offering ("IPO") of 1,000,000 shares of common
stock, $.01 par value per share (the "Common Stock"),
and 1,000,000 Redeemable Common Stock Purchase Warrants
(the "Warrants"), at a purchase price of $3.60 per share
of Common Stock and Warrant sold together. The Company
realized net proceeds from the IPO of approximately
$2,618,000. In January 1996, the Company completed an
overallotment of an additional 150,000 shares of Common
Stock and 150,000 Warrants for net proceeds of
approximately $396,000. No value was assigned to the
warrants as the amount would be nominal.
In October 1996, the Company entered into an agreement
with Rodney I. Smith, the Company's President, to accept
the Company's common stock in exchange for principal and
interest payments due on the President's note payable to
the Company. The transaction resulted in the transfer of
40,920 shares of common stock, accounted for as treasury
stock, using the cost method, in exchange for a $43,200
interest payment and a $60,000 principal curtailment.
The shares of common stock were valued at the market
value existing at the date of the agreement.
8. FOURTH QUARTER For the year ended December 31, 1996, there were no year
RESULTS end adjustments material to the fourth quarter results.
In the fourth quarter of 1995, the Company recorded
adjustments that increased its net loss by approximately
$713,000 to reflect writedowns and to adjust inventories
to the year end physical count ($148,000), and to adjust
the estimate of the allowance for doubtful accounts and
recoverability of claims due to receipt of counterclaims
and resulting disputes with customers ($565,000).
F-22
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
Number Title
- ------ -----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 632,696
<SECURITIES> 0
<RECEIVABLES> 2,818,624
<ALLOWANCES> 334,000
<INVENTORY> 1,531,040
<CURRENT-ASSETS> 4,880,126
<PP&E> 1,380,871
<DEPRECIATION> 4,344,990
<TOTAL-ASSETS> 7,194,874
<CURRENT-LIABILITIES> 4,222,289
<BONDS> 0
0
0
<COMMON> 30,857
<OTHER-SE> 1,758,006
<TOTAL-LIABILITY-AND-EQUITY> 7,194,874
<SALES> 10,146,925
<TOTAL-REVENUES> 11,410,510
<CGS> 7,459,145
<TOTAL-COSTS> 8,525,266
<OTHER-EXPENSES> 2,519,975
<LOSS-PROVISION> 194,914
<INTEREST-EXPENSE> 468,820
<INCOME-PRETAX> (298,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> (298,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (298,465)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
