SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 1-13752
SMITH-MIDLAND CORPORATION
(Name of Small Business Issuer in its Charter)
Delaware 54-1727060
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Route 28, P.O. Box 300, Midland, Virginia 22728
(Address of Principal Executive Offices) (Zip Code)
(540) 439-3266
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- -------------------------
Common Stock, $.01 par value per share Boston Stock Exchange
Redeemable Common Stock Purchase Warrants Boston Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
(Title of Class)
Redeemable Common Stock Purchase Warrants
(Title of Class)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ___
The Issuer's net sales and revenues for its most recent fiscal year were
$14,434,178.
The aggregate market value of the shares of Common Stock, held by
non-affiliates, based upon the average of the closing bid and asked prices for
such stock on March 26, 1999, was approximately $1,787,808. As of March 26,
1999, the Company had outstanding 3,144,798 shares of Common Stock, $.01 par
value per share.
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report and related documents include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause the Company's actual
results, performance (financial or operating) or achievements expressed or
implied by such forward looking statements not to occur or be realized. Such
forward looking statements generally are based upon the Company's best estimates
of future results, performance or achievement, based upon current conditions and
the most recent results of operations. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "believe," "estimate," "anticipate," "continue," or similar terms,
variations of those terms or the negative of those terms. Potential risks and
uncertainties include, among other things, such factors as:
o our high level of indebtedness and ability to satisfy the same,
o our recent significant loss under a material contract,
o our limited recent history of profitable operations and our
recent significant loss for the three months ended December 31,
1998, resulting in a loss for the year,
o the continued availability of financing in the amounts, at
the times and on the terms
required, to support our future business and capital projects,
o the extent to which we are successful in developing,
acquiring, licensing or securing
patents for proprietary products,
o changes in economic conditions specific to any one or more
of our markets (such as the availability of public funds and
grants for construction),
o changes in general economic conditions (such as interest rate
changes),
o adverse weather which inhibits the demand for our products,
o our compliance with governmental regulations,
o the outcome of pending and future litigation,
o unforeseen operational difficulties and financial losses due to
year 2000 computer problems,
o the possible delisting of our Common Stock from NASDAQ due to the
continuing trading of the stock price below $1.00 per share and
the decrease of our Net Tangible Assets below $2,000,000 and
o the other factors and information disclosed and discussed in
other sections of this report.
Investors and shareholders should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause actual
results to differ materially from those provided in the forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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ITEM 1. BUSINESS
GENERAL
Smith-Midland Corporation (the "Company") invents, develops,
manufactures, markets, leases, licenses, sells, and installs a broad array of
precast concrete products for use primarily in the construction, transportation
and utilities industries. The Company's customers are primarily general
contractors and federal, state and local transportation authorities located in
the Mid-Atlantic and Northeastern regions of the United States. The Company's
operating strategy has involved producing innovative and proprietary products,
including Slenderwall(TM), a patent-pending, lightweight, energy efficient
concrete and steel exterior wall panel for use in building construction; J-J
Hooks(TM) Highway Safety Barrier, a patented, positive-connected highway safety
barrier; Sierra Wall, a sound barrier primarily for roadside use; and
Easi-Set(R) transportable concrete buildings, also patented. In addition, the
Company produces other generic highway sound barriers, utility vaults, farm
products such as cattleguards, and water and feed troughs, and custom order
precast concrete products with various architectural surfaces.
The Company was incorporated in Delaware on August 2, 1994. Prior to a
corporate reorganization completed in October 1994, the Company conducted its
business primarily through Smith-Midland Virginia, which was incorporated in
1960 as Smith Cattleguard Company, a Virginia corporation, and which
subsequently changed its name to Smith-Midland Corporation in 1985. The
Company's principal offices are located at Route 28, Midland, Virginia 22728 and
its telephone number is (540) 439-3266. As used in this report, unless the
context otherwise requires, the term the "Company" refers to Smith-Midland
Corporation and its subsidiaries.
MARKET
The Company's market primarily consists of general contractors
performing public and private construction contracts, including the construction
of commercial buildings; public and private roads and highways; airports;
municipal utilities; and federal, state, and local transportation authorities,
primarily located in the Mid-Atlantic and Northeastern states. The Company also
licenses its proprietary products to precast concrete manufacturers nationwide
and in Puerto Rico, Canada, Belgium, and Spain. The Company, in conjunction with
the establishment of its Slenderwall(TM) exterior cladding system, intends to
expand the market in which it currently competes. The Company believes that the
annual market for exterior cladding in the Mid-Atlantic and Northeast region is
approximately $500 million and that the nationwide annual market for exterior
cladding products exceeds $2 billion based upon information obtained by an
independent third party.
The precast concrete products market is affected by the cyclical nature
of the construction industry. In addition, the demand for construction varies
depending upon weather conditions, the availability of financing at reasonable
interest rates, overall fluctuations in the national and regional economies,
past overbuilding, labor relations in the construction industry, and the
availability of material and energy supplies. A substantial portion of the
Company's business is derived from local, state, and federal building projects,
which are further dependent upon budgets and, in many cases, voter-approved
bonds.
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.
PRODUCTS
Precast concrete products are cast at a manufacturing facility and
delivered to a site for installation, as contrasted to ready-mix concrete, which
is produced in a "batch plant," put into a mixer truck where it is mixed
thoroughly and delivered to a construction site to be poured and set at the
site. Precast concrete products are used primarily as parts of buildings or
highway structures, and may be used architecturally, as in a decorative wall of
a building, or structurally. Structural uses include building walls, frames,
floors, or roofs. The Company currently manufactures and sells a wide variety of
products for use in the construction, transportation and utility industries.
SLENDERWALL(TM) LIGHTWEIGHT CONSTRUCTION PANELS
Each Slenderwall(TM) system is a prefabricated, energy-efficient,
lightweight exterior cladding system that is offered as a cost-effective
alternative to the traditional, piecemeal construction of the exterior walls of
buildings. The Company's Slenderwall system combines the essential components of
a wall system into a single unit ready for interior dry wall mounting
immediately upon installation. The base design of each Slenderwall panel
consists of a galvanized or stainless steel stud frame with an exterior sheath
of approximately two-inch thick, steel-reinforced, high-density, precast
concrete, with various available architectural surfaces. The exterior concrete
sheath is attached to the interior frame by strategically placed epoxy coated
steel connectors that suspend the exterior concrete approximately one-half inch
away from the steel frame.
Slenderwall panels are approximately one-half the weight of brick walls
of equivalent size, permanence and durability. This lighter weight translates
into reduced construction costs resulting from less onerous structural and
foundation requirements as well as lower shipping costs. Additional savings
result from Slenderwall's reduced installation time and ease of erection, and
from the use of smaller cranes for installation.
The Company custom designs and manufactures each Slenderwall exterior
cladding system. The exterior of the Slenderwall systems can be produced in a
variety of attractive architectural finishes, such as concrete, exposed stone,
granite or thin brick. Management has received a positive reaction to
Slenderwall systems in the marketplace for use in new construction and
replacement projects because it is a cost-effective, efficient, and attractive
wall system. As of March 26, 1999 the Company has a backlog for Slenderwall
systems totaling approximately $900,000, compared to $2,343,000 at March 25,
1998.
EASI-SET SIERRA WALL(TM)
The Easi-Set Sierra Wall(TM)(the "Sierra Wall") combines the strength
and durability of precast concrete with a variety of finishes to provide an
effective and attractive sound and sight barrier for use around residential,
industrial, and commercial properties and alongside highways. With additional
reinforcement, the Sierra Wall can also be used as a retaining wall to retain
earth in both highway and residential construction. The Sierra Wall is typically
constructed of four inch thick, steel-reinforced concrete panels that are
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securely joined at an integral column by a tongue and groove connection system.
This tongue and groove connection system makes the Sierra Wall easy to install
and move if boundaries change or highways are relocated after the completion of
a project.
The Company custom designs and manufactures each Sierra Wall to conform
to the specifications provided by the contractor. The width, height, strength,
and exterior finish of each wall varies depending on the terrain and
application. In addition, the Company offers increased noise abatement benefits
through the use of DuriSol(R), an optional, durable and patented
sound-absorbing, material that can be cast onto the exterior of the Sierra Wall.
In January 1996, the Company entered into a licensing agreement with DuriSol,
Inc. of Ontario, Canada, ("DuriSol") permitting the Company to utilize the
DuriSol(R) sound-absorbing technology until January 20, 1999. Under the
Company's licensing agreement with DuriSol, the Company has an exclusive license
to use DuriSol in Virginia and a right of first refusal for any new proprietary
products developed by DuriSol. The Company pays a royalty to DuriSol equal to
$.25 per square foot of product manufactured using DuriSol. Effective January 1,
1999, this agreement was extended for five years ending December 31, 2003.
The Sierra Wall is used primarily for highway projects as a noise
barrier as well as for residential purposes, such as privacy walls between
homes, security walls or windbreaks, and for industrial or commercial purposes,
such as to screen and protect shopping centers, industrial operations,
institutions or highways. The variety of available finishes enables the Company
to blend the Sierra Wall with local architecture, creating an attractive as well
as functional barrier.
EASI-SET J-J HOOKS(TM) HIGHWAY SAFETY BARRIER
The Easi-Set J-J Hooks(TM) highway safety barrier (the "J-J Hooks
Barrier") is a crash tested and patented, positively connected, safety barrier
that the Company sells, rents, delivers, installs and licenses for use on
roadways to separate lanes of traffic, either temporarily for construction work
zone purposes or permanently for traffic control. Barriers are deemed to be
positively connected when the connectors on each end of the barrier sections are
interlocked with one another. The J-J Hooks Barriers interlock without the use
of a separate locking device. The primary advantage of a positive connection is
that a barrier with such a connection can withstand vehicle crashes at higher
speeds without separating. The Federal Highway Administration (the "FHWA") now
requiress that states use only positively connected barriers which meet NCHRP350
crash test requirements..
The proprietary feature of the J-J Hooks Barrier is the design of its
positive connection. Protruding from each end of a J-J Hooks Barrier section is
a fabricated bent steel connector, rolled in toward the end of the barrier (it
resembles the letter "J" when viewed from directly above). The connector
protruding from each end of the barrier is rolled identically so that when one
end of a barrier faces the end of another, the resulting "hooks" face each
other. To connect one section of a J-J Hooks Barrier to another, a contractor
merely positions the hook of an elevated section of the barrier above the hook
of a set section and lowers the elevated section into place. The positive
connection is automatically engaged.
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The Company believes that the J-J Hooks Barrier connection design is
superior to those of earlier highway safety barriers that were positively
connected through the "eye and pin" technique. Barriers incorporating this
technique have eyes or rings protruding from each end of the barrier, which must
be aligned during the setting process. Once set, a crew inserts pins through the
eyes and bolts the barrier sections together. Compared to this technique, the
J-J Hooks Barrier is easier and faster to install, and remove, requires a
smaller crew and eliminates the need for loose hardware to make the connection.
In November 1990, the FHWA approved the J-J Hooks Barrier for use on
federally-aided highway projects following the successful completion of crash
testing based on National Cooperative Highway Research Program criteria. The J-J
Hooks Barrier has also been approved for use in state funded projects by 32
states, plus Washington, D.C. and Puerto Rico. The Company is in various stages
of the application process in 17 states and believes that approval in most of
the states will be granted; however no assurance can be given that approval will
be received from any or all of the remaining states or that such approval will
result in the J.J. Hooks Barrier being used in such states. In addition, the J-J
Hooks Barrier has been approved by the appropriate authorities for use in the
countries of Spain, Belgium, Germany and Chile.
EASI-SET PRECAST BUILDING AND EASI-SPAN(TM)
The Easi-Set Precast Building is a transportable, prefabricated,
single-story, concrete utility building designed to be adaptable to a variety of
uses ranging from housing communications operations, traffic control systems,
mechanical and electrical stations, to inventory or supply storage, restroom
facilities or kiosks. The Easi-Set Precast Building is available in a variety of
exterior finishes and in five standard sizes, or it can be custom sized. The
roof and floor of each Easi-Set Precast Building are manufactured using the
Company's patented post-tensioned system, which helps seal the buildings against
moisture. As a freestanding unit, the Easi-Set Precast Building requires no
poured foundations or footings and can be easily installed within a few hours.
After installation the building can be moved, if desired, and reinstalled in a
new location.
The Company recently introduced Easi-Span(TM), a line of expandable
precast concrete buildings. Easi-Span(TM) is identical to and incorporates the
technology of the Easi-Set Precast Building, but is available in larger sizes
and, through its modular construction, can be combined in varied configurations
to permit expansion capabilities.
The Company has sold its Easi-Set and Easi-Span Precast Buildings for
the following uses:
o COMMUNICATIONS OPERATIONS -- to house fiber optics regenerators,
switching stations and microwave transmission shelters, cellular
phone sites, and cable television repeater stations.
o GOVERNMENT APPLICATIONS -- to federal, state and local
authorities for uses such as weather and pollution monitoring
stations; military storage, housing and operations; park vending
enclosures; rest rooms; kiosks; traffic control systems; school
maintenance and athletic storage; airport lighting control and
transmitter housing; and law enforcement evidence and ammunition
storage.
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o UTILITIES INSTALLATIONS -- for electrical switching stations and
transformer housing, gas control shelters and valve enclosures,
water and sewage pumping stations, and storage of contaminated
substances or flammable materials which require spill
containment.
o COMMERCIAL AND INDUSTRIAL LOCATIONS -- for electrical and
mechanical housing, cemetery maintenance storage, golf course
vending enclosures, mechanical rooms, restrooms, emergency
generator shelters, gate houses, automobile garages, hazardous
materials storage, food or bottle storage, animal shelters, and
range houses.
EASI-SET UTILITY VAULT
The Company produces a line of precast concrete underground utility
vaults ranging in size from 36 to 702 cubic feet. Each Easi-Set utility vault
normally comes with a manhole opening on the top for ingress and egress and
openings around the perimeter, in accordance with the customer's specifications,
to access water and gas pipes, electrical power lines, telecommunications
cables, or other such media of transfer. The utility vaults may be used to house
equipment such as cable, telephone or traffic signal equipment, and for
underground storage. The Company also manufactures custom-built utility vaults
for special needs.
SOURCES OF SUPPLY
All of the raw materials necessary for the manufacture of the Company's
products are available from multiple sources. To date, the Company has not
experienced significant delays in obtaining materials and believes that it will
continue to be able to obtain required materials from a number of suppliers at
commercially reasonable prices.
LICENSING
The Company presently grants licenses, through it's wholly-owned
subsidiary Easi-Set Industries, for the manufacturing and distribution rights of
certain proprietary products, such as the J-J Hooks Barrier and Easi-Set and
Easi-Span Precast Buildings, and certain non-proprietary products, such as the
Company's cattleguards, and water and feed troughs. Generally, licenses are
granted for defined geographic regions, and depending on the size, character and
location of the territory granted, the Company receives an initial one-time
license acquisition and training fee ranging from approximately $20,000 to
$50,000. License royalties vary depending on the product licensed, but the range
is typically between 4% to 6% of the sales of the licensed product. In addition,
Easi-Set Precast Building licensees normally pay the Company a flat monthly fee
for co-op advertising and promotion programs through which the Company produces
and distributes advertising materials and promotes the licensed products.
The Company has entered into 25 licensing agreements in the United
States, and has established at least one licensee in each of Puerto Rico,
Canada, Belgium and Spain and sub-licensees in Chile.
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The Company is currently negotiating several new license arrangements
and, although no assurance can be given, expects to increase its licensing
activities. In addition, the Company is developing a licensing program for its
Slenderwall exterior cladding system.
MARKETING AND SALES
The Company uses an in-house sales force and, to a lesser extent,
independent sales representatives to market its precast concrete products
through trade show attendance, sales presentations, advertisements in trade
publications, and direct mail to end users.
The Company has also established a cooperative advertising program in
which the Company and its Easi-Set and Easi-Span licensees combine resources to
promote certain precast concrete products. Licensees pay a flat monthly fee and
the Company pays any additional amounts required to advertise the products
across the country. Although the Company advertises nationally, the Company's
marketing efforts are concentrated on the region within a 250 mile radius from
its facilities, which includes most of Virginia, Delaware, Maryland, North
Carolina, South Carolina, and parts of Pennsylvania, New York, New Jersey and
West Virginia.
The Company's sales result primarily from the submission of estimates or
proposals to general contractors who then include the estimates in their overall
bids to various government agencies, and other end users that solicit
construction contracts through a competitive bidding process. In general, these
contractors solicit and obtain their construction contracts by submitting the
most attractive bid to the party desiring the construction. The Company's role
in the bidding process is to provide estimates to the contractors desiring to
include the Company's products or services in the contractor's bid. If a
contractor who accepts the Company's bid is selected to perform the
construction, the Company provides the agreed upon products or services. In many
instances, the Company provides estimates to more than one of the contractors
bidding on a single project. The Company occasionally negotiates with and sells
directly to end users.
COMPETITION
The precast concrete industry is highly competitive and consists of a
few large companies and many small to mid-size companies, several of which have
substantially greater financial and other resources than the Company.
Nationally, the precast concrete market is dominated by several large companies.
However, due to the weight and costs of delivery of precast concrete products,
competition in the industry tends to be limited by geographical location and
distance from the construction site and is fragmented with numerous
manufacturers in a large local area.
The Company believes that the principal competitive factors for its
products are price, durability, ease of use and installation, speed of
manufacture and delivery time, ability to customize, FHWA and state approval,
and customer service. The Company believes that its plants in both Midland,
Virginia and Reidsville, North Carolina compete favorably with respect to each
of these factors in the Northeast and Mid-Atlantic regions of the United States.
Finally, the Company believes it offers a broad range of products that are
unique and technologically superior to competing products.
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PATENTS AND PROPRIETARY INFORMATION
The Company holds U.S. and Canadian patents for the J-J Hooks Barrier
and the Easi-Set Precast Building, and a U.S. patent for the Slenderwall
exterior cladding system. The European patent for J-J Hooks Barrier was allowed
in December 1997 and has been registered in eleven European countries. The
earliest of the issued patents considered material to the Company's business
expires in 2001 and a new patent was allowed March 2, 1999 which expires in
2017. The Company also owns three U.S. registered trademarks (Easi-Set with logo
symbol (R), Smith Cattleguard(R), and Smith-Midland Excellence in Precast
Concrete(R)), one Canadian registered trademark (Easi-Set(R)) and licenses the
rights to another (DuriSol(R)). The Company licenses the technology used in
DuriSol(R) products pursuant to an agreement that expires on December 31, 2003.
While the Company intends to vigorously enforce its patent rights
against infringement by third parties, no assurance can be given that the
patents or the Company's patent rights will be enforceable or provide the
Company with meaningful protection from competitors or that its patent
applications will be allowed. Even if a competitor's products were to infringe
patents held by the Company, enforcing the patent rights in an enforcement
action would be very costly, and would divert funds and resources that otherwise
could be used in the Company's operations. No assurance can be given that the
Company would be successful in enforcing such rights, that the Company's
products or processes do not infringe the patent or intellectual property rights
of a third party, or that if the Company is not successful in a suit involving
patents or other intellectual property rights of a third party, that a license
for such technology would be available on commercially reasonable terms, if at
all.
GOVERNMENT REGULATION
The Company frequently supplies products and services pursuant to
agreements with general contractors who have entered into contracts with federal
or state governmental agencies. The successful completion of the Company's
obligations under such contracts is often subject to the satisfactory inspection
or approval of such products and services by a representative of the contracting
agency. Although the Company endeavors to satisfy the requirements of each such
contract to which it is a party, no assurance can be given that the necessary
approval of its products and services will be granted on a timely basis or at
all and that the Company will receive any payments due to it. Any failure to
obtain such approval and payment may have a material adverse effect on the
Company's business.
The Company's operations are subject to extensive and stringent
governmental regulations including regulations related to the Occupational
Safety and Health Act (OSHA) and environmental protection. The Company believes
that it is substantially in compliance with all applicable regulations. The cost
of maintaining such compliance is not considered by the Company to be
significant.
The Company's employees in its manufacturing division operate
complicated machinery that may cause substantial injury or death upon
malfunction or improper operation. The Company's manufacturing facilities are
subject to the workplace safety rules and regulations of OSHA. The Company
believes that it is in compliance with the requirements of OSHA.
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During the normal course of its operations, the Company uses and
disposes of materials, such as solvents and lubricants used in equipment
maintenance, that are classified as hazardous by government agencies that
regulate environmental quality. The Company attempts to minimize the generation
of such waste as much as possible, and to recycle such waste where possible.
Remaining wastes are disposed of in permitted disposal sites in accordance with
applicable regulations.
A Phase I Environmental Site Assessment of the Company's Midland
facility was completed in January, 1997. Only two minor recommendations were
made as a result of the survey. These were addressed and corrected.
In the event that the Company is unable to comply with the OSHA or
environmental requirements, the Company could be subject to substantial
sanctions, including restrictions on its business operations, monetary liability
and criminal sanctions, any of which could have a material adverse effect upon
the Company's business.
EMPLOYEES
As of March 26, 1999, the Company had 136 full-time and 5 part-time
employees, 114 of which are located at the Company's Midland facility, and 27 of
which are located at the Company's facility located in Reidsville, North
Carolina. Of the 141 employees, 8 are executive officers or managers, 7 are
responsible for sales and marketing, 114 are in manufacturing, and 12 are
administrative personnel. None of the Company's employees is represented by
labor organizations and the Company is not aware of any activities seeking such
organization. The Company considers its relationships with its employees to be
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES
FACILITIES
The Company operates two manufacturing facilities. The primary
manufacturing operations are conducted in a 44,000 square foot manufacturing
plant on approximately 22 acres of land in Midland, Virginia, of which
approximately 19 acres are owned by the Company and three acres are leased from
Rodney I. Smith, the Company's President, at an annual rental rate of $6,000.
This area houses two concrete mixers, and one concrete blender. The plant also
includes two evironmentally controlled casting areas two batch plants, a form
fabrication shop, a welding and metal fabrication facility, a carpentry shop,
and a quality control center. The Company's Midland facility also includes a
large storage yard for inventory and stored materials.
The Company completed a 16,000 square foot manufacturing building on its
Midland property during the first quarter of 1999 and, in view of the additional
capacity, discontinued performing a portion of its concrete pouring and curing
processes on uncovered, outdoor manufacturing areas. Such outdoor processing was
adversely affected by wet or cold weather and bringing these operations under
roof significantly increased production capacity and efficiency.
In addition, the Company carries out administration, research and
development, sales and marketing, and licensing operations in a 4,500 square
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foot office building located on its Midland property. The Company also owns 19
acres of undeveloped industrial property in Midland, not adjacent to the
manufacturing facility.
The Company's second manufacturing facility is located in Reidsville,
North Carolina on five acres of owned land and includes an 8,000 square foot
manufacturing plant and administrative offices.
The Company believes that its present facilities are adequate for its
current needs. Substantially all of the Company's facilities and equipment were
used as collateral for a $4,000,000 twenty three year note which resulted from a
restructuring of the Company's debt in June 1998 (see Liquidity and Capital
Resources).
ITEM 3. LEGAL PROCEEDINGS
In late 1995, the Company filed four separate informal claims with the
Maryland State Contractor Board of Appeals. These claims totaled approximately
$502,000 for damages and costs incurred as a result of specification, policy and
operating changes to contracts primarily instituted by the State of Maryland,
including the then newly issued "Noise Barrier Acceptance Criteria," all of
which were undertaken after the award of the contracts and after unit production
in accordance with the contracts was virtually complete. In 1996, the Company
filed additional claims against the State of Maryland related to the same
contracts in the amount of $578,500 which brought the amount of the total claims
to $1,080,500. In early 1996, the Company received several counterclaims from
the State of Maryland. The Company has considered the counterclaims in
estimating the recoverability of its claims and certain trade accounts
receivable and approximately $270,100 of the total contract claims is included
in trade accounts receivable at December 31, 1998. The Company collected
$185,000 of the outstanding claims during the first quarter of 1999 and expects
to collect the remaining balance during 1999, although there can be no assurance
of such collections. (See footnote six in the accompanying consolidated
financial statements).
In late 1998 the Company filed suit in the circuit court of Lake County,
Illinois against Trapani Construction Company ("Trapani") & L. J. Sheridan &
Company, as agent for the owner, for the enforcement of a mechanic's lien and
the recovery of approximately $186,500 representing the balance due on a
contract entered into by the Company to manufacture and install Slenderwall
Panels at the Hawthorn Place Medical Center II in Libertyville, Illinois. Work
on that building has been completed, approved and accepted by Trapani and the
owner. Trapani withheld payment on this project because the Company refused to
proceed with a renovation project to reclad Medical Center I, a second building
at the same site which was part of the original contract, without a change order
to cover incremental costs anticipated as a result of alleged inaccurate
specifications supplied by Trapani. The Company believes that there is a high
probability of collection of a major portion of the balance due, but there can
be no assurance in this regard.
The Company is not presently involved in any other litigation of a
material nature.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998, through the solicitation of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "SMID"
and on the Boston Stock Exchange ("BSE") under the symbol "SMC" since December
13, 1995. As of March 26, 1999, there were approximately 65 record holders of
the Company's Common Stock. Management believes there are approximately 500
beneficial owners of the Company's Common Stock.
The following table sets forth the high and low sale prices for the
Company's Common Stock as reported by NASDAQ for the periods indicated. Such
quotations represent interdealer quotations without adjustment for retail
markups, markdowns or commissions and may not represent actual transactions.
Sale
High Low
1997
First Quarter $ 2 1/8 $ 15/16
Second Quarter $ 1 3/8 $ 11/16
Third Quarter $ 1 1/2 $ 9/16
Fourth Quarter $ 1 3/6 $ 3/4
1998
First Quarter $ 1 11/16 $ 3/4
Second Quarter $ 1 11/16 $ 1
Third Quarter $ 1 1/4 $ 1 1/16
Fourth Quarter $ 1 1/16 $ 5/8
The Company has recently been notified by NASDAQ that its securities are
currently being reviewed for compliance with the Nasdaq SmallCap Market
eligibility requirements. As of March 26, 1999, the Company was not in
compliance with all current applicable requirements and the Company believes
that it will have difficulty meeting all the current requirements. In
particular, the minimum bid price ($1) requirement and the net asset requirement
(minimum of $2,000,000) are not currently being met. By June 2, 1999, the
Company must either meet such requirements or request a hearing (which will stay
delisting beyond June 2, 1999).
DIVIDENDS
The Company has not paid dividends on its Common Stock since its
inception and has no intention of paying any dividends to its stockholders in
the foreseeable future. The Company currently intends to reinvest earnings, if
any, in the development and expansion of its business. The declaration of
dividends in the future will be at the election of the Board of Directors and
will depend upon earnings, capital requirements and financial position of the
Company, general economic conditions and other pertinent factors. The Company's
current loan agreement with First International Bank prohibits the payment of
dividends to stockholders without the bank's prior written consent, except for
dividends paid in shares of the Company's Common Stock.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this report.
GENERAL
The Company generates revenues primarily from the sale, shipping,
licensing, leasing and installation of precast concrete products for the
construction, utility and farming industries. The Company's operating strategy
has involved producing innovative and proprietary products, including
Slenderwall(TM), a patent-pending, lightweight, energy efficient concrete and
steel exterior wall panel for use in building construction; J-J Hooks(TM)
Highway Safety Barrier, a patented, positive-connected highway safety barrier;
Sierra Wall, a sound barrier primarily for roadside use; and transportable
concrete buildings. In addition, the Company produces utility vaults, farm
products such as cattleguards, and water and food troughs, and custom order
precast concrete products with various architectural surfaces.
In 1998, the Company began work on a contract to renovate the Bradley
Hall building at Rutgers University (the "Bradley Hall project"). This project,
which is expected to be completed in mid-1999, involves the design, production,
and installation of Slenderwall panels by the Company. While executing the
Bradley Hall project, the original structure was found to be not structurally
sufficient to support the installation of the Slenderwall panels as originally
designed. This lead to cost overruns relating to re-design of the panels,
production of the panels with additional steel and reinforcing, and installation
costs. Management estimates that the cost overruns over the course of the entire
project will total approximately $1.2 million and estimates that the total loss
on the job before recovery on any claims by the Company will be approximately
$1.0 million, which loss has been accrued in its entirety as of December 31,
1998. In 1999, the Company plans to file claims, for which notification had been
made, in the amount of $1.2 million. As of December 31, 1998, $400,000 of the
contract claim has been included in sales and accounts receivable. There can be
no assurance that the loss will not exceed the $1.1 million estimate or that the
Company will be able to collect any of its claim.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997
The Company's operations for 1998 resulted in a loss of $(783,883), or
$(0.26) per share, representing a decrease in net income of $(1,047,686) when
compared to net income in 1997 of $263,803, or $0.09 per share.
For 1998, the Company had total revenue of $14,434,178 compared to total
revenue of $12,004,897 in 1997, an increase of $2,429,281, or 20%. Total product
sales increased 23% to $12,415,252 in 1998, compared to $10,102,121 in 1997.
14
<PAGE>
This increase in product sales is primarily attributed to a change in product
mix to a higher percentage of Slenderwall and other architectural products,
which are higher priced products, and to volume increases. Unit prices have not
changed significantly. Shipping and installation revenue increased to $2,018,926
in 1998 from $1,902,776 in 1997, an increase of $116,150, or 6%, primarily
attributed to an increase in the number and size of installation contracts.
Royalty revenue increased slightly from $262,257 in 1997 to $264,178 in
1998. The increase was principally attributed to an increase in royalty fees
earned on production of Easi-Set(R) precast buildings.
Total cost of goods sold for 1998 was $12,015,760 compared to $9,090,998
in 1997, an increase of $2,924,762. Total cost of goods sold as a percentage of
total revenue increased from 76% in 1997 to 83% in 1998. The percentage increase
was primarily attributed to cost overruns on the Bradley Hall project (see
"General" in this Section).
General and administrative expenses increased $321,428, or 17%, to
$2,236,938 in 1998 from $1,915,510 in 1997. The increase was primarily the
result of an increase in expenses relating to increased costs of hiring and
relocation of staff, professional fees and an increase in the provisions for bad
debts.
Selling and marketing expenses in 1998 were comparable to 1997. Selling
and marketing expenses totaled $678,871 in 1998 compared with $680,489 in 1997.
Interest expense and loan fees increased to $541,161 in 1998 from
$372,118 in 1997, an increase of $169,043, or 45%. The increase was primarily
due to two factors related to the Company's debt refinancing in 1998 (see
"Liquidity and Capital Resources"). First, the Company incurred expense as a
result of the early retirement of several capital leases. Second, the Company
increased its total debt outstanding by approximately $1.6 million during 1998.
These two factors were offset, somewhat, by a reduction in the Company's
weighted average interest rate on its debt outstanding.
As a result of cumulative net operating loss ("NOL") carryforwards of
approximately $2,750,000 available to the Company as of January 1, 1998, no
income tax expense was recorded for 1998. The Company does not expect to incur
income tax expense for 1999 due to the NOL carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its capital expenditures, operating
requirements and growth to date primarily with proceeds from operations, its
initial public offering ("IPO") and bank and other borrowings. The Company had
$4,698,461 of indebtedness at December 31, 1998, of which $573,104 was scheduled
to mature within twelve months.
In June 1998, the Company successfully restructured substantially all of
its debt into one $4,000,000 note with First International Bank ("FIB"),
formerly the First National Bank of New England, headquartered in Hartford,
Connecticut. The Company closed on this loan on June 25, 1998. The Company
obtained a twenty three year term on this note at 1.5% above prime, secured by
equipment and real estate. The term of the note dramatically improved the
Company's current debt ratio and debt service. Current debt decreased from
15
<PAGE>
$2,199,228 at December 31, 1997 to $573,104 at December 31, 1998. In addition to
paying off existing debt of approximately $3.0 million, the Company received
approximately $832,000 in restricted funds, to be used only for plant expansion
and new equipment. The loan is guaranteed in part by the U.S. Department of
Agriculture Rural Business-Cooperative Service's loan guarantee. Under the terms
of the note, the Company's unfinanced fixed asset expenditures are limited to
$300,000 per year for a five year period. In addition, FIB will permit chattel
mortgages on purchased equipment not to exceed $200,000 on an annual basis so
long as the Company is not in default. The Company was also granted a $500,000
operating line of credit by FIB. This commercial revolving promissory note,
which carries a variable interest rate of 1% above prime and which was
originally scheduled to terminate on May 1, 1999, was recently extended for
sixty days. The Company expects to refinance, extend and/or term the line of
credit upon its extended maturity date.
At December 31, 1998, the Company had cash totaling $207,661 and
restricted cash balances in the amount of $387,462, compared to total cash of
$288,310 and restricted cash in the amount of $196,977, at December 31, 1997.
During 1998, the Company used $284,756 in cash (net) to fund its operating
activities and $1,229,604 in its investing activities, primarily for the funding
of a 16,000 square foot plant addition (see "Item 2. Description of Properties -
Facilities"). The Company's financing activities provided $1,624,196 primarily
as a result of the refinancing discussed above.
Capital spending increased to $1,237,689 in 1998, from $524,232 in 1997,
as the Company implemented programs to improve manufacturing efficiencies as
well as overall plant capacity and yard storage capacity. Planned capital
expenditures for 1999 are limited, as stated above, by the FIB loan agreement.
Approximately $387,000 of restricted cash was held at December 31, 1998 for
construction and equipment expenditures. The majority of the restricted funds
were used early in 1999 to complete the new production facility (see "Item 2.
Description of Properties - Facilities"). No other significant cash
committments are expected in 1999.
As a result of the Company's debt burden, the Company is especially
sensitive to changes in the prevailing interest rates. Increases in such
interest rates may materially and adversely affect the Company's ability to
finance its operations either by increasing the Company's cost to service its
current debt, or by creating a more burdensome refinancing environment.
Management intends to refinance this debt as it becomes due. Although management
has shown the ability to refinance and/or extend its debt in prior years, no
assurance can be given that the Company will be successful in its efforts to
extend or refinance its current indebtedness should that become necessary, or
that if it is successful in those efforts, that such extension or refinancing
will be on terms favorable to the Company. If the Company is not able to extend
or refinance the indebtedness, the Company may be subject to having its assets
foreclosed upon by certain lenders which would have a material adverse effect on
the Company's business.
The Company's cash flow from operations is affected by production
schedules set by contractors, which generally provide for payment 45 to 75 days
after the products are produced. This payment schedule has resulted in liquidity
problems for the Company because it must bear the cost of production for its
products before it receives payment. In addition, the Company's cash flow has
been significantly effected by the loss on the Bradley Hall project. Although no
assurance can be given, the Company believes that anticipated cash flow from
operations and existing credit facilities will be sufficient to finance the
Company's operations for at least the next 12 months. In the event cash flow
from operations and existing credit facilities are not adequate to support
operations, the Company is currently investigating alternative sources of
short-term financing, for which there can be no assurance of obtaining.
16
<PAGE>
The Company has formed a team to address the affect of the year 2000 on
the Company's systems and operations. The Company expects that costs incurred in
the preparation for the year 2000 will not have a significant impact on the
Company's cash flow or results of operations. The Company plans to be fully Y2K
compliant by the fourth quarter of 1999.
SEASONALITY
The Company services the construction industry primarily in areas of the
United States where construction activity is inhibited by adverse weather during
the winter. As a result, the Company experiences reduced revenues from December
through March and realizes the substantial part of its revenues during the other
months of the year. The Company typically experiences lower profits, or losses,
during the winter months, and must have sufficient working capital to fund its
operations at a reduced level until the spring construction season. The failure
to generate or obtain sufficient working capital during the winter may have a
material adverse effect on the Company.
INFLATION
To date, management believes that the Company's operations have not been
materially affected by inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued Statement
of financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair market value. Presently the Company does not use derivative
instruments either in hedging activities or as investments. Accordingly, the
Company believes that adoption of SFAS 133 will have no impact on its financial
position or results of operations.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997................... F-3
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997 ......... ....................................................F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998 and 1997..................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997 ............................................................... F-7
Summary of Significant Accounting Policies..................................... F-9
Notes to Consolidated Financial Statements .................................... F-12
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
DIRECTOR OR
EXECUTIVE
NAME AGE OFFICER SINCE POSITION
<S> <C> <C> <C>
Rodney I. Smith 60 1970 Chief Executive Officer, President
And Chairman of the Board of
Directors
Ashley B. Smith 36 1994 Vice President of Sales and
Marketing and Director
Wesley A. Taylor 51 1994 Vice President of Administration
and Director
Andrew Kavounis 73 1995 Director
Theodore D. Pennington 61 1998 Vice President, Finance and
Chief Financial Officer
</TABLE>
BACKGROUND
The following is a brief summary of the background of each Director and
executive officer of the Company:
RODNEY I. SMITH. CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER AND
PRESIDENT. Rodney I. Smith co-founded the Company in 1960 and became its
President and Chief Executive Officer in 1965. He has served on the Board of
Directors and has been its Chairman since 1970. Mr. Smith is the principal
developer and inventor of the Company's proprietary and patented products. Mr.
Smith is the past President of the National Precast Concrete Association. Mr.
Smith has served on the Board of Trustees of Bridgewater College in Bridgewater,
Virginia, since 1986.
ASHLEY B. SMITH. VICE PRESIDENT OF SALES AND MARKETING AND DIRECTOR. Ashley B.
Smith has served as Vice President of Sales and Marketing of the Company since
1990 and as a Director since December 1994. Mr. Smith holds a Bachelor of
Science degree in Business Administration from Bridgewater College. Mr. Ashley
B. Smith is the son of Mr. Rodney I. Smith.
WESLEY A. TAYLOR. VICE PRESIDENT OF ADMINISTRATION AND DIRECTOR. Wesley A.
Taylor has served as Vice President of Administration of the Company since 1989
and as a Director since December 1994, and previously held positions as
Controller and Director of Personnel and Administration. Mr. Taylor holds a
Bachelor of Arts degree from Northwestern State University.
19
<PAGE>
ANDREW KAVOUNIS. DIRECTOR. Andrew Kavounis has served as a Director of the
Company since December 1995. Mr. Kavounis was President of Core Development Co.,
Inc., a privately held construction and development concern from 1991 until he
retired in 1995. From 1989 to 1991, Mr. Kavounis was the Executive Vice
President of the Leadership Group, a Maryland based builder and developer. Prior
to that time, Mr. Kavounis spent 37 years as an executive at assorted
construction and development companies, which included a position as the
National Vice President of Ryland Homes, a privately held company, in which
capacity he was directly responsible for the construction of 17,000 homes
annually, nationwide. Mr. Kavounis received a Bachelor of Science degree in
Chemical Engineering from Presbyterian College, a Bachelor of Science degree in
Civil and Mechanical Engineering from Wofford College, and a Master's degree in
Business Administration from the University of South Carolina.
THEODORE D. PENNINGTON. VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER. Mr.
Pennington has served as Vice President, Finance and Chief Financial Officer of
the Company since September 1998. Prior to joining the Company, Mr. Pennington
was a financial consultant serving clients in the telecommunications and
financial services industries. From September 1996 through December 1997, Mr.
Pennington was Vice President, Finance and Administration, Chief Financial
Officer and Secretary for Codon Pharmaceuticals Corporation. Mr. Pennington also
served as Vice President, Finance and Administration for Cryomedical Sciences,
Inc. from 1990 through 1995 and as Secretary from 1992 through 1995. Mr.
Pennington holds a Master of Business Administration degree in finance from the
University of Hartford, a Master of Business Administration Degree in industrial
management from the Wharton School of the University of Pennsylvania, and a
Bachelor of Science Degree in mechanical engineering from Lafayette College
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), requires executive officers and Directors and
persons who beneficially own more than ten percent (10%) of the Company's Common
Stock to file initial reports of ownership on Form 3 and reports of changes in
ownership on Form 4 with the Securities and Exchange Commission (the
"Commission") and any national securities exchange on which the Corporation's
securities are registered. Executive officers, Directors and greater than ten
percent (10%) beneficial owners are required by the Commission's regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and Directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, Directors and greater than ten per cent (10%) beneficial
owners were satisfied, except for the Form 3 and Form 4 filings due for the
following transactions, which filings are currently being prepared:
Form 4 for Andrew Kavounis for the Nov. 5, 1997 grant of non-qualified
stock options,
Form 4 for Bernard Patriacca for the Nov. 5, 1997 grant of non-qualified
stock options,
Form 4 for Rodney I. Smith for the July 31, 1998 grant of non-qualified
stock options,
20
<PAGE>
Form 4 for Rodney I. Smith for the August 4, 1998 grant of
non-qualified stock options,
Form 4 for Ashley Smith for the November 5, 1997 grant of incentive
stock options,
Form 4 for Ashley Smith for the August 4, 1998 grant of incentive stock
options,
Form 4 for Wesley A. Taylor for the November 5, 1997 grant of incentive
stock options,
Form 4 for Wesley A. Taylor for the August 4, 1998 grant of incentive
stock options,
Form 3 for Thomas Deserable due upon appointment as Chief Operating
Officer of Smith-Midland Virginia and for the August 4, 1998 grant of
incentive stock options.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by the Company for
services rendered for the last three completed fiscal years to the executive
officers of the Company and its subsidiaries whose cash compensation exceeded
$100,000 during 1998:
<TABLE>
<CAPTION>
- --------------------- ------------------------------------- -------------------------------------
Annual Compensation Long Term Compensation
- --------------------- ------------------------------------- -------------------------------------
- --------------------- ------------------------------------- ------------------ ------------------
Awards Payouts
- --------------------- ------------------------------------- ------------------ ------------------
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
Securities
Other Under- All
Name and Annual Restricted lying Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts sation
$ $ $ $ (#) $ $
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rodney I. Smith 1998 175,000 54,500 - - 20,000 - -
President, Chief 1997 170,503 81,500 - - - - -
Executive Officer 1996 175,000 - - - - - -
and Chairman of the
Board.
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
Thomas J. Deserable 1998 45,867 - 65,508(1) - 2,000 - -
Former Chief 1997 - - - - - - -
Operating Officer, 1996 - - - - - - -
Smith-Midland
Corporation
(Virginia) through
3/16/99
- --------------------- --------- -------- --------- -------- --------- -------- --------- --------
</TABLE>
(1) Mr. Deserable received $65,508 in consulting fees prior to commencing
employment as Chief Operating Officer of Smith-Midland Corporation (Virginia),
the primary subsidiary of the Company.
COMPENSATION OF DIRECTORS
All non-employee Directors receive $500 per meeting as compensation for
their services as Directors and are reimbursed for expenses incurred in
connection with the performance of their duties. All employee Directors, except
Rodney I Smith, receive $250 per meeting as compensation for their services and
are reimbursed for expenses incurred in connection with the performance of their
duties. Rodney I. Smith receives no compensation as a Director.
21
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes option grants during 1998 to the named
executive officers:
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
---- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Rodney I. Smith........... 20,000 32.27% 1.00 7/31/06
Thomas J. Deserable...... 2,000 3.23% 1.00 7/31/06
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Shares Shares Underlying Value of Unexercised
Acquired Unexercised Options In-the-Money Options
on Value at Fiscal Year End (#) at Fiscal Year-End ($)(1)
Exercise Realized ------------------------ --------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- -------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Rodney I. Smith........ --- --- 0 20,000 0 ---
Thomas J. Deserable.... --- --- 0 2,000 0 ---
- --------
</TABLE>
(1) Value is based on the closing sales price of the Company's Common Stock on
December 31, 1998 ($1.00), the last trading day of 1998, less the option
exercise price ($1.00).
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mr. Rodney I.
Smith, which provides for an annual base salary of $175,000. The present term of
the agreement continues until December 31, 1999, and is thereafter automatically
renewed for successive one year periods unless Mr. Smith or the Company gives
the other party three months prior written notice of non-renewal. Bonuses and
salary increases may be granted by the Compensation Committee of the Board of
Directors, as it so determines from time to time. Mr. Smith has voluntarily
reduced his annual base salary by 22.5% to $135,625 temporarily, effective March
8, 1999. Mr. Smith also is entitled to receive benefits offered to the Company's
employees generally. If terminated without cause, Mr. Smith is entitled to
receive as severance pay an amount equal to twenty-four (24) months of his base
salary, less taxes, other required withholdings and any amounts owed to the
Company, payable in accordance with the Company's standard payroll procedures.
In addition, the employment agreement precludes Mr. Smith from competing with
the Company during his employment and for at least one year thereafter, and from
disclosing confidential information. The Company is the owner of and the
beneficiary of three key person life insurance policies on Mr. Smith totaling
$1,400,000.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 26, 1998, certain
information concerning ownership of the Company's Common Stock by (i) each
person known by the Company to own of record or be the beneficial owner of more
than five percent (5%) of the Company's Common Stock, (ii) each of the Company's
Directors and Executive Officers, and (iii) all Directors and Executive Officers
as a group. Except as otherwise indicated, the Stockholders listed in the table
have sole voting and investment powers with respect to the shares indicated.
NUMBER OF SHARES
NAME AND ADDRESS OF PERCENTAGE OF PERCENTAGE
BENEFICIAL OWNER(1) BENEFICALLY OWNED(2) OF CLASS
- ------------------- -------------------- -----------
Rodney I. Smith (3)(4)(5) 843,298 27.70
Robert M. Rubin (6) 230,000 7.55
Ashley B. Smith (3)(4)(7) 94,717 3.11
Wesley A. Taylor (8) 4,700 *
Andrew Kavounis (9) 2,000 *
Theodore D. Pennington 1,000 *
All directors and executive
officers as a group (5 persons)
(2)(3)(4)(5)(6)(7)(8)(9) 945,715 30.94
- ----------------------------------
* Less than 1%
(1) The address for each of Messrs. Rodney I. Smith, Ashley B. Smith, Taylor,
Kavounis, and Pennington is c/o Smith-Midland Corporation, P.O. Box 300,
5119 Catlett Road, Midland, Virginia 22728. The address for Mr. Rubin is
6060 Kings Gate Circle, Dealany Beach, Florida 33486.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person
shown in the table.
(3) Rodney I. Smith and Ashley B. Smith are father and son, respectively. Each
of Rodney I. Smith and Ashley B. Smith disclaims beneficial ownership of the
other's shares of Common Stock.
(4) Does not include an aggregate of 98,958 shares of Common Stock held by
Jeremy Smith, Matthew Smith, and Roderick Smith, sons of Rodney I. Smith,
and brothers of Ashley B. Smith, and 112,713 shares held by Merry Robin
Bachetti, sister of Rodney I. Smith and aunt of Ashley B. Smith, for which
each of Rodney I. Smith and Ashley B. Smith disclaims beneficial ownership.
23
<PAGE>
(5) Includes the 100,000 shares of Common Stock that have been deposited into an
irrevocable trust (the "Trust") for the benefit of Hazel Smith, the income
beneficiary of the Trust and former wife of Rodney I. Smith, and Mr. Smith's
children. Mr. Smith is the trustee of the Trust and, as such, may vote the
shares as he deems fit. Includes the 230,000 shares of Common Stock held by
Mr. Robert M. Rubin which Mr. Smith holds an irrevocable proxy to vote as
Mr. Smith deems fit, subject to certain limitations. This proxy expires on
the first to occur of (i) ten years from the date of the proxy or (ii) the
sale by Mr. Rubin of the shares of Common Stock subject to the proxy. The
230,000 shares of Common Stock held by Mr. Rubin were accounted for in
calculating both Mr. Smith's and Mr. Rubin's beneficial ownership.
(6) Mr. Rodney I. Smith holds an irrevocable proxy to vote the 230,000 shares of
Common Stock held by Mr. Rubin. This proxy expires on the first to occur of
(i) ten years from the date of the proxy or (ii) the sale by Mr. Rubin of
the shares of Common Stock subject to the proxy. The 230,000 shares of
Common Stock held by Mr. Rubin were accounted for in calculating both Mr.
Smith's and Mr. Rubin's beneficial ownership.
(7) Includes options to purchase 5,100 shares of Common Stock of the C Company
exercisable at $1.00 per share.
(8) Includes options to purchase 4,700 shares of Common Stock of the Company
exercisable at $1.00 per share.
(9) Includes options to purchase 2,000 shares of Common Stock of the Company
exercisable at $1.00 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At December 31, 1998, the Company owned an unsecured note for
approximately $624,387 receivable from Mr. Rodney I. Smith, the Company's
President and majority shareholder, with a seven year term accruing interest at
a rate of 6% per annum. During 1996, $102,300 of the note was reduced for the
Company's purchase of 40,920 common shares from Mr. Smith. On December 31, 1997,
the terms of the note were changed to call for annual payments of $45,948
beginning on December 31, 1998 and continuing through maturity on December 31,
2002. Total interest income on this note was approximately $37,600 and $39,500
for the years ended December 31, 1998 and 1997, respectively.
24
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
(1) The following exhibits are filed herewith:
Exhibit
No.
- -------
27 Financial Data Schedule
(2) The following exhibits were filed as part of the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1998 and are
incorporated herein by reference:
Exhibit
No. Title
- ------- -----
1 First National Bank of New England Loan Agreement
2 First National Bank of New England Loan Note
(3) The following exhibits were filed as part of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997and are
incorporated herein by reference:.
Exhibit
No. Title
- ------- -----
10c Promissory Note from Rodney I. Smith to the Company, dated as of
December 31, 1997.
(4) The following exhibits were filed as part of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995 and
are incorporated herein by reference.
25
<PAGE>
Exhibit
No. Title
- ------- -----
10a License Agreement by and between the Company and DuriSol, Inc.,
dated January 22, 1996.
21 List of Subsidiaries of the Company.
(5) The following exhibits were filed as part of the Company's Form
SB-2 Registration Statement (No. 33-89312) declared effective by
the Commission on December 13, 1995 and are incorporated herein
by reference:
Exhibit
No. Title
- ------- -----
3a Certificate of Incorporation, as amended.
3b Bylaws, as amended.
4b Specimen Common Stock Certificate.
4c Form of Public Warrant Agreement, including Specimen Redeemable Common
Stock Purchase Warrant.
4d Form of Warrant Agreement between the Company, Network 1 Financial
Securities Inc. and First Hanover Securities, Inc., including Form of
Underwriter's Warrant Certificate.
10a Employment Agreement between the Company and Rodney I. Smith.
10r Lease Agreement between the Company and Rodney I. Smith.
10t Collateral Assignment of Letters Patent between the Company and Rodney
I. Smith.
10u Form of License Agreement between the Company and its Licensee.
10w 1994 Stock Option Plan.
(B) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1998.
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SMITH-MIDLAND CORPORATION
Date: April 14, 1999 By: /s/ Rodney I. Smith
--------------------------
Rodney I. Smith, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
Name Capacity Date
- ---- -------- ----
/s/ Rodney I. Smith Chairman of the Board, April 14, 1999
- --------------------- Chief Executive Officer
Rodney I. Smith and President (principal
executive officer)
/s/ Theodore D. Pennington Vice President, Finance April 14, 1999
- -------------------------- and Chief Financial
Theodore D. Pennington Officer(principal finance
and accounting officer)
/s/ Wes Taylor Vice President of April 14, 1999
- --------------- Administration and
Wes Taylor Director
/s/ Ashley Smith Vice President of Sales April 14, 1999
- ---------------- and Marketing and Director
Ashley Smith
/s/ Andrew Kavounis Director April 14, 1999
- -------------------
Andrew Kavounis
27
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Contents
Report of Independent Certified Public Accountants F - 2
Consolidated Financial Statements
Balance Sheets F - 3
Statements of Operations F - 5
Statements of Stockholders' Equity F - 6
Statements of Cash Flows F - 7
Summary of Significant Accounting Policies F - 9
Notes to Financial Statements F - 12
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Smith-Midland Corporation
Midland, Virginia
We have audited the accompanying consolidated balance sheets of Smith-Midland
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smith-Midland
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
Richmond, Virginia
April 12, 1999
F-2
<PAGE>
December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets (Note 2)
Current assets
Cash $ 207,661 $ 288,310
Accounts receivable (Note 6)
Trade - billed, (less allowance for doubtful
accounts of $262,000 - 1998 and $231,000 - 1997) 3,824,012 3,254,993
Trade - unbilled 199,108 410,158
Inventories
Raw materials 522,468 486,583
Finished goods 989,745 942,427
Prepaid expenses and other assets 116,034 69,801
- --------------------------------------------------------------------------------
Total current assets 5,859,028 5,452,272
- --------------------------------------------------------------------------------
Property and equipment, net (Notes 1 and 2) 2,449,566 1,531,062
- --------------------------------------------------------------------------------
Other assets
Cash - restricted (Notes 2 and 6) 387,462 196,977
Note receivable, officer (Note 3) 624,387 632,472
Other 246,058 79,443
- --------------------------------------------------------------------------------
Total other assets 1,257,907 908,892
- --------------------------------------------------------------------------------
$9,566,501 $7,892,226
================================================================================
F-3
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of notes payable (Note 2) $ 573,104 $2,199,228
Accounts payable - trade 2,177,884 1,744,127
Accrued expenses and other liabilities (Note 6) 1,115,118 570,693
Customer deposits 306,255 450,474
- --------------------------------------------------------------------------------
Total current liabilities 4,172,361 4,964,522
Notes payable - less current maturities (Note 2) 4,020,661 759,440
Notes payable - related parties (Note 3) 104,696 115,598
- --------------------------------------------------------------------------------
Total liabilities 8,297,718 5,839,560
- --------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 6)
- --------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $.01 par value; authorized
1,000,000 shares, none outstanding - -
Common stock, $.01 par value; authorized
8,000,000 shares; 3,085,718 issued,
3,044,798 outstanding 30,857 30,857
Additional capital 3,450,085 3,450,085
Accumulated deficit (2,109,859) (1,325,976)
- --------------------------------------------------------------------------------
1,371,083 2,154,966
Treasury stock, at cost, 40,920 shares (102,300) (102,300)
- --------------------------------------------------------------------------------
Total stockholders' equity 1,268,783 2,052,666
- --------------------------------------------------------------------------------
$9,566,501 $7,892,226
================================================================================
See accompanying summary of significant accounting
policies and notes to consolidated financial
statements.
F-4
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Revenue $14,434,178 $12,004,897
Cost of goods sold 12,015,760 9,090,998
- --------------------------------------------------------------------------------
Gross profit 2,418,418 2,913,899
- --------------------------------------------------------------------------------
Operating expenses
General and administrative expenses 2,236,938 1,915,510
Selling expenses 678,871 680,489
- --------------------------------------------------------------------------------
Total operating expenses 2,915,809 2,595,999
- --------------------------------------------------------------------------------
Operating income (loss) (497,391) 317,900
- --------------------------------------------------------------------------------
Other income (expense)
Royalties 264,178 262,257
Interest expense and loan fees (541,161) (372,118)
Interest income (Note 3) 63,616 45,795
Other, net (73,125) 9,969
- --------------------------------------------------------------------------------
Total other income (expense) (286,492) (54,097)
- --------------------------------------------------------------------------------
Net income (loss) $ (783,883) $ 263,803
================================================================================
Basic and diluted income (loss) per share $ (.26) $ .09
================================================================================
Weighted average common shares outstanding 3,044,798 3,044,798
================================================================================
See accompanying summary of significant accounting
policies and notes to consolidated financial
statements.
F-5
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Treasury
Stock Capital Deficit Stock Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $30,857 $3,450,085 $(1,589,779) $(102,300) $1,788,863
Net income - - 263,803 - 263,803
- -------------------------------------------------------------------------------------------
Balance, December 31, 1997 30,857 3,450,085 (1,325,976) (102,300) 2,052,666
Net loss - - (783,883) - (783,883)
- -------------------------------------------------------------------------------------------
Balance, December 31, 1998 $30,857 $3,450,085 $(2,109,859) $(102,300) $1,268,783
===========================================================================================
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial
statements.
F-6
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Cash received from customers $14,203,657 $11,670,478
Cash paid to suppliers and employees (13,955,985) (10,876,160)
Interest paid (540,695) (372,118)
Other 8,267 103,804
- --------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities (284,756) 526,004
- --------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (1,237,689) (524,232)
Repayments (advances) on officer note receivable 8,085 26,528
- --------------------------------------------------------------------------------------
Net cash absorbed by investing activities (1,229,604) (497,704)
- --------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from borrowings 4,642,275 192,565
Repayments of borrowings (3,007,177) (368,274)
Repayments on borrowings - related
parties, net (10,902) -
- --------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities 1,624,196 (175,709)
- --------------------------------------------------------------------------------------
Increase in cash - restricted (190,485) (2,360)
- --------------------------------------------------------------------------------------
Net decrease in cash (80,649) (149,769)
Cash, beginning of year 288,310 438,079
- --------------------------------------------------------------------------------------
Cash, end of year $ 207,661 $ 288,310
======================================================================================
</TABLE>
continued...
F-7
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided (absorbed) by operating activities
Net income (loss) $ (783,883) $ 263,803
Adjustments to reconcile net income (loss) to net
cash provided (absorbed) by operating activities
Depreciation and amortization 319,185 374,041
(Increase) decrease in
Accounts receivable - billed (569,019) (549,668)
Accounts receivable - unbilled 211,050 (296,859)
Inventories (83,203) 102,030
Prepaid expenses and other assets (212,848) 23,399
Increase (decrease) in
Accounts payable - trade 433,757 304,193
Accrued expenses and other liabilities 544,425 55,214
Customer deposits (144,220) 249,851
- --------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities $ (284,756) $ 526,004
======================================================================================
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial
statements.
F-8
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
Nature of Business The Company develops, manufactures, licenses, sells and
installs precast concrete products for the construction,
transportation and utilities industries primarily in the
Mid-Atlantic region.
Principles of The accompanying consolidated financial statements include
Consolidation the accounts of Smith-Midland Corporation and its wholly-
owned subsidiaries (the "Company"). All material
intercompany accounts and transactions have been
eliminated in consolidation.
Inventories Inventories are stated at the lower of cost, using the
first-in, first-out (FIFO) method, or market.
Property and Property and equipment is stated at cost. Expenditures
Equipment for ordinary maintenance and repairs are charged to
income as incurred. Costs of betterments, renewals, and
major replacements are capitalized. At the time properties
are retired or otherwise disposed of, the related cost
and allowance for depreciation are eliminated from the
accounts and any gain or loss on disposition is reflected
in income.
Depreciation is computed using the straight-line method
over the following estimated useful lives:
Years
----------------------------------------------
Buildings 10-33
Trucks and automotive equipment 3-10
Shop machinery and equipment 3-10
Land improvements 10-15
Office equipment 3-10
Income Taxes The Company utilizes the asset and liability method of
accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to
differences between the financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that
includes the enactment date.
F-9
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
Revenue Recognition The Company recognizes revenue on the sale of its standard
precast concrete products at shipment date, including
revenue derived from any projects to be completed under
short-term contracts. Installation services for precast
concrete products, leasing and royalties are recognized as
revenue as they are earned on an accrual basis. Licensing
fees are recognized under the accrual method unless
collectibility is in doubt, in which event revenue is
recognized as cash is received.
Certain sales of Soundwall and Slenderwall concrete
products are recognized upon completion of units produced
under long-term contracts. When necessary, provisions for
estimated losses on these contracts are made in the period
in which such losses are determined. Changes in job
performance, conditions and contract settlements which
affect profit are recognized in the period in which the
changes occur. An amount equal to contract costs
attributable to claims is included in revenues when
realization is probable and the amount can be reliably
estimated. Unbilled trade accounts receivable represents
revenue earned on units produced and not yet billed.
Risks and The Company sells products to highway contractors
Uncertainties operating under government funded highway programs and
other customers and extends credit based on an evaluation
of the customer's financial condition, generally without
requiring collateral. Exposure to losses on receivables is
principally dependent on each customer's financial
condition. The Company monitors its exposure to credit
losses and maintains allowances for anticipated losses.
Due to inclement weather, the Company may experience
reduced revenues from December through February and may
realize the substantial part of its revenues during the
other months of the year.
Fair Value The estimated fair value of financial instruments
of Financial approximates their carrying amounts as of December 31,
Instruments 1998 and 1997. The estimated fair value of long term debt
is based on current rates offered to the Company for debt
of the same maturities.
Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-10
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
Earnings (Loss) Earnings per share is based on the weighted average number
per share of shares of common stock and dilutive common stock
equivalents outstanding. Basic earnings per share is
computed by dividing income available to common
shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that
could share in earnings of an entity. Basic and diluted
earnings per share are the same in 1998 and 1997 because
the impact of dilutive securities is anti-dilutive.
Long-Lived Assets Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and
For Long-Lived Assets to Be Disposed Of." SFAS 121
requires that long-lived assets and certain intangibles to
be held and used by an entity be reviewed for impairment
when events or changes in circumstances indicate that the
carrying amount may not be recoverable. In addition, SFAS
121 requires long-lived assets and certain intangibles to
be disposed of to be reported at the lower of carrying
amount or fair value less costs to sell. The Company
reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment
whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable based
on undiscounted estimated future operating cash flows. As
of December 31, 1998, the Company has determined no
impairment has occurred.
Recent Accounting In June 1998, the Financial Accounting Standards Board
Pronouncements issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments" ("SFAS 133").
SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets
or liabilities and measure those instruments at fair
market value. Presently, the Company does not use
derivative instruments either in hedging activities or as
investments. Accordingly, the Company believes that
adoption of SFAS 133 will have no impact on its financial
position or results of operations.
F-11
<PAGE>
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, 1998 1997
---------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 568,660 $ 435,110
Buildings 1,012,840 955,386
Machinery and equipment 5,325,917 4,772,713
Rental equipment 39,240 39,240
Construction in progress 562,092 68,612
---------------------------------------------------------------
7,508,749 6,271,061
Less: accumulated depreciation 5,059,183 4,739,999
---------------------------------------------------------------
$2,449,566 $1,531,062
===============================================================
</TABLE>
At December 31, 1998, the Company had a manufacturing
plant and an engineering building in progress. The
manufacturing plant was completed in the first quarter of
1999. The total cost of the facilities is currently
estimated to be $738,000.
2. Notes Payable Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Note payable to Riggs Bank, maturing July 8,
1998 with monthly principal payments of
$2,000 plus interest, at a rate of prime
plus 1.5%, collateralized by accounts
receivable. $ - $935,000
Note payable to John Schied, maturing May 21,
1998; with monthly payments of $1,169 of
principal and interest, at a rate of 10%;
collateralized by certain vehicles. - 5,699
Note payable to First International Bank,
formerly First National Bank of New England,
maturing June 2021; with monthly payments of
$37,087 of principal and interest, at a rate
of prime plus 1.5% (9.75% at December 31,
1998); collateralized by principally all
assets of the Company. 3,979,245 -
F-12
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
2. Notes Payable December 31, 1998 1997
(continued) -----------------------------------------------------------------------
Note payable to Security Bank maturing July 13,
1999; monthly payments of $4,280 of principal
and interest, at a rate of prime plus 3%;
collateralized by a first deed of trust on
certain land. $ - $ 83,115
Note payable to Midland Loan Service maturing
March 1, 1999; with varying monthly payments
of principal and interest at a rate of 14%;
collateralized by plant buildings. - 103,918
Note payable to State Bank of Remington,
maturing December 22, 2000; with monthly
payments of $5,788 of principal and interest,
at a rate of 10.75%; collateralized by
equipment and vehicles. - 180,300
Note payable to State Bank of Remington,
maturing February 11, 1999; with monthly
payments of interest, at a rate of 6.85%;
collateralized by a certificate of deposit. - 185,689
Line of credit with First International Bank,
maturing May 30, 1999; interest payable
monthly at prime plus 1% (8.75% at December
31, 1998); secured by accounts receivable
and inventory 425,000 -
F-13
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
2. Notes Payable December 31, 1998 1997
(continued) -----------------------------------------------------------------------
Notes payable to Myers' trusts, each of four
maturing June 26, 1998; with monthly payments
of $3,241 each of principal and interest at a
rate of 12%; collateralized by a third deed
of trust on land, inventory and accounts
receivable. $ - $623,252
Notes payable to Branch Banking and Trust
maturing November 5, 1998; with monthly
payments of $2,000 of principal and interest
at a rate of 8%; collateralized by accounts
receivable, inventory and equipment of
Smith-Carolina Corporation. - 83,064
Note payable to Obrey Messick, maturing May 31,
2001; with monthly payments of $1,461 of
principal and interest, at a rate of 10%;
collateralized by equipment. - 50,559
Notes payable to Obrey Messick, maturing
December 1, 2002; with monthly payments of $582
of principal and interest at a rate of 10%;
collateralized by equipment. - 27,383
Notes payable to State Bank of Remington,
maturing June 21, 1998; with varying monthly
payments of principal and interest at a rate
of 9.26%; collateralized by machinery. - 17,574
Notes payable to Orix Leasing, maturing July 2002,
with monthly payments of $1,640 of principal
and interest at 13%; collateralized by equipment. - 82,815
F-14
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
2. Notes Payable December 31, 1998 1997
(continued) -----------------------------------------------------------------------
Notes payable to Poland Brothers Farm, maturing
August 2009, with monthly payments of $598 of
principal and interest at a rate of 10%;
collateralized by land. $ - $ 49,268
Notes payable to United Leasing, maturing June
29, 1999, with monthly payments of $2,987 of
principal and interest at a rate of 21.7%;
collateralized by equipment. - 39,974
Notes payable to United Leasing, maturing
October 4, 2000, with monthly payments of
$9,039 of principal and interest at a rate of
19.7%; collateralized by equipment, machinery,
and a second deed of trust on land. - 209,502
Installment notes and capitalized leases
collateralized by certain machinery and
equipment maturing at various dates,
primarily August 2001 through October 2003,
with interest rates at 7.25% through 8.25%. 169,520 147,227
Unsecured note payable due on demand,
with interest rate at 14%. 20,000 134,329
----------------------------------------------------------------------
4,593,765 2,958,668
Less current maturities 573,104 2,199,228
----------------------------------------------------------------------
$4,020,661 $ 759,440
======================================================================
</TABLE>
F-15
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
2. Notes Payable During 1998, the Company restructured substantially all
(continued) its debt with First International Bank (formerly the First
National Bank of New England). The Company obtained a
$4,000,000 twenty-three year term note at prime plus 1.5%
and paid off existing debt at that time of approximately
$3,000,000. The remaining proceeds are being used for
plant expansion and the purchase of equipment. The loan is
guaranteed in part by the U.S. Department of Agriculture
Rural Business - Cooperative Services. The Company was
also granted a $500,000 operating line of credit. The loan
agreement includes certain provisions, affirmative and
negative covenants, including tangible capital and debt to
net worth ratio, which were met by the Company at December
31, 1998.
The $500,000 line of credit is due contractually within
the next fiscal year. Management has shown the ability to
refinance and/or extend its debt in prior years, and
intends to extend and/or refinance this debt as it becomes
due in 1999.
The aggregate amounts of notes payable maturing in each of
the next five years and thereafter are as follows:
Year Ending December 31, Amount
-------------------------------------------
1999 $ 573,104
2000 103,674
2001 106,933
2002 99,662
2003 and thereafter 3,710,392
-------------------------------------------
$4,593,765
===========================================
3. Related Party The Company currently leases three and one half acres of
Transactions its Midland, Virginia property from its President, on a
month-to-month basis, as additional storage space for the
Company's finished work product. The lease agreement calls
for minimum annual rent of $6,000.
Notes payable - related parties are unsecured, with no
fixed maturity date (but no earlier than January 1, 2000)
and bear interest at 10%. Total interest expense on these
notes was $10,500 and $11,500 for the years ended December
31, 1998 and 1997, respectively.
F-16
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
3. Related Party The Company has an unsecured note receivable from its
Transactions President and majority stockholder with a seven- year term
(continued) bearing interest at 6%. The terms of the note call for
annual payments of $45,948 beginning on December 31, 1998,
and continuing through maturity on December 31, 2002.
Total interest income on this note was approximately
$37,600 and $39,500 for the years ended December 31, 1998
and 1997, respectively.
As of December 31, 1998 and 1997, the Company was the
beneficiary of individual life insurance policies on the
life of the President with a total cash surrender value of
approximately $148,000 and $139,000, respectively.
Borrowings of approximately $116,724 and $117,514 were
outstanding against the cash surrender value at December
31, 1998 and 1997.
4. Income Taxes The provision for income taxes differs from the amount
determined by applying the federal statutory tax rate to
pre-tax income as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
------------------------------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $(273,000) (34)% $ 89,700 34%
Increase (decrease) in taxes
resulting from:
Utilization of net operating loss
carryforward - - (97,800) (37)
Increase in valuation allowance 261,000 30 - -
Other 12,000 4 8,100 3
------------------------------------------------------------------------------
$ - - % $ - -%
==============================================================================
</TABLE>
F-17
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
4. Income Taxes Deferred tax assets (liabilities) are as follows:
(continued)
<TABLE>
<CAPTION>
December 31, 1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Depreciation $ (44,600) $ (4,400)
Allowance for doubtful accounts 102,000 92,500
Vacation accrued 41,000 68,300
Operating loss carryforwards 1,072,000 753,000
-------------------------------------------------------------------
Net deferred tax asset 1,170,400 909,400
Deferred tax asset valuation allowance (1,170,400) (909,400)
-------------------------------------------------------------------
$ - $ -
===================================================================
</TABLE>
At December 31, 1998, the Company had approximately
$2,750,000 of cumulative net operating loss carryforwards
with expiration dates through December 31, 2018.
5. Employee Benefit The Company has a 401(k) retirement plan (the "Plan")
Plans substantially all employees. Participants may contribute
up to 10% of their compensation to the Plan. The Company
contributes 25% of the participant's contribution, up to
1% of the participant's compensation, as a matching
contribution. Total contributions for the years ended
December 31, 1998 and 1997 were $6,465 and $3,908,
respectively.
The Company has a profit sharing plan which provides for
employee bonuses based upon the Company's results of
operations. No payments were made during the years ended
December 31, 1998 and 1997.
6. Commitments a) The Company has an employment agreement with its
and President which expires December 31, 1999 pursuant to
Contingencies which he will be paid an annual salary of $175,000. The
President is also entitled to receive benefits offered to
the Company's other employees, and certain severance
benefits if the Company terminates the employment
agreement without cause. In addition, the employment
agreement precludes the President from disclosing
confidential information and from competing with the
Company during each year of his employment and for at
least one year thereafter.
F-18
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
6. Commitments b) On August 5, 1994, the Board of Directors and
and Stockholders of the Company adopted the 1994 Stock Option
Contingencies Plan (the "1994 Plan") which allows the Company to grant
(continued) options to employees, officers, directors and consultants
to purchase shares of the Company's Common Stock. Options
granted under the plan may be either Incentive Stock
Options or Non-Qualified Stock Options. Incentive Stock
Options may be granted only to employees of the Company,
while Non-qualified options may be issued to non-employee
directors, consultants, and others, as well as to
employees of the Company. The maximum aggregate number of
shares which may be granted shall not exceed 280,000
shares of the Company's Common Stock.
<TABLE>
<CAPTION>
Weighted
Average Vested
Exercise Available Options and
Price For Grant Outstanding Exercisable
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $3.60 260,000 20,000 20,000
Granted 1.00 (37,450) 37,450 -
Forfeited 1.00 3,000 (3,000) -
Vested - - - 12,483
----------------------------------------------------------------------------
Balance, December 31, 1997 - 225,550 54,450 32,483
Granted 1.00 (61,975) 61,975 -
Forfeited 1.00 5,000 (5,000) -
Vested - - - 12,483
----------------------------------------------------------------------------
Balance, December 31, 1998 $1.44 168,575 111,425 44,966
============================================================================
</TABLE>
F-19
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
6. Commitments In October 1995, the Financial Accounting Standards Board
and issued Statement of Financial Accounting Standards No.
Contingencies 123, Accounting for Stock-Based Compensation ("SFAS 123").
(continued) SFAS 123 establishes alternative methods of accounting and
disclosure for employee stock-based compensation
arrangements. The Company has elected to use the intrinsic
value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, for
stock options granted to the Company's employees. This
method does not result in the recognition of compensation
expense when employee stock options are granted if the
exercise price of the option equals or exceeds the fair
market value of the stock at the date of grant.
If the provisions of SFAS 123 had been adopted, the effect
on 1998 and 1997 earnings (loss) would have been as
follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Net earnings (loss):
Reported $(783,883) $263,803
Proforma (816,010) 246,021
Basic and diluted earnings (loss) per share:
Reported $ (0.26) $ 0.09
Proforma (0.27) 0.08
</TABLE>
For purposes of computing the proforma amounts
indicated above, the fair value of each option on the
date of grant is estimated using the Black-Scholes
option pricing model with the following assumptions:
no dividend yield, expected volatility of 50%,
risk-free interest rate of 5.27% and expected lives of
five to six years. Substantially all options become
vested and exercisable evenly over a five year period.
The weighted average fair value of options granted
during the years ended December 31, 1998 and 1997 was
$.52 and $.47, respectively.
F-20
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
6. Commitments c) In 1999, the Company plans to file claims, for which
and notification has been made to the general contractor, in
Contingencies the amount of approximately $1,200,000 for damages and
(continued) cost overruns incurred as a result of engineering and
design flaws on a project to renovate a building at
Rutgers University ("Rutgers"). Specifically, after the
Company commenced the Rutgers project, the Company found
that the original structure was not structurally
sufficient to support the panels as originally designed.
The cost overruns relate to re-designing of panels,
producing panels with additional steel and reinforcement
criteria, and erection of the panels to the structure.
The contract began in 1998 and has a current expected
completion date of June 15, 1999. Management estimates
the total loss on the contract, to be approximately
$1,100,000, before recognition of additional revenues
related to the claim. Approximately $326,000 of the total
estimated loss was incurred in 1998. A $764,000 provision
for additional loss on the contract was accrued as of
December 31, 1998 representing 1999 losses, and is
included in "accrued expenses and other liabilities" and
"contract costs" in the accompanying financial statements.
Due to the significant costs required to continue the
project and to fund ongoing commitments, the Company
entered into a working agreement with the general
contractor to finance certain costs, at cost plus 10%
through the estimated completion date.
The Company has hired an attorney, who has given an
opinion that a legal basis exists for the claim, to pursue
collection of the claim. All conditions for claim
recognition have been satisfied, and approximately
$400,000 of the potential $1,200,000 contract claim is
included in trade accounts receivable, as such amounts
are probable (subject to negotiations and legal
proceedings), at December 31, 1998, respectively. No
assurance can be made that the total loss on the contract
will not exceed $1,200,000 or that any amount of the
claim can be collected.
d) In late 1995, the Company filed four separate informal
claims totalling $502,000 for damages and costs incurred
as a result of specification, policy and operating changes
to contracts primarily instituted by the state of
Maryland, including the newly issued "Noise Barrier
Acceptance Criteria", which occurred after the award of
the contracts and after unit production in accordance with
the contracts was virtually complete. These claims were
increased to approximately $1,081,000 at December 31,
1996.
F-21
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
6. Commitments Specifically, the state of Maryland adjusted its noise
and barrier acceptance criteria over a period of several
Contingencies months during 1995 with the latest version dated October
(continued) 13, 1995. According to the Company, these changes were
significantly different than contract provisions and
historical acceptance criteria upon which the jobs were
bid and for which the Company was contracted. The Company
incurred significant costs to rework panels and in certain
instances construct new panels to comply with the new
standards. Additionally, the Company lost production time
and revenue on other contracts due to the time devoted to
address the criteria changes. The Company has continued to
pursue collection on the claims filed and hired an
attorney who specializes in this area. According to the
Company's attorney, there is substantial likelihood the
State Highway Administration (SHA) will compensate the
prime contractors for SHA's improper actions, and the
Company will receive additional compensation. All
conditions for claim recognition has been satisfied, and
approximately $270,000 of the total contract claims is
included in trade accounts receivable, as such amounts are
probable, at December 31, 1998. The Company received
$185,000 of these contract claims during 1999 as
settlement for all but one claim for which the Company has
received, but not accepted, an offer for settlement.
e) The Company owed prior benefit plan participants
approximately $14,000 and $205,000 at December 31, 1998
and 1997, respectively, related to the Company's
terminated retirement plan, which is included in accrued
expenses and other liabilities. At December 31, 1997, the
Company had a certificate of deposit with a balance of
approximately $197,000, which had also been pledged as
collateral on a $186,000 loan, to fund the plan obligation
with all interest earned allocated to the participants.
During 1998, the Company redeemed the certificate of
deposit and paid the plan participants approximately
$191,000 in benefits owed.
f) The Company is self insured for heath care claims for
eligible active employees. The Company carries stop loss
insurance which limits the amount for individual claims
and total claims in any one year. The Company provides a
liability for estimated claims incurred but not reported.
F-22
<PAGE>
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
6. Commitments and g) On March 2, 1999, the Company received notification
Contingencies from the NASDAQ SmallCap Market ("NASDAQ") that the
(continued) Company had failed to meet certain market criteria, and
may be subject to delisting if compliance cannot be
achieved. Specifically, the Company's Common Stock had
fallen below the minimum standard of $1.00 per share.
According to NASDAQ, the Company's Common Stock must trade
above $1.00 per share for at least ten consecutive days
within the 90 day period ended June 2, 1999 to comply
with the minimum bid price requirement.
F-23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 207,661
<SECURITIES> 0
<RECEIVABLES> 4,285,120
<ALLOWANCES> 262,000
<INVENTORY> 1,512,213
<CURRENT-ASSETS> 5,859,028
<PP&E> 7,508,749
<DEPRECIATION> 5,059,183
<TOTAL-ASSETS> 9,566,501
<CURRENT-LIABILITIES> 4,172,361
<BONDS> 4,125,357
0
0
<COMMON> 30,857
<OTHER-SE> 1,340,226
<TOTAL-LIABILITY-AND-EQUITY> 9,566,501
<SALES> 12,415,252
<TOTAL-REVENUES> 14,434,178
<CGS> 9,958,800
<TOTAL-COSTS> 12,015,760
<OTHER-EXPENSES> 2,915,809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 541,161
<INCOME-PRETAX> (783,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (783,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (783,883)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
