10KSB40 1 0001.txt FORM 10-KSB405 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, 2000 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.) P.O. Box 300, 5119 Catlett Road, -------------------------------- Midland, Virginia 22728 ------------------ ------------ (Address of Principal Executive Offices) (Zip Code) (540) 439-3266 ---------------------------------------------- (Issuer's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Exchange Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ Common Stock, $.01 par value per share Boston Stock Exchange Redeemable Common Stock Purchase Warrants Boston Stock Exchange Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 par value per share -------------------------------------- (Title of Class) Redeemable Common Stock Purchase Warrants ----------------------------------------- (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X --- The Issuer's revenues for its most recent fiscal year were $15,695,837. 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 20, 2001, was $2,049,437. As of March 20, 2001, the Company had outstanding 3,050,798 shares of Common Stock, $.01 par value per share. Documents Incorporated By Reference ----------------------------------- None. 2 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: . our high level of indebtedness and ability to satisfy the same, . our significant loss in 1998 under a material contract, and the litigation arising out of that contract, . our limited recent history of profitable operations, . the continued availability of financing in the amounts, at the times and on the terms required, to support our future business and capital projects, . the extent to which we are successful in developing, acquiring, licensing or securing patents for proprietary products, . changes in economic conditions specific to any one or more of our markets (such as the availability of public funds and grants for construction), . changes in general economic conditions (such as interest rate changes), . adverse weather which inhibits the demand for our products, . our compliance with governmental regulations, . the outcome of pending and future litigation, . on material construction projects, our ability to produce and install product that conforms to contract specifications and in a time frame that meets the contract requirements, . the other factors and information disclosed and discussed in other sections of this report. Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. 3 Item 1. Description of 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 patented, 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 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 5119 Catlett Road, 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, New Zealand, and Spain. The Company, in conjunction with the establishment of its Slenderwall(TM) exterior cladding system, intends to expand the market in which it currently competes. The Company believes that the annual market for exterior cladding in the Mid-Atlantic and Northeast region is approximately $500 million and that the nationwide annual market for exterior cladding products exceeds $2 billion based upon information obtained by an independent third party. The precast concrete products market is affected by the cyclical nature of the construction industry. In addition, the demand for construction varies depending upon weather conditions, the availability of financing at reasonable interest rates, overall fluctuations in the national and regional economies, past overbuilding, labor relations in the construction industry, and the availability of material and energy supplies. A substantial portion of the Company's business is derived from local, state, and federal building projects, which are further dependent upon budgets and, in many cases, voter-approved bonds. 4 Products Precast concrete products are cast at a manufacturing facility and delivered to a site for installation, as contrasted to ready-mix concrete, which is produced in a "batch plant," put into a mixer truck where it is mixed thoroughly and delivered to a construction site to be poured and set at the site. Precast concrete products are used primarily as parts of buildings or highway structures, and may be used architecturally, as in a decorative wall of a building, or structurally. Structural uses include building walls, frames, floors, or roofs. The Company currently manufactures and sells a wide variety of products for use in the construction, transportation and utility industries. Slenderwall(TM) Lightweight Construction Panels ----------------------------------------------- Each Slenderwall(TM) system is a prefabricated, energy-efficient, lightweight exterior cladding system that is offered as a cost-effective alternative to the traditional, piecemeal construction of the exterior walls of buildings. The Company's Slenderwall system combines the essential components of a wall system into a single unit ready for interior dry wall mounting immediately upon installation. The base design of each Slenderwall panel consists of a galvanized or stainless steel stud frame with an exterior sheath of approximately two-inch thick, steel-reinforced, high-density, precast concrete, with various available architectural surfaces. The exterior concrete sheath is attached to the interior frame by strategically placed epoxy coated steel connectors that suspend the exterior concrete approximately one-half inch away from the steel frame. Slenderwall panels are approximately one-half the weight of brick walls of equivalent size, permanence and durability. This lighter weight translates into reduced construction costs resulting from less onerous structural and foundation requirements as well as lower shipping costs. Additional savings result from Slenderwall's reduced installation time and ease of erection, and from the use of smaller cranes for installation. The Company custom designs and manufactures each Slenderwall exterior cladding system. The exterior of the Slenderwall systems can be produced in a variety of attractive architectural finishes, such as concrete, exposed stone, granite or thin brick. 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 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. 5 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 requires that states use only positively connected barriers which meet NCHRP350 crash test requirements. J-J Hooks Barrier met the requirements and received NCHRP350 approval in March 1999. 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. 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 6 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 39 states, plus Washington, D.C. and Puerto Rico. The Company is in various stages of the application process in 11 states and believes that approval in some 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, New Zealand 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 also offers 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: . Communications Operations -- to house fiber optics regenerators, switching stations and microwave transmission shelters, cellular phone sites, and cable television repeater stations. . 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 7 housing; and law enforcement evidence and ammunition storage. . 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. . Commercial and Industrial Locations -- for electrical and mechanical housing, cemetery maintenance storage, golf course vending enclosures, mechanical rooms, rest rooms, 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, Easi-Set and Easi- Span Precast Buildings and Slenderwall(TM), as well as 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 and Slenderwall(TM) licensees 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. 8 The Company has entered into 26 licensing agreements in the United States, and has established at least one licensee in each of Puerto Rico, Canada, Belgium, New Zealand, and Spain and sub-licensees in Canada and Chile. The Company is currently negotiating several new license arrangements and, although no assurance can be given, expects to increase its licensing activities. The Company recently completed its first licensing arrangement for its Slenderwall(TM) 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, the District of Columbia, 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. 9 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. 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, with respect to this product, was allowed March 2, 1999 which expires in 2017. The Company also owns three U.S. registered trademarks (Easi-Set(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 assuming the Company has sufficient resources, 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. 10 The Company's operations are subject to extensive and stringent governmental regulations including regulations related to the Occupational Safety and Health Act (OSHA) and environmental protection. The Company believes that it is substantially in compliance with all applicable regulations. The cost of maintaining such compliance is not considered by the Company to be significant. The Company's employees in its manufacturing division operate complicated machinery that may cause substantial injury or death upon malfunction or improper operation. The Company's manufacturing facilities are subject to the workplace safety rules and regulations of OSHA. The Company believes that it is in compliance with the requirements of OSHA. During the normal course of its operations, the Company uses and disposes of materials, such as solvents and lubricants used in equipment maintenance, that are classified as hazardous by government agencies that regulate environmental quality. The Company attempts to minimize the generation of such waste as much as possible, and to recycle such waste where possible. Remaining wastes are disposed of in permitted disposal sites in accordance with applicable regulations. A Phase I Environmental Site Assessment of the Company's Midland facility was completed in January, 1997. Only two minor recommendations were made as a result of the survey. These were addressed and corrected. In the event that the Company is unable to comply with the OSHA or environmental requirements, the Company could be subject to substantial sanctions, including restrictions on its business operations, monetary liability and criminal sanctions, any of which could have a material adverse effect upon the Company's business. Employees As of March 23, 2001, the Company had 140 full-time and 2 part-time employees, 116 of which are located at the Company's Midland facility, and 26 of which are located at the Company's facility located in Reidsville, North Carolina. Of the 142 employees, 11 are executive officers or managers, 4 are responsible for sales and marketing, 113 are in manufacturing, and 14 are administrative personnel. None of the Company's employees are 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 Property ----------------------- 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 11 $6,000. The manufacturing facility houses two concrete mixers and one concrete blender. The plant also includes two environmentally 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, sales and marketing, and licensing operations in a 4,500 square foot office building located on its Midland property. In the second quarter of 2000, the Company completed a new 3,456 square foot office building on its Midland property to provide additional work space for its engineering department, which occupies 1,728 feet of the building, and its purchasing office and store room, which occupies the other 1,728 square feet. 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 and that they are adequately covered by insurance. 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 1998, the Company began work on a contract to renovate the Bradley Hall building (the "Bradley Hall project") at Rutgers University ("Rutgers"). The Bradley Hall project, which was completed in October 1999, involved the design, production, and installation of Slenderwall(TM) 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(TM) 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. In that the Company was suffering losses on the project and was unable to fund its commitments, in January 1999, the Company entered into an agreement with Seacoast Builders Corporation ("Seacoast"), the prime contractor for the project. Pursuant to the agreement, Seacoast agreed to finance the cost of labor and small tools for the balance of the installation phase of the project commencing January 13, 1999, (ii) the Company remained responsible for the other services and materials required for the project, including provision of the Slenderwall(TM) system, (iii) the Company was required to reimburse Seacoast out of payments due the Company for Seacoast's expenses plus 10% for overhead, and (iv) the Company remained liable for cost overruns for which the Company was originally responsible for (the "Seacoast Agreement"). The cost overruns over the course of the entire project totaled approximately $1.6 million and the total loss to the Company on the job, before recovery on any claims by the Company, totaled approximately $1.45 million, which was recognized in fiscal 1999. Seacoast has filed claims in 1999 on the Company's behalf, in the amount of $1.1 million. All conditions for claim recognition have been satisfied and as of December 31, 2000 and 1999, $497,000 of the contract claim was included in accounts receivable. The Company believes that, based on the specific facts and circumstances and prior experience in claims settlement, it will ultimately collect the recorded claim receivable. 12 On February 15, 2000, Seacoast filed a suit in New Jersey Superior Court in Monmouth County against Rutgers, Grad Associates, P.A., the architect for the Bradley Hall project, and the Company. With respect to the Company, Seacoast alleges, among other things, that the Company failed to pay Seacoast $1,141,571 invoiced to the Company pursuant to the Seacoast agreement, that the Company failed to pay sub-contractors and suppliers, and that the Company did not complete all of the work and obligations required for the project. Seacoast has indicated that it has withheld $386,753 from the Company to offset the amount it alleges is due and owing from the Company. Seacoast claims that the Company is liable to it with respect to all of the matters indicated above, as well as any liquidated damages that may be assessed against Seacoast by Rutgers. The actual amount of damages sought by Seacoast against the Company are not specified. The Company has denied that it has any liability to Seacoast, and asserts, among other things, it dutifully performed the work required of it until such time as conditions beyond its control interfered with, frustrated, and interrupted its performance. Moreover, the Company has asserted that the conditions under which it was to perform its obligations related to the Bradley Hall project materially changed. The Company has counterclaimed against Seacoast in an amount in excess of $1,126,955 for Seacoast's failure to pay the Company for the additional work performed by it. In addition, the Company has filed a third party complaint against Sky-Lift Corporation ("Sky-Lift"), the initial subcontractor responsible for installation of the Slenderwall(TM) panels. The Company had entered into a sub-subcontract with Sky-Lift for the installation of hardware required to attach the Slenderwall(TM) building panels and the erection of the Slenderwall(TM) building panels. The Company has asserted that Sky-Lift abandoned its work on the project causing the Company to sustain damages in excess of $1,000,000, for which the Company is seeking damages. The Company also seeks indemnification from Sky-Lift for any damages that may be found to be owing by the Company to Seacoast. The Company also separately commenced a suit, in October 1999, against Sky-Lift in the Supreme Court of New York, County of Westchester. The complaint essentially covers the same matters as described in the third party action disclosed in the immediately preceding paragraph. On June 7, 1999, Construction Services, Inc. ("CSI"), the second subcontractor responsible for installation of the Slenderwall(TM) panels, filed a complaint against the Company in the United States District Court for the District of New Jersey. CSI alleges that it properly performed its work and that the Company, without cause, terminated CSI. CSI was seeking in excess of $150,000 for work performed, equipment/materials supplied and lost profits on the uncompleted portion of the work. In July 2000, the Company and CSI reached an agreement to settle the suit for $75,000, payable in a combination of cash and an installment payment arrangement from the Company. 13 On March 6, 2000, AmQuip Corporation ("AmQuip"), an equipment leasing company, brought a suit against Seacoast, the Company, and Safeco Insurance Company of America, the surety on a payment and performance bond for the Bradley Hall project. AmQuip alleges that it provided goods and services requested by the Company with respect to the Bradley Hall project, but was never paid. In June 2000, AmQuip and the Company reached an agreement to settle their portion of the suit for $31,000, payable in a combination of cash and an installment payment arrangement from the Company. In June 2000, the Company received notice of a personal injury lawsuit filed by Kenneth R. Hughes and Braunya P. Hughes in the United States District Court for the District of Columbia. Mr. Hughes was a road construction worker engaged in the transportation and relocation of pre-cast concrete barrier to create temporary concrete walls at road construction sites for a third party construction company. On or about June 20, 1997, Mr. Hughes suffered injuries when a barrier section-coupling device apparatus failed. The suit alleges that the Company sold the section-coupling device to the third party contractor and was negligent in the design and manufacture of said barrier section-coupling device. The suit seeks $10,000,000 in compensatory damages and $10,000,000 in punitive damages. Management believes the suit to be without merit as there is no evidence that indicates that the Company either sold or manufactured the section-coupling device in question. The Company plans to vigorously defend its position, and believes that any settlement will not adversely affect the financial statements. In January 2001, the Company received notice of a wrongful death lawsuit filed by the Estate of Joy V. Synder and her surviving Children in the Circuit Court of Prince George's County Maryland. On or about March 12, 1998, Ms. Synder was involved in an automobile accident whereby the rear of her vehicle was struck by another vehicle, which caused her to leave the highway and run into the back of a tractor-trailer owned by the Company, causing her death. The tractor-trailer was parked on the shoulder to deliver sound abatement panels to a Maryland State Highway Administration project. The suit names the Company, the tractor-trailer driver, the general contractor, and the Maryland State Highway Administration as defendants, alleging negligence as to the truck's location on the shoulder of the highway and asks for damages in the amount of $8,000,000 plus interest and costs. The Company believes that it's driver was parked properly in accordance with instructions received from the general contractor and that the accident was entirely a result of the negligence by the driver that hit Ms. Synder, not any of the parties named in the suit. The Company plans to vigorously defend its position, and believes that any settlement will not adversely affect the financial statements. The Company is not presently involved in any other litigation of a material nature. 14 Item 4. Submission of Matters to Vote of Security Holders ------------------------------------------------- On November 20, 2000 the Company held its Annual Meeting of Stockholders. The Stockholders voted on and approved the following: 1. The election of the following individuals to serve as directors until the next annual meeting and until their successors are duly elected and qualified: Shares Voted to Name Shares Voted For Withhold Authority Rodney I. Smith 2,916,442 16,650 Ashley B. Smith 2,916,442 16,650 Wesley A. Taylor 2,916,442 16,650 Andrew Kavounis 2,916,442 16,650 2. An amendment to the Smith-Midland Corporation 1994 Stock Option Plan to increase the number of shares authorized to be issued under the plan to 575,000 shares. In this connection, 1,535,624 shares voted for the amendment, 36,393 shares voted against the amendment and 8,550 shares abstained. In addition, 1,352,525 shares were subject to broker non-votes. 3. The ratification of the selection by the Board of Directors of BDO Seidman LLP as independent auditors for the year ending December 31, 2000. In this connection, 2,918,492 shares voted for ratification, 1,600 shares voted against ratification, and 13,000 shares abstained. PART II Item 5. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- The Company's Common Stock has traded on the Boston Stock Exchange ("BSE") under the symbol "SMC" since December 13, 1995. The Company's Common Stock also trades on the OTC Bulletin Board System under the symbol "SMID". Trading of the publicly held securities of the Company was transferred from the Nasdaq SmallCap Market to the OTC Bulletin Board in October 1999 because the Company was no longer in compliance with Nasdaq's minimum requirements. As of March 30, 2001, there were approximately 46 record holders of the Company's Common Stock. Management believes there are at least 335 beneficial owners of the Company's Common Stock. 15 The following table sets forth the high and low closing prices for the Company's Common Stock for the periods indicated. Such information was obtained from Commodity Systems, Inc. (CSI) The quotations represent interdealer quotations without adjustment for retail markups, markdowns or commissions and may not represent actual transactions. High Low 1999 ---- --- First Quarter $ 1 1/16 $ 9/16 Second Quarter $ 1 $ 1/2 Third Quarter $ 1 $ 10/16 Fourth Quarter $ 1 $ 3/8 2000 First Quarter $ 3/4 $ 9/16 Second Quarter $ 7/8 $ 7/16 Third Quarter $ 15/16 $ 7/16 Fourth Quarter $ 3/4 $ 3/8 In 1999, the stockholders of the Company approved an amendment of the Company's Certificate of Incorporation to affect a one-for-three, one-for-two, three-for-five, two-for-three or three-for-four reverse stock split of the Common Stock of the Company, but as of the date of this report, the Board of Directors has taken no action in this regard. The reverse stock split was contemplated as a means of retaining the Company's listing on the Nasdaq SmallCap Market. 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. 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. 16 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 was completed in October 1999, involved 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 to the Company for the project are approximately $1.6 million and estimates that the total loss on the job before recovery on any claims by the Company is approximately $1.45 million, which was booked in its entirety as of December 31, 1999. In 1999, the general contractor filed claims on the Company's behalf in the amount of $1.1 million. As of December 31, 2000, $497,000 of the contract claim was included in accounts receivable, of which $97,000 was recorded as income in 1999 versus $400,000 in 1998. The Company is currently involved in litigation over this matter, and there can be no assurance that the loss will not exceed the $1.45 million estimate or that the Company will be able to collect any of its claim. The Company believes that, based on the specific facts and circumstances and prior experience in claims settlement, it will ultimately collect the recorded claim receivable. Results of Operations Year ended December 31, 2000 compared to the year ended December 31, 1999 The Company's operations for 2000 resulted in net income of $593,373 or 0.19 per share, representing an increase in net income of $551,098 when compared to the income in 1999 of $42,275, or $0.01 per share. Total revenue for 2000 was $15,695,837 compared to $14,432,749 recorded in 1999, an increase of 9%. Total product sales increased by $1,309,191, or 11% to $13,152,570 in 2000, compared to $11,843,379 in 1999. The increase in product sales was due to higher levels of commercial construction in the Company's primary markets, resulting in record sales of architectural products which was partially offset by decreases in Slenderwall(TM), building sales, and soundwall sales. The Company also recorded increases in the sales of highway barrier and utility products. Soundwall and highway barrier sales, in particular, are heavily dependent on Local, State, and Federal highway contracts and can fluctuate accordingly. Unit prices have not changed significantly. Shipping and installation revenue decreased slightly $2,543,267 in 2000 from $2,589,370 in 1999, a decrease of $46,103, or 2%, attributable to a slight decrease in the size of installation contracts. 17 Commercial construction activity has remained strong in the Company's primary markets allowing the Company to accumulate an unfilled order backlog of approximately $8.5 million as of March 31, 2001, versus approximately $4.3 million as of March 31, 2000. Royalty revenue increased from $326,239 in 1999 to $339,816 in 2000, an increase of $13,577, or 4%. The increase was attributed to an increase in royalty fees earned on production of Easi-Set(R) barrier and start-up fees from new licensees. Total cost of goods sold for 2000 was $12,025,768 compared to $11,185,901 in 1999, an increase of $839,867. Although the product mix was different, the total cost of goods sold as a percentage of total revenue remained relatively constant at 77% in 2000 versus 78% in 1999. The overall dollar increase resulted from the higher sales volume in 2000 compared to 1999. General and administrative expenses decreased $41,268, or 2%, to $2,345,594 in 2000 from $2,386,862 in 1999. The decrease was the result of lower expenses related to telephones, depreciation and lower provision for bad debts, as the Company sought to control expenses and limit its credit exposure, offset by increases in dues and subscriptions, insurance, and legal expenses. Selling and marketing expenses in 2000 were lower compared to 1999 by $93,990 or 16%. Total selling and marketing expenses were $489,510 in 2000 compared with $583,500 in 1999. The decrease was due primarily to a temporary reduction in staff, lower commissions paid to outside sales people, and reductions in the expenditures for advertising. In 2001, the Company intends to fill the sales and marketing staff vacancies, as well as increase the expenditures for advertising in anticipation of a possible slowdown in commercial construction activity. Interest expense and loan fees rose slightly to $554,638 in 2000 from $543,770 in 1999. Although the Company had higher average levels of debt outstanding in 2000, the weighted average interest rate on the outstanding debt remained relatively constant. As a result of cumulative net operating loss ("NOL") carryforwards of approximately $2,618,000 available to the Company as of January 1, 2000, no income tax expense was recorded for 2000. The Company does not expect to incur income tax expense for 2001 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, and bank and other borrowings.The Company had $4,893,021 of indebtedness at December 31, 2000, of which $524,305 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 $2,199,228 at December 31, 1997 to $524,305 at December 31, 2000. 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 was renewed in May 2000, and now has a maturity date of May 1, 2001. The Company has agreed with the FIB to extend the line of credit upon its extended maturity date. On December 20, 1999, the Company secured an additional term loan of $500,000 from FIB. The term loan is payable in monthly installments over a five year period and carries an interest rate of 1.75% above prime. 18 At December 31, 2000, the Company had cash totaling $218,264 compared to cash totaling $374,190, at December 31, 1999. During 2000, the Company received $220,674 in cash (net) from its financing activities, and used $429,966 in its investing activities, primarily for the funding of new equipment and the Engineering Building (see "Item 2. Description of Properties - Facilities"). The Company's operating activities provided cash of $53,366 (net) after deducting the resources required to fund the Company's growth. The Company expects more moderate sales growth in 2001, which would limit the funding required for higher accounts receivable or inventory. Capital spending decreased to $437,613 in 2000, from $537,073 in 1999, as the Company completed construction on the new production facility in early 1999 and the new engineering building in June 2000. No other significant cash commitments are anticipated and planned expenditures for 2001 are limited as stated above, by the FIB loan agreement. 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. The Company's cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 45 to 75 days after the products are produced. This payment schedule has resulted in liquidity problems for the Company because it must bear the cost of production for its products before it receives payment. Although no assurance can be given, the Company believes that anticipated cash flow from operations with adequate project management on jobs, 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 financing, for which there can be no assurance of obtaining. 19 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 may experience reduced revenues from December through February and realize the substantial part of its revenues during the other months of the year. The Company may experiences lower profits, or losses, during the winter months, and as such, 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 ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, which was subsequently amended by SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities", requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Presently the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the adoption of SFAS 133 had no impact on its financial position or results of operations. The Securities and Exchange Commission ("SEC") has issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 is effective in the fourth quarter of fiscal years beginning after December 15, 1999. SAB 101 summarizes appropriate criteria to be considered in determining recognition of revenue. Adoption of SAB 101 did not have a material impact on the Company's financial position or results of operations. In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB No. 25 for: a) the definition of employees for purposes of applying APB 25, b) the criteria for determining whether a plan qualifies as a non- compensatory plan, c) the accounting consequences of various modifications to the previously fixed stock option or award, and, d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 2, 2000 but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The Company believes that adoption of FIN 44 in 2000 did not have a material effect on the Company's financial statements but may impact the accounting for grants or awards in future periods. 20 Item 7. Financial Statements -------------------- The following financial statements are filed as part of this report:
Page ---- Report of Independent Certified Public Accountants......................................... F-3 Consolidated Balance Sheets as of December 31, 2000 and 1999............................... F-4 Consolidated Statements of Operations for the years ended December 31, 2000 and 1999....... F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000 and 1999.......................................................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999....... F-7 Summary of Significant Accounting Policies................................................. F-9 Notes to Consolidated Financial Statements ................................................ F-13
Item 8. Changes In and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- Not Applicable. 21 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; ------------------------------------------------------------- Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- Director Or Executive Name Age Officer Since Position ---- --- ------------- -------- Rodney I. Smith 62 1970 Chief Executive Officer, President and Chairman of the Board of Directors Ashley B. Smith 38 1994 Vice President of Sales and Marketing and Director Wesley A. Taylor 53 1994 Vice President of Administration and Director Andrew G. Kavounis 75 1995 Director Guy M. Schuch 52 1999 Chief Operating Officer Smith Midland Corp. (Virginia) James W. Dean 63 2000 Vice President of Engineering Smith-Midland Corp. (Virginia) Robert E. Albrecht, Jr. 50 2000 Chief Financial Officer Background The following is a brief summary of the background of each Director, executive officer and key employee 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. 22 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. 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. Guy M. Schuch. Chief Operating Officer, Smith Midland Corp.(Virginia). Mr. Schuch has served as Chief Operating Officer of Smith-Midland (Virginia), the Company's primary operating subsidiary, since joining the Company in May, 1999. Mr. Schuch was Production Manager for Southdown Corporation, a manufacturer of cement, from 1995 to 1998 and was a Plant Manager for LaFarge Corporation, a manufacturer of cement, from 1979 to 1995. Mr. Schuch holds a Master of Science degree in Industrial Engineering from Stanford University, and a Bachelor of Science degree in Mechanical Engineering from the Arts et Metiers School of Engineering in Paris, France. James W. Dean. Vice President of Engineering, Smith Midland Corp.(Virginia). Mr. Dean re-joined the company in November 2000. Prior to re-joining the Company, from November 1994 to October 2000, Mr. Dean worked for a concrete erector, Concrete Placement Systems. From December 1984 to October 1994, he served as the Vice President of Operation for Smith-Midland Corporation (Virginia). Mr. Dean holds a Bachelor of Science degree in Civil Engineering from Virginia Polytechnic Institute. Robert E. Albrecht, Jr. Chief Financial Officer. Mr. Albrecht Joined the Company as Controller in August 1999 and has served as Chief Financial Officer of the Company since January 1, 2000. Prior to joining the Company, Mr. Albrecht was CFO and Controller of Omega World Travel, Inc., a travel agency, from 1996 to 1999. Mr. Albrecht is a Certified Public Accountant and holds a Bachelor of Arts degree in Accounting from the College of William and Mary. 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 23 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. 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. 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 (the "named executive officer"), whose cash compensation exceeded $100,000 during 2000:
---------------------------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation ---------------------------------------------------------------------------------------------------------------------- Awards Payouts ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Securities Other Under- All Name and Annual Restricted Lying Other Principal Compen- Stock Options/ LTIP Compen- Position Year Salary Bonus sation Awards SARs Payouts Sation $ $ $ $ (#) $ $ ---------------------------------------------------------------------------------------------------------------------- Rodney I. Smith 2000 175,000 54,500 - - - - - President, Chief 1999 156,825 54,500 - - 20,000 - - Executive Officer 1998 175,000 54,500 - - 20,000 - - and Chairman of the Board. Guy M. Schuch 2000 108,745 - - - - - - Chief Operating Officer 1999 61,730 - - - 15,000 - - Smith-Midland Corp (VA) 1998 - - - - - - - ----------------------------------------------------------------------------------------------------------------------
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 $250 per meeting as compensation for their services and are reimbursed for expenses incurred in connection with the performance of their duties. Rodney I. Smith receives no compensation as a Director, but is reimbursed for expenses incurred in connection with the performance of his duties as a Director. 24 Option Grants in Last Fiscal Year None. Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
Shares Number of Acquired Shares Underlying Value of Unexercised on Value Unexercised Options In-the-Money Options Exercise Realized at Fiscal Year End (#) at Fiscal Year-End ($)(1) ----------------------------- ------------------------------ Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Rodney I. Smith........ --- --- 20,332 19,668 --- --- Guy M. Schuch.......... --- --- 5,000 10,000 --- ---
_____________ (1) Value is based on the closing sales price of the Company's Common Stock on December 29, 2000 ($0.5625), the last trading day of 2000, less the option exercise price. All per share prices of the options held by Mr. Smith equal or exceed $0.5625 and the per share price of Mr. Schuch's options were $.5625. 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, 2001, 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 voluntarily reduced his annual base salary by 22.5% effective March 8, 1999 through August 23, 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. Item 11. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- The following table sets forth, as of March 26, 2001, 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 25 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. Name and Address of Number of Shares Percentage of Beneficial Owner(1) Beneficially Owned(2) of Class ------------------- --------------------- -------- Rodney I. Smith (1)(3)(4)(5)(6) 633,630 20.6 Fred E. Kassner Estate (1) 589,172 19.3 H. T. Ardinger & Son (1) 395,000 12.9 Carl W. Grover(1) 203,050 6.7 Ashley B. Smith (1)(3)(4)(7) 106,133 3.5 Wesley A. Taylor (1)(8) 14,850 * James W. Dean (1) 5,669 * Guy M. Schuch (1)(9) 5,000 * Robert E. Albrecht, Jr. (1)(10) 3,333 * Andrew Kavounis (1)(11) 3,000 * All directors, executive officers and key employees as a group (7 persons)(2)(3)(4) (5)(6)(7)(8)(9)(10)(11) 771,615 24.8 ______________ * Less than 1% (1) The address for each of Messrs. Rodney I. Smith, Ashley B. Smith, Taylor, Dean, Schuch, Albrecht and Kavounis is c/o Smith-Midland Corporation, P.O. Box 300, 5119 Catlett Road, Midland, Virginia 22728. The address for the Fred E. Kassner Estate is 69 Spring St., Ramsey , New Jersey 07446. The Address for H. T. Ardinger & Son is P.O. Box 569360, Dallas, Texas 75356. The address for Mr. Grover is 1010 S Ocean Blvd, Suite 1017, Pompano Beach, Florida 33062. (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 77,972 shares of Common Stock held by 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. (5) Includes 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 mother 26 of Mr. Smith's children. Mr. Smith is the trustee of the Trust and, as such, may vote the shares, as he deems fit. (6) Includes options to purchase 13,666 shares of Common Stock of the Company exercisable at $1.00 per share and 6,666 shares exercisable at $.5625 per share. (7) Includes options to purchase 10,850 shares of Common Stock of the Company exercisable at $1.00 per share and 5,666 shares exercisable at $.5625 per share. (8) Includes options to purchase 9,850 shares of Common Stock of the Company exercisable at $1.00 per share and 5,000 shares exercisable at $.5625 per share. (9) Includes options to purchase 5,000 shares of Common Stock of the Company exercisable at $.5625 per share. (10) Includes options to purchase 3,333 shares of Common Stock of the Company exercisable at $.5625 per share. (11) Includes options to purchase 3,000 shares of Common Stock of the Company exercisable at $1.00 per share. Item 12. Certain Relationships and Related Transactions. ---------------------------------------------- At December 31, 2000, the Company owned an unsecured note for approximately $630,700 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. Terms of the note call for annual payments of $45,948 through maturity on December 31, 2002. Payments for the years 1999 and 2000 have been made. During 1999, the note was increased by $20,776 for additional borrowings. Total interest income on this note was approximately $38,000 and $39,000 for the years ended December 31, 2000 and 1999, respectively. Item 13. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits. (1) The following exhibits are filed herewith: Exhibit No. ------- 23 Consent of BDO Seidman, LLP. (2) The following exhibits were filed as part of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 and are incorporated herein by reference: Exhibit No. ------- 1 Continuation of Exclusive License Agreement between DuriSol Resources, Inc. and Smith-Midland Corporation, with an effective date of January 1, 1999, dated May 3, 1999. 27 2 First National Bank of New England Commercial Loan Agreement dated December 20, 1999. 3 First National Bank of New England Commercial Term Promissory Note dated December 20, 1999. (3) 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, 1997 and 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. Exhibit No. Title ------- ----- 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. 28 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. None. 29 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 9, 2001 By: /s/ Rodney I. Smith ------------------------------ Rodney I. Smith, President (principal executive officer) By: /s/ Robert E. Albrecht, Jr. ------------------------------ Robert E. Albrecht, Jr., CFO (principal finance and accounting officer) 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 Director April 9, 2001 ------------------------- Rodney I. Smith /s/ Wesley A. Taylor Director April 9, 2001 ------------------------- Wesley A. Taylor /s/ Ashley Smith Director April 9, 2001 ------------------------- Ashley Smith 30 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, 2000 and 1999, 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. BDO Seidman, LLP Richmond, Virginia March 20, 2001 F-3 December 31, 2000 1999 -------------------------------------------------------------------------------- Assets (Note 2) Current assets Cash $ 218,264 $ 374,190 Accounts receivable (Note 6) Trade - billed, (less allowance for doubtful accounts of $258,542 and $323,474) 4,122,118 2,597,684 Trade - unbilled 2,405 123,332 Inventories Raw materials 576,995 493,979 Finished goods 1,475,383 1,013,958 Prepaid expenses and other assets 62,811 46,656 -------------------------------------------------------------------------------- Total current assets 6,457,976 4,649,799 -------------------------------------------------------------------------------- Property and equipment, net (Note 1) 2,684,918 2,608,145 -------------------------------------------------------------------------------- Other assets Notes receivable, officer (Note 3) 630,700 638,347 Claims and accounts receivable (Note 6) 960,254 960,254 Other 309,374 317,845 -------------------------------------------------------------------------------- Total other assets 1,900,328 1,916,446 -------------------------------------------------------------------------------- $11,043,222 $9,174,390 -------------------------------------------------------------------------------- Smith-Midland Corporation and Subsidiaries Consolidated Balance Sheets
December 31, 2000 1999 --------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Current maturities of notes payable (Note 2) $ 524,305 $ 228,025 Accounts payable - trade 2,482,238 1,690,853 Accrued expenses and other liabilities (Note 6) 347,674 277,621 Customer deposits 416,816 172,914 ------------------------------------------------------------------------------------------- Total current liabilities 3,771,033 2,369,413 Reserve for contract loss 995,845 1,046,400 Notes payable - less current maturities (Note 2) 4,281,528 4,350,644 Notes payable - related parties (Note 3) 87,188 96,875 ------------------------------------------------------------------------------------------- Total liabilities 9,135,594 7,863,332 ------------------------------------------------------------------------------------------- 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; 3,091,718 and 3,085,718 issued and outstanding 30,917 30,857 Additional paid-in capital 3,453,222 3,450,085 Accumulated deficit (1,474,211) (2,067,584) ------------------------------------------------------------------------------------------- 2,009,928 1,413,358 Treasury stock, at cost, 40,920 shares (102,300) (102,300) ------------------------------------------------------------------------------------------- Total stockholders' equity 1,907,628 1,311,058 ------------------------------------------------------------------------------------------- $11,043,222 $9,174,390 ===========================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements F-4 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Operations Year Ended December 31, 2000 1999 ------------------------------------------------------------------------------- Revenue $15,695,837 $14,432,749 Cost of goods sold 12,025,768 11,185,901 ------------------------------------------------------------------------------ Gross profit 3,670,069 3,246,848 ------------------------------------------------------------------------------ Operating expenses General and administrative expenses 2,345,595 2,386,862 Selling expenses 489,510 583,500 ------------------------------------------------------------------------------ Total operating expenses 2,835,105 2,970,362 ------------------------------------------------------------------------------ Operating income 834,964 276,486 ------------------------------------------------------------------------------ Other income (expense) Royalties 339,816 326,239 Interest expense and loan fees (554,638) (543,770) Interest income (Note 3) 64,877 68,603 Other, net (91,646) (85,283) ------------------------------------------------------------------------------ Total other income (expense) (241,591) (234,211) ------------------------------------------------------------------------------ Net income $ 593,373 $ 42,275 ============================================================================== Basic and diluted income (loss) per share $ .19 $ .01 ============================================================================== Weighted average common shares outstanding 3,050,190 3,044,798 ============================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements F-5 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity
Additional Common Paid-In Accumulated Treasury Stock Capital Deficit Stock Total ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $30,857 $3,450,085 $(2,109,859) $(102,300) $1,268,783 Net income - - 42,275 - 42,275 ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 30,857 3,450,085 (2,067,584) (102,300) 1,311,058 Warrants exercised 60 3,137 - - 3,197 Net income - - 593,373 - 593,373 ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $30,917 $3,453,222 $(1,474,211) $(102,300) $1,907,628 ================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-6 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, 2000 1999 ------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities Cash received from customers $ 14,876,048 $ 14,967,497 Cash paid to suppliers and employees (14,241,275) (14,052,234) Interest paid (554,638) (543,770) Other (26,769) (16,680) ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 53,366 354,813 ------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Purchases of property and equipment (437,613) (537,073) Repayments (advances) on officer note receivable 7,647 (13,960) ------------------------------------------------------------------------------------------------------------------ Net cash absorbed by investing activities (429,966) (551,033) ------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Proceeds from borrowings 799,181 677,157 Repayments of borrowings (572,017) (692,253) Repayments on borrowings - related parties, net (9,687) (9,617) Proceeds from warrants exercised 3,197 - ------------------------------------------------------------------------------------------------------------------ Net cash provided (absorbed) by financing activities 220,674 (24,713) ------------------------------------------------------------------------------------------------------------------ Decrease in cash - restricted - 387,462 ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash (155,926) 166,529 Cash, beginning of year 374,190 207,661 ------------------------------------------------------------------------------------------------------------------ Cash, end of year $ 218,264 $ 374,190 ==================================================================================================================
continued... F-7 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year Ended December 31, 2000 1999 ------------------------------------------------------------------------------------------------ Reconciliation of net income to net cash Provided by operating activities Net income $ 593,373 $ 42,275 Adjustments to reconcile net income to net cash Provided by operating activities Depreciation and amortization 360,840 380,290 (Increase) decrease in Accounts receivable - billed (1,524,434) 266,074 Accounts receivable - unbilled 120,927 75,776 Inventories (544,441) 4,276 Prepaid expenses and other assets (7,684) (2,409) Increase (decrease) in Accounts payable - trade 791,385 (487,031) Accrued expenses and other liabilities 19,498 208,903 Customer deposits 243,902 (133,341) ------------------------------------------------------------------------------------------------ Net cash provided by operating activities $ 53,366 $ 354,813 ================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-8 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies Nature of Business The Company develops, manufactures, licenses, sells and installs precast concrete products for the construction, transportation and utilities industries primarily in the Mid-Atlantic region. Principles of The accompanying consolidated financial statements Consolidation include the accounts of Smith-Midland Corporation and its wholly-owned subsidiaries (the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market. Property and Property and equipment is stated at cost. Expenditures Equipment for ordinary maintenance and repairs are charged to income as incurred. Costs of betterments, renewals, and major replacements are capitalized. At the time properties are retired or otherwise disposed of, the related cost and allowance for depreciation are eliminated from the accounts and any gain or loss on disposition is reflected in income. Depreciation is computed using the straight-line method over the following estimated useful lives: Years -------------------------------------------------- Buildings 10-33 Trucks and automotive equipment 3-10 Shop machinery and equipment 3-10 Land improvements 10-15 Office equipment 3-10 Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-9 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) Revenue Recognition The Company recognizes revenue on the sale of its standard precast concrete products at shipment date, including revenue derived from any projects to be completed under short-term contracts. Installation services for precast concrete products, leasing and royalties are recognized as revenue as they are earned on an accrual basis. Licensing fees are recognized under the accrual method unless collectibility is in doubt, in which event revenue is recognized as cash is received. Certain sales of Soundwall and Slenderwall concrete products are recognized upon completion of units produced under long-term contracts. 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. Shipping and Handling Amounts billed to customers are recorded in sales and the costs associated with the shipping and handling are recorded as cost of goods sold. Risks and Uncertainties The Company sells products to highway contractors 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 of The estimated fair value of financial instruments Financial Instruments approximates their carrying amounts as of December 31, 2000 and 1999. The estimated fair value of long term debt is based on current rates offered to the Company for debt of the same maturities. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-10 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) Earnings (Loss) Earnings per share is based on the weighted average Per Share number 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. The Company had no securities which had a dilutive effect on earnings per share for the years ended December 31, 2000 and 1999. Long-Lived Assets The Company follows the guidance for accounting for asset impairment set forth in 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, 2000, 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 and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, which was subsequently amended by SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities", requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Presently the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the adoption of SFAS 133 had no impact on its financial position or results of operations. F-11 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) Recent Accounting The Securities and Exchange Commission ("SEC") has Pronouncements issued Staff Accounting Bulletin No. 101, "Revenue (continued) Recognition in Financial Statements" ("SAB 101"). SAB 101 is effective in the fourth quarter of fiscal years beginning after December 15, 1999. SAB 101 summarizes appropriate criteria to be considered in determining recognition of revenue. Adoption of SAB 101 did not have a material impact on the Company's financial position or results of operations. In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 2, 2000 but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 in 2000 did not have any effect on the Company's financial statements but may impact the accounting for grants or awards in future periods. Reclassifications Certain reclassifications have been made in the prior year consolidated financial statements and notes to conform to the December 31, 2000 presentation. F-12 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements 1. Property and Property and equipment consist of the following: Equipment
December 31, 2000 1999 ---------------------------------------------------------------------------------------- Land and land improvements $ 607,421 $ 589,441 Buildings 1,960,359 1,792,197 Machinery and equipment 5,473,860 5,227,067 Rental equipment 92,818 73,539 Construction in progress - 72,632 ---------------------------------------------------------------------------------------- 8,134,458 7,754,876 Less: accumulated depreciation 5,449,540 5,146,731 ---------------------------------------------------------------------------------------- $2,684,918 $2,608,145 ========================================================================================
2. Notes Payable Notes payable consist of the following:
December 31, 2000 1999 ---------------------------------------------------------------------------------------- Note payable to individual, maturing December 2001; with monthly payments of $1,003 of principal and interest, interest at 12%; collateralized by certain vehicles. $ 11,294 $ 21,317 Note payable to individual, maturing March 2003; with monthly payments of $432 of principal and interest, interest at 12%; collateralized by a drop-deck trailer. 10,177 - Note payable to First International Bank, maturing June 2021; with monthly payments of $37,087 of principal and interest, interest at prime plus 1.5% (11% at December 31, 2000); collateralized by principally all assets of the Company. 3,864,383 3,906,716
F-13 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued)
2. Notes Payable December 31, 2000 1999 ------------------------------------------------------------------------------------------- (continued) Note payable to First International Bank, maturing January 1, 2005; with monthly payments of $10,961 of principal and interest at prime plus 1.75% (11.25% at December 31, 2000); collateralized by blanket lien on Company assets. $ 420,956 $ 500,000 Line of credit with First International Bank, maturing May 1, 2001; interest payable monthly at prime plus 1% (10.5% at December 31, 2000); collateralized by accounts receivable and inventory. 349,615 - Installment notes and capitalized leases collateralized by certain machinery and equipment maturing at various dates, primarily August 2001 through January 2005, with interest at 7.25% through 8.25%. 149,408 130,636 Unsecured note payable due on demand, with interest at 14%. - 20,000 ------------------------------------------------------------------------------------------ 4,805,833 4,578,669 Less current maturities 524,305 228,025 ------------------------------------------------------------------------------------------ $4,281,528 $4,350,644 ==========================================================================================
F-14 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Notes Payable The Company has a mortgage loan, which is guaranteed (continued) in part by the U.S. Department of Agriculture Rural Business - Cooperative Services. The Company was also granted a $500,000 line of credit and an additional $500,000 term note. The loan agreement includes certain restrictive covenants, which require the Company to maintain minimum levels of tangible net worth and limits total outstanding indebtedness. The Company was in compliance with these restrictive covenants at December 31, 2000. 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 has agreed with the bank to extend this debt as it becomes due in May 2001. There was $349,615 in outstanding borrowings on the line of credit at December 31, 2000. The aggregate amounts of notes payable maturing in each of the next five years and thereafter are as follows: Year Ending December 31, Amount ---------------------------------------------- 2001 $ 524,305 2002 161,713 2003 168,031 2004 171,235 2005 28,265 Thereafter 3,752,284 ---------------------------------------------- $4,805,833 ============================================== 3. Related Party The Company currently leases three and one half Transactions acres of 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 annual rent of $6,000. Notes payable - related parties are unsecured, with no specified maturity date (but no earlier than January 1, 2001) and bear interest at 10%. Total interest expense related to these notes was $7,162 and $8,500 for the years ended December 31, 2000 and 1999, respectively. F-15 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 stockholder with as even- year term (continued) bearing interest at 6%. The terms of the note call for annual principal and interest payments of $45,948, beginning on December 31, 1998, and continuing through maturity. During 1999, the note was increased by $20,776 for additional borrowings. Total interest income on this note was approximately $38,000 and $39,000 for the years ended December 31, 2000 and 1999, respectively. As of December 31, 2000 and 1999, the Company was the beneficiary of individual life insurance policies on the life of the President with a total cash surrender value of approximately $162,000. Borrowings of approximately $134,000 were outstanding against the cash surrender value at December 31, 2000 and 1999. 4. Income Taxes There was no provision for income taxes in 2000 or 1999 due to the existence of net operating losses from prior years. The provision for income taxes differs from the amount determined by applying the federal statutory tax rate to pre-tax income as a result of the following:
Year Ended December 31, 2000 1999 ---------------------------------------------------------------------------------------------- Amount Percent Amount Percent ---------------------------------------------------------------------------------------------- Income taxes at statutory rate $ 202,000 34% $ 14,000 34% Increase (decrease) in taxes resulting from: Reduction in valuation allowance (238,000) (40) (14,000) (34) Other 36,000 6 - - ---------------------------------------------------------------------------------------------- $ - -% $ - -% ==============================================================================================
F-16 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Income Taxes Deferred tax assets (liabilities) are as follows: (continued)
December 31, 2000 1999 --------------------------------------------------------------------------------- Depreciation $ (83,000) $ (80,000) Provision for doubtful accounts 103,000 129,000 Vacation accrued 42,000 34,000 Deferred income 9,000 9,000 Operating loss carryforwards 889,000 1,106,000 ----------------------------------------------------------------------------- Net deferred tax asset 960,000 1,198,000 Deferred tax asset valuation allowance (960,000) (1,198,000) ----------------------------------------------------------------------------- $ - $ - =============================================================================
At December 31, 2000, the Company had approximately $2,224,000 of net operating loss carryforwards with expiration dates through December 31, 2018. The Company has offset the deferred tax asset with a valuation allowance since recoverability of the asset is not assured. 5. Employee Benefit The Company has a 401(k) retirement plan (the "Plan") Plans covering substantially all employees. Participants may contribute up to 10% of their compensation to the Plan. The Company contributes 25% of the participant's contribution, up to 4% of the participant's compensation, as a matching contribution. Total contributions for the years ended December 31, 2000 and 1999 were $104,284 and $13,631, 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, 2000 and 1999. 6. Commitments a) The Company has an employment agreement with its and President which provides for an annual salary of Contingencies up to $175,000. The term of the agreement expires December 31, 2001, and is thereafter automatically renewed for successive one year periods, unless written notice for non-renewal is given. 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-17 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 Contingencies Option Plan (the "1994 Plan") which allows the (continued) Company to grant 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. On November 21, 2000, the Board of Directors and Stockholders of the Company increased the maximum aggregate number of shares which may be granted under the 1994 Plan to 575,000 of the Company's Common Stock. The following tables summarize activity of the Plan and the stock options outstanding at December 31, 2000:
Weighted Average Vested Exercise Options and Price Outstanding Exercisable ------------------------------------------------------------------------------- Balance, December 31, 1998 $1.47 111,425 40,299 Granted .56 88,000 - Forfeited 1.00 (13,150) (4,182) Vested - - 27,403 ---------------------------------------------------------------------------- Balance, December 31, 1999 1.07 186,275 63,520 Granted - - - Forfeited - (11,300) (5,132) Vested - - 43,867 ---------------------------------------------------------------------------- Balance, December 31, 2000 $1.07 174,975 102,255 ============================================================================
Options Outstanding Options Exercisible ----------------------------------- -------------------- Weighted Average Number of Remaining Contractual Number Exercise Prices Shares Life (Years) of Shares ---------------------------------------------------------------------------- $0.56 88,000 7.0 29,331 $1.00 66,975 5.7 52,924 $3.50 20,000 5.5 20,000 ---------------------------------------------------------------------------- 174,975 6.3 102,255 ============================================================================
F-18 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments The Company has adopted Statement of Financial and Contingencies Accounting Standards No. 123, Accounting for Stock- (continued) Based Compensation ("SFAS 123"). 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 2000 and 1999 earnings (loss) would have been as follows:
2000 1999 --------------------------------------------------------------- Net earnings (loss): Reported $593,373 $42,275 Proforma 593,373 10,595 Basic and diluted earnings (loss) per share: Reported $ .19 $ .014 Proforma .19 .003
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 6.43% and expected lives of five to six years. Substantially all options become vested and exercisable ratably over a five year period. The weighted average fair value of options granted during the year ended December 31, 1999 was $.36. No options were granted during the year ended December 31, 2000. F-19 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments c) In 1999, the Company, through the general and Contingencies contractor, filed claims, in the amount of (continued) approximately $1,100,000 for damages and 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 panels, producing panels with additional steel reinforcement, and erection of the panels on the structure. The general contractor filed suit against the Company, Rutgers, and the architect on the project, for damages. While the actual damages were not specified, based upon the pleadings, the general contractor is seeking in excess of $700,000 in damages from the Company. The Company filed a countersuit against the general contractor for damages in excess of $1,100,000. The Company also filed suit against Skylift Corporation, the Company's subcontractor, initially responsible for installation of construction panels, for approximately $1,000,000. The Company has approximately $950,000 due to the general contractor included in reserve for contract loss at December 31, 2000 and 1999. The Company's outside counsel has provided the Company with an opinion that a legal basis exists for a claim against the general contractor and Rutgers. All conditions for claim recognition have been satisfied, and as of December 31, 2000 and 1999, approximately $497,000 of the potential $1,100,000 contract claim is included in claims receivable, as such amounts are probable (subject to negotiations and legal proceedings). The Company believes that, based on prior experience in claims settlement, it will ultimately collect the recorded claim receivable. d) In late 1995, the Company filed four separate informal claims totaling $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 $1,080,500 at December 31, 1996. F-20 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments As of December 31, 2000 all of the claims except one and Contingencies had been settled and the Company has considered (continued) certain counterclaims filed by the State of Maryland in estimating the recoverability of its remaining claim of $76,500 which was fully reserved and certain trade accounts receivable of approximately $149,000 at December 31, 2000. e) 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 $120,000 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 it can collect a portion of the balance due, and established a reserve of approximately $80,000 for the remainder. f) In June 2000, the Company received notice of a personal injury lawsuit filed by Kenneth R. Hughes and Braunya P. Hughes in the United States District Court for the District of Columbia. Mr. Hughes was a road construction worker engaged in the transportation and relocation of pre-cast concrete barrier to create temporary concrete walls at road construction sites for a third party construction company. On or about June 20, 1997, Mr. Hughes suffered injuries when a barrier section-coupling device apparatus failed. The suit alleges that the Company sold the section-coupling device to the third party contractor and was negligent in the design and manufacture of said barrier section- coupling device. The suit seeks $10,000,000 in compensatory damages and $10,000,000 in punitive damages. Management believes the suit to be without merit as there is no evidence that indicates that the Company either sold or manufactured the section- coupling device in question. The Company plans to vigorously defend its position, and believes that any settlement will not adversely affect the financial statements. F-21 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Commitments g) In January 2001, the Company received notice of a and Contingencies wrongful death lawsuit filed by the Estate of Joy (continued) V. Snyder and her surviving children. On or about March 12, 1998, Ms. Snyder was involved in an automobile accident whereby the rear of her vehicle was struck by another vehicle, which caused her to leave the highway and run into the back of a tractor-trailer owned by Smith-Midland, causing her death. The tractor-trailer was parked on the shoulder to deliver sound abatement panels to a Maryland State Highway Administration project. The suit names the Company, the tractor-trailer driver, the general contractor, and the Maryland State Highway Administration as defendants alleging negligence as to the truck's location on the shoulder of the highway and asks for damages in the amount of $8,000,000 plus interest and costs. The Company believes that its driver was parked properly in accordance with instructions received from the general contractor and that the accident was entirely a result of the negligence by the driver that hit Ms. Snyder, not any of the parties named in the suit. The Company plans to vigorously defend its position, and believes that any settlement will not adversely affect the financial statements. F-22