UNITED STATES
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, 2003
Commission File Number 1-13752
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SMITH-MIDLAND CORPORATION
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(Name of Small Business Issuer in its Charter)
Delaware 54-1727060
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 300, 5119 Catlett Road,
Midland, Virginia 22728
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(Address of Principal Executive Offices) (Zip Code)
(540) 439-3266
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(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.01 par value per share Boston Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
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(Title of Class)
Preferred Stock Purchase Rights
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
The Issuer's revenues for its most recent fiscal year were $18,163,783.
The aggregate market value of the shares of Common Stock, held by
non-affiliates, based upon the closing price for such stock on March 25, 2004,
was $3,690,368.
As of March 25, 2004, the Company had outstanding 4,449,548 shares of Common
Stock, $.01 par value per share.
Transitional Small Business Disclosure Format
Yes No X
--- ---
Documents Incorporated By Reference
-----------------------------------
None.
2
FORWARD-LOOKING STATEMENTS
This Annual Report and related documents include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause the Company's actual
results, performance (financial or operating) or achievements expressed or
implied by such forward looking statements not to occur or be realized. Such
forward looking statements generally are based upon the Company's best estimates
of future results, performance or achievement, based upon current conditions and
the most recent results of operations. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "believe," "estimate," "anticipate," "continue," or similar terms,
variations of those terms or the negative of those terms. Potential risks and
uncertainties include, among other things, such factors as:
o our significant loss for the year ended December 31, 2003,
o our decrease in revenues from $26.9 million in 2001 to $18.2 million
in 2003,
o our high level of indebtedness and ability to satisfy the same,
o the decision of our bank, UPS Capital, not to renew our line of credit
beyond July 1, 2004,
o the continued availability of financing in the amounts, at the times
and on the terms required, to support our future business and capital
projects,
o the extent to which we are successful in developing, acquiring,
licensing or securing patents for proprietary products,
o changes in economic conditions specific to any one or more of our
markets (including the availability of public funds and grants for
construction),
o changes in general economic conditions (such as interest rate
changes),
o adverse weather which inhibits the demand for our products,
o our compliance with governmental regulations,
o the outcome of pending and future litigation,
o 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,
o the cyclical nature of the construction industry,
o our exposure to increased interest expense payments should interest
rates change and,
o the Board of Directors, which is composed of four members, has only
one outside, independent director,
o the Company does not have an audit committee; the Board of Directors
functions in that role,
o the Company's Board of Directors does not have a member that qualifies
as an audit committee financial expert as defined in the regulations,
o the Company has experienced a high degree of employee turnover,
especially at the senior manager level, and
o the other factors and information disclosed and discussed in other
sections of this report.
Investors and shareholders should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause actual
results to differ materially from those provided in the forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
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, utilities and
farming 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, and 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 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 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.
1
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.
Easi-Set Slenderwall(TM) Lightweight Construction Panels
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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.
2
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.
The Company was a party to a licensing agreement with DuriSol Resource, Inc. of
Ontario, Canada, permitting the Company to utilize the DuriSol(R)
sound-absorbing technology until December 31, 2003. The License Agreement
between Durisol Resource Inc. and the Company expired on December 31, 2003 and
was not renewed. At this time the Company may manufacture Durisol products on a
project by project basis. Durisol must first authorize each project. Durisol
Resource Inc. is in negotiations with the Company to work out a new relationship
which is expected to be restricted to manufacturing on a project by project
basis at Durisol Resource, Inc.'s option. Royalties, fees and cost of shavings
are negotiated prior to bidding of each project by the Company.
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")
requires that states use only positively connected barriers which meet NCHRP-350
test level 3 crash test requirements. J-J Hooks Barrier meets the requirements
and is NCHRP-350 approved.
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
3
technique have eyes or rings protruding from each end of the barrier, which must
be aligned during the setting process. Once set, a crew inserts pins through the
eyes and bolts the barrier sections together. Compared to this technique, the
J-J Hooks Barrier is easier and faster to install, and remove, requires a
smaller crew and eliminates the need for loose hardware to make the connection.
In November 1990, the FHWA approved the J-J Hooks Barrier for use on
federally-aided highway projects following the successful completion of crash
testing based on National Cooperative Highway Research Program criteria. The J-J
Hooks Barrier has also been approved for use in state funded projects by 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:
o Communications Operations -- to house fiber optics regenerators,
switching stations and microwave transmission shelters, cellular phone
sites, and cable television repeater stations.
o Government Applications -- to federal, state and local authorities for
uses such as weather and pollution monitoring stations; military
storage, housing and operations; park vending enclosures; rest rooms;
kiosks; traffic control systems; school maintenance and athletic
storage; airport lighting control and transmitter housing; and law
enforcement evidence and ammunition storage.
4
o Utilities Installations -- for electrical switching stations and
transformer housing, gas control shelters and valve enclosures, water
and sewage pumping stations, and storage of contaminated substances or
flammable materials which require spill containment.
o Commercial and Industrial Locations -- for electrical and mechanical
housing, cemetery maintenance storage, golf course vending enclosures,
mechanical rooms, 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 27 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 SlenderwallTM, as well as certain
non-proprietary products, such as the Company's cattleguards, and water and feed
troughs. Generally, licenses are granted for a point of manufacture. The Company
receives an initial one-time license acquisition and training fee ranging from
approximately $25,000 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 SlenderwallTM
licensees pay the Company a flat monthly fee for co-op advertising and promotion
programs. The Company produces and distributes advertising materials and
promotes the licensed products through its own advertising subsidiary,
AdVentures.
5
The Company has entered into 34 licensing agreements in the United
States, and has established at least one licensee in each of Canada, Belgium,
New Zealand, and Spain and sub-licensees in Canada.
The Company is currently negotiating several new license arrangements
and, although no assurance can be given, expects to increase its licensing
activities. Additional licensees were added in 2003 with licensee fees amounting
to $69,000.
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.
6
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 very
competitive in their markets.
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
expired 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
licensed the rights to another (DuriSol(R)); this agreement expired 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.
7
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.
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 22, 2004, the Company had 123 full-time and 7 part-time
employees, 100 of which are located at the Company's Midland Virginia facility,
and 23 of which are located at the Company's facility located in Reidsville,
North Carolina. 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 $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.
8
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 are used as collateral for a
long-term note, which as of December 31, 2003, had a balance of $3.6 million.
(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 (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, 2003, $497,000 of the
contract claim was included in claims 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.
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,
9
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 March 26, 2004, the parties, with the assistance of the
Court-appointed Mediator, reached agreement to settle this matter and, as a
result, all claims by or against the Company asserted in the action are expected
to be dismissed with prejudice. The Company's only obligation in connection with
the settlement will be the payment of the sum of $30,000 to Seacoast, in
exchange for which the Company will receive a complete release of liability in
connection with the Project. It is probable there will also be a non-cash gain
recorded by the Company as a result of netting the amount recorded for Claims
Receivable against the amount recorded for Estimated Contract Loss.
In March 2004, the Company received notice of a personal injury lawsuit
filed by Thomas Hergenroeder in the Circuit Court for Baltimore City. Mr.
Hergenroeder was working at a construction site located at the Baltimore
Washington Airport located in Anne Arundel County, Maryland for another
subcontractor. On or about August 2, 2002, Mr Hergenroeder allegedly suffered
injuries when he slipped and fell on acid and water that had been sprayed by the
Company. The suit seeks $1,000,000 in damages plus interest and costs of suit
herein. Management believes the case to be without merit; it is being defended
by the Company's insurance company, which had insured the Company in this type
of claim.
The Company is not presently involved in any other litigation of a
material nature.
10
Item 4. Submission of Matters to Vote of Security Holders - None.
---------------------------------------------------------
PART II
Item 5. Market for Common Equity, Related Stockholder Matters, and Small
----------------------------------------------------------------
Business Issuer Purchases of Securities.
----------------------------------------
The Company's Common Stock has traded on the Boston Stock Exchange
("BSE") under the symbol "SMC" from December 13, 1995 to March 3, 2002. On March
4, 2002 the BSE amended the symbol to "SMID". The Company's Common Stock also
trades on the OTC Bulletin Board System under the symbol "SMID".
As of March 26, 2004, there were approximately 85 record holders of
the Company's Common Stock. Management believes there are at least 400
beneficial owners of the Company's Common Stock.
The following table sets forth the high and low closing prices on the
OTC Bulletin Board System for the Company's Common Stock for the periods
indicated. Such information was obtained from Yahoo Finance. These market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
High Low
---- ---
2003
First Quarter $ 1.30 $1.02
Second Quarter $ 1.11 $0.75
Third Quarter $ 0.95 $0.75
Fourth Quarter $ 0.98 $0.79
2002
First Quarter $ 2.04 $1.40
Second Quarter $ 2.37 $1.50
Third Quarter $ 1.78 $1.20
Fourth Quarter $ 1.33 $ .98
Dividends
The Company has not paid dividends on its Common Stock since its
inception and may not pay 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
11
earnings, capital requirements and financial position of the Company, general
economic conditions and other pertinent factors. The Company's current loan
agreement with UPS Capital 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.
Shareholder Rights Plan
The Company's Board of Directors adopted a Shareholder Rights Plan (the
"Plan") in January 2003. Under the Plan, preferred stock purchase rights (each,
a "Right") were distributed as a dividend at the rate of one Right for each
share of Common Stock outstanding as of the close of business on February 11,
2003 and automatically attach to shares issued thereafter. Each Right entitles
the holder to purchase one one-hundredth of a share of newly created Series A
Junior Participating Preferred Stock of the Company at an exercise price of
$8.00 (the "Exercise Price") per Right. In general, the Rights will be
exercisable if a person or group ("Acquiring Person") becomes the beneficial
owner of 15% or more of the outstanding Common Stock of the Company or announces
a tender offer for 15% or more of the Common Stock of the Company. When the
Rights become exercisable, a holder, other than the Acquiring Person, will have
the right to receive upon exercise Common Stock having a value equal to two
times the Exercise Price of the Right. If, after the Rights become exercisable,
the Company is acquired in a merger or similar transaction, each Right will
entitle the holder thereof, other than the Acquiring Person, to purchase, at the
Exercise Price, shares of the acquiring corporation having a value equal to two
times the Exercise Price of the Right. After a person or group becomes an
Acquiring Person, but before an Acquiring Person owns 50% or more of the
outstanding Common Stock of the Company, the Board of Directors of the Company
may extinguish the Rights by exchanging one share of Common Stock or an
equivalent security for each Right, other than Rights held by the Acquiring
Person. The Board of Directors will in general be entitled to redeem the Rights
for $.001 per Right at any time prior to any person or group becoming an
Acquiring Person. The Rights will expire on January 20, 2013.
Item 6. Management's Discussion and Analysis
------------------------------------
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 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 transportable concrete
12
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.
Plan for Operations in 2004
The Company's budget for 2004 is based on operating profitably at
approximately $15 million in sales and generating positive cash flow to reduce
the debt level. The Company formed a team made up of senior managers to identify
and implement the steps necessary to return the Company to profitability which
includes:
o Increasing the gross margin on our large projects by improving the
estimating/bid process and regularly monitoring the actual costs
incurred versus the budget.
o Improving quality by involving engineering more at the design stage,
revising the scheduling process, upgrading the batching plant and
strengthening the quality control and finishing departments.
o Decreasing employee turnover by improving testing of new hires,
upgrading training and development and seeking more feedback from
employees.
o Operating shipping at a profit by updating rates and procedures,
benchmarking to other operations and a weekly report to monitor
status.
o Improving cost controls by use of the budget to control expenses,
reviewing key costs monthly to identify savings and assigning
authority for spending levels.
o Increasing liquidity by extending the UPS Capital line of credit and
seeking additional financing.
o Improving cost accounting by implementing the new MAS 500 integrated
accounting software.
Preliminary results indicate the plan is working; the productions
backlog at the end of February 2004 was approximately $4.6 million compared to
approximately $1.4 million at the same time in 2003; sales in the first quarter
of 2004 are ahead of budget; quality deficiencies and their related expenses are
decreasing; approximately $1.3 million in costs have been identified for
potential savings; and the credit line has been extended through July 1, 2004.
Results of Operations
Year ended December 31, 2003 compared to the year ended December 31,
2002
Overall, the Company's performance in 2003 was extremely disappointing
with a consolidated net loss of $1,900,942 compared to a net profit of $600,511
for 2002. The causes of the net loss are a large decrease in sales that occurred
in product sales and project billings; an increase in cost of goods sold as a
percentage of sales in the same areas and an increase in selling, general and
administrative expense. In the fourth quarter, the Company had a net loss of
$1,603,477. The reasons for this loss are the same as for the year to date. The
sales decrease was a result of a decrease in barrier, architectural, and
soundwall products and Slenderwall(TM). Royalty fees were also down due to
decreased barrier sales by the Company's licensees. The increase in the cost of
goods sold was due to a much higher materials cost related to two projects which
had been bid at a low margin, quality problems with several projects and the
recognition of a contingent warranty expense. The increase in selling, general
and administrative expense resulted from legal expenses mostly related to the
Seacoast case; professional fees related to audit/tax work; an increase in
workers compensation adjustment; business insurance, an increase in bad debt
expense and additional advertising expense.
13
For the year ended December 31, 2003, the Company had total revenue of
$18,163,783 compared to total revenue of $22,604,958 for the year ended December
31, 2002, a decrease of $4,441,175, or 20%. Sales include revenues from product
sales, royalty income, barrier rental income, installation income and shipping
income. Total product sales were $14,115,735 for the year ended December 31,
2003, compared to $17,823,449 for the same period in 2002, a decrease of
$3,707,714, or 21%. Sales of barrier, soundwall, architectural products and
SlenderwallTM decreased due to a lack of projects using these products. Farm
products and utility products had small increases and building sales were flat.
Barrier rental revenue decreased to $447,476 for the year ended December 31,
2003 from $519,469 for the year ended December 31, 2002 due to a decrease in
security related contracts related to events in the Washington D.C. metro area.
Shipping and installation revenue was $3,133,469 for the year ended December 31,
2003 and $3,686,887 for the same period in 2002, a decrease of $553,418, or 15%.
The decrease is attributable to the overall decrease in product and other sales.
Royalty income totaled $487,323 for the year ended December 31, 2003, compared
to $575,153 for the same period in 2002. The decrease of $87,830, or 15%, was
due largely to a decrease in royalties from barrier sales. Revenue from the
addition of new licensees was up slightly to $69,610 compared to $61,205 for the
same period in 2002.
Construction activity remained weak most of the year in the Company's
primary markets lagging behind the improvement in general economic conditions.
This decreased the number of projects available to the Company and put increased
price pressure on the Company's bids. The Company's unfilled order backlog for
products increased in December and at the end of 2003 was significantly higher
than it was at the same time in 2002. The Company's bid activity remains high
and we expect the backlog to build up in 2004 if the upturn in the construction
industry continues.
Total cost of goods sold for the year ended December 31, 2003 was
$15,497,959, a decrease of $1,433,848, or 8%, from $16,931,807 for the year
ended December 31, 2002. The majority of the decrease was the result of the
lower volume of sales however, total cost of goods sold, as a percentage of
total revenue, increased to 85% for the year ended December 31, 2003, from 75%
for the year ended December 31, 2002. The increase in the cost of goods sold
percentage was due to lower margins on projects; quality problems and higher
complexity on the particular projects being produced in 2003. The lower margins
were primarily due to the Company accepting a lower price on two projects bid in
2002 to maintain plant capacity when they were produced in 2003. The Company has
put in place several improvements in the bid and forecast process that will help
14
identify these types of projects and what the effect will be on the production
schedule. The Company has addressed its quality problems by assigning a senior
manager to implement improvements related to training, adherence to procedures
and quality reviews. Preliminary results have shown a decrease in quality
related deficiencies.
For the year ended December 31, 2003, the Company's general and
administrative expenses increased $418,354, or 14%, to $3,375,306, from
$2,956,952 during the same period in 2002. This was due to increases in workers
compensation adjustment; business insurance; legal expenses mostly related to
the Seacoast case; use of temporary workers; personnel recruitment; professional
fees related to audit/tax work; and health insurance.
Selling expenses for the year ended December 31, 2003 increased $116,401,
or 8%, to $1,500,012 from $1,383,611 for the year ended December 31, 2002. The
overall increase was due to increased payroll expense, advertising and sales
commissions as the Company sought to offset revenue losses with greater
marketing efforts.
The Company's operating loss for the year ended December 31, 2003 was
$2,209,494, compared to operating income of $1,332,588 for the year ended
December 31, 2002, a decrease of $3,542,082. The operating loss for the current
year resulted from the decreased sales volume coupled with higher materials
expense caused by quality problems (see explanation above) and increased
selling, general and administrative expense.
Interest expense and loan fees was $289,173 for the year ended December 31,
2003, compared to $301,888 for the year ended December 31, 2002. The decrease of
$12,715, or 4%, was due to lower average interest rates that more than
compensated for the increase in the amount of debt.
Other expense, net of other income, totaled $73,618 in the year ended
December 31, 2003 versus other expense of $69,852 for the year ended December
31, 2002. The decrease of $3,766 was due to normal business fluctuations.
Income tax benefit was $492,000 in the year ended December 31, 2003
compared to an income tax expense of $579,000 for the year ended December 31,
2002. The change from a tax expense to a tax benefit was due to the large net
operating loss recorded in 2003.
Net loss was $1,900,942 for the year ended December 31, 2003, compared to
net income of $600,511 for the same period in 2002. Basic and diluted net loss
per share for the current year was $.43 compared to basic and diluted net income
per share of $.16 for the year ended December 31, 2002 with 4,442,490 weighted
average shares outstanding in the 2003 period versus 3,774,291 in the 2002
period.
Liquidity and Capital Resources
The Company has financed its capital expenditures and operating
requirements in 2003 primarily with proceeds from bank
and other borrowings.The Company had $5,233,154 of total indebtedness at
December 31, 2003, of which $1,072,886 is scheduled to mature within twelve
months. Included in this amount is $600,000 that is due on the credit line to
UPS Capital as described below.
15
Schedule of Contractual Obligations
Less than
Total 1 year 1 to 3 years 4 to 5 years Over 5 years
-------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
Long term debt and $5,204,598 $1,045,226 $686,002 $391,624 $3,081,746
capital leases
Debt to related parties $26,668 $26,668 $0 $0 $0
Operating leases $1,888 $992 $896 $0 $0
Total contractual $5,233,154 $1,072,886 $686,898 $391,624 $3,081,746
obligations
The Company has a $3,578,966 note with UPS Capital, formerly First
International Bank, headquartered in Hartford, Connecticut. The note had an
original term of twenty three years beginning on June 25, 1998 with an interest
rate of 1.5% above prime, secured by equipment and real estate. The loan is
guaranteed in part by the U.S. Department of 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, UPS Capital 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. At December 31, 2003, the Company was in violation of
covenants related to fixed asset expenditures, however, the Company received a
waiver of the covenants by the USDA and the bank. The Company also had a
$1,000,000 line of credit, under which $600,000 was outstanding at December 31,
2003. UPS Capital informed the Company that it would not renew the line of
credit when it expires April 1, 2004. However, as of April 15, 2004, UPS Capital
had extended the expiration date on the line of credit until July 1, 2004 with
an outstanding balance of $500,000.
At December 31, 2003, the Company had cash totaling $699,645 compared
to cash totaling $1,223,756 at December 31, 2002. During 2003, the financing
activities provided $971,847 (net) in cash which resulted mainly from borrowings
to purchase fixed assets and use of the credit line to provide working capital;
used $596,655 in its investing activities, primarily for the purchase of new
equipment. The Company's operating activities used cash of $899,303 (net) due to
the large net loss and increase in inventory which was offset by the decrease in
accounts receivable and the increase in accounts payable.
Capital spending increased to $769,452 in 2003, from $756,763 in 2002
for various improvements in the plant and the existing infrastructure. The
Company intends to continue to fund capital improvements but at a reduced scale
that is in line with current operations and takes into account the current debt
load.
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
16
project management on jobs, will be sufficient to finance the Company's
operations for at least the next 12 months. In the event cash flow from
operations and is not adequate to support operations, the Company is currently
investigating alternative sources of financing, for which there can be no
assurance of obtaining.
Significant Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in it's Summary of Accounting Policies to the Company's consolidated financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below, however, application of these
accounting policies involves the exercise of judgment and the use of assumptions
as to future uncertainties and as a result, actual results could differ from
these estimates.
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.
The Company estimates inventory markdowns based on customer orders sold
below cost, to be shipped in the following period and on the amount of similar
unsold inventory at period end. The Company analyzes recent sales and gross
margins on unsold inventory in further estimating inventory markdowns. These
specific markdowns are reflected in the cost of sales and the related gross
margins at the conclusion of the appropriate sales period. This estimate
involves significant judgment by the management of the Company. Actual gross
margins on sales of excess inventory may differ from the Company's estimate.
The Company recognizes revenue on the sale of its standard precast
concrete products at shipment date, including revenue derived from any projects
to be completed under short-term contracts. Installation services for precast
concrete products, leasing and royalties are recognized as revenue as they are
earned on an accrual basis. Licensing fees are recognized under the accrual
method unless collectibility is in doubt, in which event revenue is recognized
as cash is received. Certain sales of Soundwall and Slenderwall concrete
products are recognized upon completion of units produced under long-term
contracts. When necessary, provisions for estimated losses on these contracts
17
are made in the period in which such losses are determined. Changes in job
performance, conditions and contract settlements that affect profit are
recognized in the period in which the changes occur. Unbilled trade accounts
receivable represents revenue earned on units produced and not yet billed.
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 experience 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
Management believes that the Company's operations were not materially
affected by inflation in 2003.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
did not have an effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. This Statement requires many instruments previously classified ass
equity to be classified as liabilities. Such as mandatorily redeemable shares
and repurchase obligations related to an issuer's equity shares. The adoption of
SFAS 150 did not have a material impact on the financial statements.
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities (VIE)", which clarifies the
application of ARB No. 51 and replaces Interpretation No. 46. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. A nonpublic enterprise shall
apply this Interpretation to all entities that are subject to this
Interpretation by the beginning of the first annual period beginning after
18
December 15, 2004. The Interpretation requires certain disclosures in financial
statements issued after December 31, 2003 if it is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective. The Company does not believe
that it has any VIE for consolidation.
Item 7. Financial Statements
--------------------
The following financial statements, which appear at the back portion of
the report, are filed as part of this report:
Page
----
Report of Independent Certified Public Accountants..................... F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002........... F-4
Consolidated Statements of Operations for the years ended December 31,
2003 and 2002 ....................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2003 and 2002 ................................ F-7
Consolidated Statements of Cash Flows for the years ended December 31,
2003 and 2002 ..................................................... F-8-9
Summary of Significant Accounting Policies............................. F-10-14
Notes to Consolidated Financial Statements ............................ F-15-23
Item 8. Changes In and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 8a. Controls and Procedures.
------------------------
BDO Seidman, LLP ("BDO"), the Company's independent auditors advised
the company's management that during the course of the fiscal 2003 audit,
material weaknesses in internal controls were noted due to the lack of timely
reconciliation of key accounts by the company, including cash, accounts
receivable, inter-company accounts and accounts payable.
19
BDO also advised management of significant deficiencies with respect to
certain other matters, principally relating to the documentation of job costs
and the ability to identify on an on-going manner, the amount of profit or loss
to be recognized on long-term contracts.
Management response
In regard to paragraph one above, the Company's principal executive
officer and principal financial officer believe that the procedures followed by
the Company provide reasonable assurance that the identified weaknesses and
deficiencies did not lead to material misstatements in the Company's audited
consolidated financial statements included in this report on Form 10-KSB. This
problem occurred in one subsidiary only and was due to problems with the
accounting information system. The Company recognizes the need for a more robust
information system and has purchased MAS 500 software for this purpose. However,
the Company recognizes the need for additional documentation of processes and
training of personnel in how to use the new system. Several additional
procedures have been implemented as corrective measures that will be used until
the new system is up and running.
The Company's principal executive officer and principal financial
officer believe that the inability of the current information system in Smith
Midland Virginia to provide timely and accurate product cost information is a
material weakness. A replacement system, MAS 500, has been purchased and is due
to be implemented in the near future. This system provides full integration of
the manufacturing process and the ability to provide timely and accurate cost
information on the products the Company sells. The Company recognizes the need
to document its processes and provide extensive training to the company's
personnel in how the system works and what their responsibilities are.
In addition, BDO advised the Company that significant deficiencies were noted
with respect to certain other matters, principally related to the lack of
documentation of policies, procedures and responsibilities in a number of
functional areas. In some cases the identified weaknesses could also constitute
deficiencies in the Company's disclosure controls and procedures.
The Company's principal executive officer and principal financial officer
believe that the procedures followed by the Company provide reasonable assurance
that the identified deficiencies did not lead to material misstatements in the
Company's audited consolidated financial statements and other disclosures
included in this report on Form 10-KSB. The Company understands the importance
of the role senior management must take in implementing an appropriate overall
control environment and recognizes that components of the internal control
structure and environment must be strengthened, including the need for
additional documentation of processes and procedures and employee training in
certain areas, and has initiated corrective measures to address these
significant deficiencies.
20
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 65 1970 Chief Executive Officer,
President and Chairman of the
Board of Directors
Ashley B. Smith 41 1994 Vice President of Sales and
Marketing and Director
Wesley A. Taylor 56 1994 Vice President of
Administration and Director
Andrew G. Kavounis 78 1995 Director
James W. Dean 66 2000 Vice President of Engineering
Smith-Midland Corp.(Virginia)
John K. Johnson 53 2003 Chief Financial Officer
Guy Schuch 55 2004 Chief Operating Officer
Smith-Midland Corp.(Virginia)
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. He 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 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.
21
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 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.
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 Operations for Smith-Midland Corporation (Virginia). Mr. Dean
holds a Bachelor of Science degree in Civil Engineering from Virginia
Polytechnic Institute.
John K. Johnson. Chief Financial Officer. Mr. Johnson joined Smith-Midland
Corporation in January 2003 as the Chief Financial Officer. Previously he was
the chief Financial Officer for Iceweb, Inc., a communications company, from
March 2001 to January 2003. From February 2000 to March 2001 he was the
controller for Comstor, a distribution company, and from March 1999 to February
2000 he was the Director of Finance for Strayer Education, Inc., an education
company. From January 1997 to March 1999 he was the Controller/CFO for Dunn*IDP
Computer, Inc., a computer manufacturing and consulting company. Mr. Johnson is
a member of the American Institute of Certified Public Accountants where he is
involved in the business and industry section. Mr. Johnson received a BBA from
Southern Methodist University and a MSBA from Boston University. He also served
as a commissioned officer in the United States Air Force. Mr. Johnson's
employment with the Company ended on April 20, 2004. His successor as Chief
Financial Officer, Lawrence Crews, assumed his duties on April 21, 2004.
Guy 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, from May 1999 to February 2002 and from January
2004 to present. 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.
22
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), requires executive officers and Directors and
persons who beneficially own more than ten percent (10%) of the Company's Common
Stock to file initial reports of ownership on Form 3 and reports of changes in
ownership on Form 4 with the Securities and Exchange Commission (the
"Commission") and any national securities exchange on which the Corporation's
securities are registered.
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.
Code of Ethics
The Company adopted a code of ethics that applies to the principal executive
officer, Chief Financial Officer, Controller and persons performing similar
functions. The Board of Directors approved the code of ethics at their meeting
on December 17, 2003. A copy of the code of ethics is filed as an exhibit to
this report and is posted on the Company website. The website address is
www.smithmidland.com.
Audit Committee
The Company does not have an Audit Committee of the Board of Directors; the
entire Board of Directors serves the functions of the Audit Committee. No member
of the Board of Directors qualifies as an "Audit Committee financial expert" as
defined in Regulation S-B. As a small company, the Company does not have the
resources to recruit a person that so qualifies.
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 officers"),
whose cash compensation exceeded $100,000 during 2003:
23
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 2003 82,192 190,560* 99,000** 0 20,000 0 0
President, Chief 2002 170,962 189,081* 0 0 0 0 0
Executive Officer 2001 175,000 189,081 0 0 120,000 0 0
and Chairman of the
Board.
Michael Catteau*** 2003 109,615 68,294 0 0 15,000 0 0
Chief Operating Officer 2002 100,352 13,670 0 0 0 0 0
2001 70,498 450 0 0 20,000 0 0
Wesley A. Taylor 2003 84,596 23,430 0 0 10,000 0 0
Vice President of 2002 82,963 33,120 0 0 0 0 0
Administration and 2001 68,879 1,788 0 0 20,000 0 0
Director
Ashley B. Smith 2003 92,310 20,316 0 0 10,000 0 0
Vice President Sales and 2002 85,388 23,800 0 0 0 0 0
Marketing and Director 2001 89,165 2,005 0 0 20,000 0 0
Guy M. Schuch 2003 111,250 0 0 0 0 0 0
Chief Operating Officer 2002 111,250 29,933 0 0 0 0 0
Smith Midland Virginia 2001 111,250 0 0 0 30,000 0 0
* This is a non-cash (except for the portion related to the payment of taxes)
bonus to Rodney Smith to pay down an officer receivable due the Company.
The receivable originated in 1969 as $60,000. The current amount owed is
equal to original principal plus accrued interest. See Employment Contracts
and Termination of Employment and Change in Control Arrangements on page
29.
** This represents an annual royalty fee paid under Rodney Smith's employment
agreement.
*** Mr. Catteau resigned as Chief Operating Officer in December 2003 and is
expected to leave the Company at the end of April 2004.
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 $250 per meeting as compensation for their services and
are reimbursed for expenses incurred in connection with the performance of their
duties. Rodney I. Smith receives no compensation as a Director, but is
reimbursed for expenses incurred in connection with the performance of his
duties as a Director.
Option Grants in Last Fiscal Year
The following table summarizes option grants during 2003 to the named executive officers
Name Number of Securities % of Total Options Exercise Price ($/Sh) Expiration Date
Underlying Options Granted to Employees
Granted (#) in Fiscal Year
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Rodney I Smith 20,000 14.3% 0.83 17 Dec 2013
Wesley A. Taylor 10,000 7.1% 0.83 17 Dec 2013
Ashley B. Smith 10,000 7.1% 0.83 17 Dec 2013
Michel Catteau 15,000 10.7% 0.83 17 Dec 2013
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 0 0 120,000 60,000 8,550 1,800
Michael Catteau 0 0 13,333 21,667 333 467
Guy Schuch 0 0 35,000 10,000 4,813 250
Wesley A. Taylor 0 0 39,583 16,667 4,646 367
Ashley B. Smith 0 0 42,783 16,667 5,221 367
-------
(1) Value is based on the closing price of the Company's Common Stock on
December 31, 2003 ($0.85), the last trading day of 2003, less the option
exercise price.
24
Employment Contracts and Termination of Employment and Change in Control
Arrangements.
The Company entered into a four-year Employment Agreement with Rodney
I. Smith, its current President and Chief Executive Officer, effective as of
September 30, 2002. The term of employment automatically renews commencing on
the date one year after the effective date, and on an annual basis thereafter,
for an additional one year, unless earlier terminated or not renewed as provided
for therein. The agreement provides for an annual base salary of $99,000 ("Base
Salary"), which will be reviewed at least annually and adjusted from time to
time at the determination of the Board of Directors. It also provides for an
annual royalty fee of $99,000 payable as consideration for Mr. Smith's
assignment to the Company of all of his rights, title and interest in and to the
Patents (as defined in the agreement). Payment of the royalty continues only for
as long as the Company is using the inventions underlying the non-expired
Patents. Mr. Smith is also entitled to bonuses as follows (the "Bonus"): (i) a
performance-based bonus as determined by the Board each calendar year, and (ii)
a $27,000 quarterly bonus equal to one-twentieth of the then outstanding
principal balance on the loan (the "Loan") made by the Company to Mr. Smith in
the aggregate amount of $540,000, at the date of the employment agreement, and
the unpaid interest accrued thereon during the quarter, and a cash amount which
reimburses Mr. Smith for certain taxes payable by him as a result of such
quarterly bonus. Payment of the Bonuses that are equal to one-twentieth of the
Loan and the quarterly interest thereon are paid in the form of forgiveness of
such principal and interest. Once the Loan has been fully repaid, no further
quarterly Bonus in respect of the Loan shall be payable.
Mr. Smith's employment agreement provides further that if Mr. Smith (i)
voluntarily leaves the employ of the Company within six months of his becoming
aware of a Change of Control (as defined in the agreement) of the Company, then
he shall be entitled to receive a lump sum amount equal to three times the
five-year average of his combined total annual compensation, which includes the
Base Salary and Bonus, less one dollar ($1.00), and certain other unpaid accrued
amounts as of the date of his termination, or (ii) is terminated by the Company
without Cause (as defined in the agreement) or leaves the Company with Good
Reason (as defined in the agreement), Mr. Smith shall be entitled to a lump sum
payment equal to three times the combined Base Salary and Bonus paid during the
immediately preceding calendar year, and such other unpaid accrued amounts. In
any of such cases, the Company will provide Mr. Smith with certain Company
fringe benefits for two years, subject to certain conditions as provided for in
the agreement, and all of Mr. Smith's unvested options to purchase Company stock
shall become fully vested and exercisable on the date of termination. Mr. Smith
will be entitled to exercise all such options for three years from the date of
termination. The Company will have no further obligations to Mr. Smith, other
than with respect to the payment of royalties.
In the event Mr. Smith's employment by the Company is terminated as a
result of Mr. Smith's (i) death, his estate shall be entitled to a lump sum
payment of one times the combined Base Salary and Bonus, and certain other
25
accrued and unpaid amounts, or (ii) disability, Mr. Smith shall be entitled to
Base Salary and Bonus for a period of one year commencing with the date of
termination, and all other unpaid accrued amounts. In either of such cases the
outstanding principal balance of the Loan, and any accrued interest thereon,
shall be forgiven in full, and payment shall be made to reimburse for taxes
payable as a result thereof.
In the event Mr. Smith's employment is terminated for cause or Mr.
Smith voluntarily leaves the employ of the Company for no reason, Mr. Smith
shall be entitled to accrued but unpaid Base Salary and Bonus up to the date of
termination, and all other unpaid amounts. The Company shall have no further
obligations to Mr. Smith, other than with respect to the Loan.
The employment agreement also contains Noncompetition and
Nonsolicitation covenants for one year following Mr. Smith's termination of
employment for any reason.
26
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
and Related Stockholder Matters.
--------------------------------
The following table sets forth, as of March 19, 2004, certain
information concerning ownership of the Company's Common Stock by (i) each
person known by the Company to own of record or be the beneficial owner of more
than five percent (5%) of the Company's Common Stock, (ii) named Executive
Officers and Directors, 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) 742,298 16.2
Ashley B. Smith(1)(3)(4)(6) 133,250 3.0
Wesley A. Taylor(1)(7) 39,583 *
Andrew Kavounis(1)(8) 3,000 *
Michael Catteau (9) 13,333 *
Guy Schuch (1)(10) 35,000 *
AL Frank Asset Management, Inc. (11) 468,700 10.5
All directors, executive officers and key
employees as a group (6 persons)(2)(12) 966,464 20.5
-------------------------------
* Less than 1%
(1) The address for each of Messrs. Rodney I. Smith, Ashley B. Smith, Taylor,
Kavounis, and Schuch is c/o Smith-Midland Corporation, P.O. Box 300, 5119
Catlett Road, Midland, Virginia 22728.
(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) Ashley B. Smith is the son of Rodney I. Smith. 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 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 of
Mr. Smith's children. Mr. Smith is the trustee of the Trust and, as such,
may vote the shares, as he deems fit. Includes options to purchase 120,000
shares.
27
(6) Includes options to purchase 42,783 shares.
(7) Includes options to purchase 39,583 shares.
(8) Includes options to purchase 3,000 shares.
(9) Includes options to purchase 13,333 shares.
(10) Includes options to purchase 35,000 shares.
(11) Address of holder is 32392 Coast Highway, Suite 260, Laguna Beach, CA 92651
(12) Includes options to purchase 253,699 shares for all directors, executive
officers and key employees as a group.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights (a) warrants and rights (b) equity compensation
plans (excluding
securities reflected in
column (a))(c)
------------------------- ------------------------- -------------------------
Equity compensation plans approved by 607,075 $1.00 401,325
security holders
Equity compensation plans not approved 0 $0 0
by security holders
Total 607,075 $1.00 401,325
Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------
At December 31, 2003, the Company owned an unsecured note for
approximately $363,070 receivable from Mr. Rodney I. Smith, the Company's
President and majority shareholder, accruing interest at a rate of 6% per annum.
This note was extended by the Board of Directors at their July 22, 2002 meeting
to mature on December 31, 2007. The Board also approved the use of bonuses to
pay off the loan and any applicable taxes (more fully described in Item 10).
Principal received on the note was $100,449 for the year ended December 31, 2003
and $94,763 the year ended December 31, 2002. Total interest received on this
note was approximately $27,811 and $33,500 for the years ended December 31, 2003
and 2002, respectively.
Item 13. Exhibits, Lists and Reports on Form 8-K
---------------------------------------
(a) Exhibits.
(1) The following exhibits are filed herewith:
28
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation, as amended (Incorporated by reference to
the Company's Registration Statement on Form SB-2 (No. 33-89312)
declared effective by the Commission on December 13, 1995).
3.2 Bylaws of the Company adopted on January 21, 2003 (Incorporated by
reference to the Company's Registration Statement on Form 8-A (No.
000-25964) filed with the Commission on January 24, 2003).
4.1 Specimen Common Stock Certificate (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (No. 33-89312) declared
effective by the Commission on December 13, 1995).
4.2 Rights Agreement, dated as of January 21, 2003, between the Company and
Computershare Trust Company, Inc., as rights agent, including the Form
of Certificate of Designations, the Form of Rights Certificate and the
Summary of Rights to Purchase Preferred Shares attached thereto as
Exhibits A, B, and C, respectively (Incorporated by reference to the
Company's Registration Statement on Form 8-A (No. 000-25964) filed with
the Commission on January 24, 2003).
10.1 Lease Agreement, dated January 1, 1995, between the Company and Rodney
I. Smith (Incorporated by reference to the Company's Registration
Statement on Form SB-2 (No. 33-89312) declared effective by the
Commission on December 13, 1995).
10.2 Collateral Assignment of Letters Patent, dated between the Company and
Rodney I. Smith (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (No. 33-89312) declared effective
by the Commission on December 13, 1995).
10.3 Form of License Agreement between the Company and its Licensee
(Incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 33-89312) declared effective by the Commission on
December 13, 1995).
10.4 Promissory Note from Rodney I. Smith to the Company, dated as of
December 31, 1997 (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997 (Commission
File No.: 001-13752), filed with the Commission on April 15, 1998).
10.5 First National Bank of New England Loan Agreement, assumed by UPS
Capital, dated June 25, 1998 (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1998 (Commission File No.:001-13752), filed with the Commission on
August 19, 1998).
10.6 First National Bank of New England Loan Note, dated June 25, 1998
(Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998 (Commission File
No.:001-13752), filed with the Commission on August 19, 1998).
10.7 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 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999
(Commission File No.: 001-13752), filed with the Commission on April
14, 2000).
29
10.8 First National Bank of New England Commercial Loan Agreement dated
December 20, 1999 (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999 (Commission
File No.: 001-13752), filed with the Commission on April 14, 2000).
10.9 First National Bank of New England Commercial Term Promissory Note
dated December 20, 1999 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999
(Commission File No.: 001-13752), filed with the Commission on April
14, 2000).
10.10 Employment Agreement, dated September 30, 2002, between the Company and
Rodney I. Smith.
10.11 1994 Stock Option Plan (as amended through October 1, 2002)
(Incorporated by reference to the Company's Registration Statement on
Form S-8 (No.: 333-102892) filed with the Commission on January 31,
2003).
14 Code of Professional Conduct
21 List of Subsidiaries of the Company (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 (Commission File No.: 001-13752) filed with the Commission on
April 15, 1996).
23 Consent of BDO Seidman, LLP.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32 Certification pursuant 18 U.S.C. Section 1350 as adapted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None.
Item 14. Principal Accountant Fees and Services
--------------------------------------
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by BDO Seidman, LLP, the principal accountant for the audit of
the Company; for assurance and related services related to the audit; for tax
compliance, tax advice, and tax planning; and for all other fees for products
and services are shown in the table below.
Audit Fees. Fees charged as audit fees are for the audit of the
Company's annual financial statements and review of financial statements
included in the Company's Forms 10-QSB or services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements.
30
Audit-Related Fees. There were no audit related fees paid in either of
the two most recent fiscal years.
Tax Fees. Tax fees are for professional services rendered by BDO
Seidman, LLP for tax compliance, tax advice, and tax planning. These fees
related to services for preparation of taxes for 2002 and the estimated tax
payments for 2003.
All Other Fees. There were no fees paid for the category All Other
Fees.
The Company does not have an Audit Committee. The Board of Directors
has the responsibility normally assigned to the Audit Committee. The Board of
Directors has not adopted any blanket pre-approval policies and procedures.
Instead, the Board will pre-approve the provision by BDO Seidman, LLP of all
audit or non-audit services. The Board has not pre-approved all the tax fees
paid by the Company in 2003 and 2002.
2003 2002
----------- -----------
Audit Fees $85,000 $77,000
Audit -Related Fees -- --
Tax Fees 12,000 16,000
All Other Fees -- --
31
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 120, 2004 By: /s/ Rodney I. Smith
---------------------------------
Rodney I. Smith, President
(principal executive officer)
By: /s/ John K. Johnson
-------------------------------
John K. Johnson, CFO
(principal financial 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 16, 2004
-------------------------------------
Rodney I. Smith
/s/ Wesley A. Taylor Director April 16, 2004
-------------------------------------
Wesley A. Taylor
/s/ Ashley Smith Director April 16, 2004
-------------------------------------
Ashley Smith
/s/ Andrew Kavounis Director April 16, 2004
-------------------------------------
Andrew Kavounis
32
Smith-Midland Corporation
and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2003 and 2002
Smith-Midland Corporation
and Subsidiaries
Contents
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets 4 - 5
Statements of Operations 6
Statements of Stockholders' Equity 7
Statements of Cash Flows 8 - 9
Summary of Significant Accounting Policies 10 - 14
Notes to Consolidated Financial Statements 15 - 22
F-2
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, 2003 and 2002, 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, 2003 and 2002, 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 31, 2004
F-3
Smith-Midland Corporation
and Subsidiaries
Consolidated Balance Sheets
====================================================================================================================
December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------
Assets (Note 2)
Current assets
Cash $ 699,645 $ 1,223,756
Accounts receivable
Trade - billed, (less allowance for doubtful
accounts of $231,600 and $242,700) 4,201,835 4,950,528
Trade - unbilled 22,812 351,986
Inventories
Raw materials 655,517 498,984
Finished goods 1,807,132 1,490,635
Income tax receivable 433,169 -
Prepaid expenses and other assets 242,607 310,054
--------------------------------------------------------------------------------------------------------------------
Total current assets 8,062,717 8,825,943
--------------------------------------------------------------------------------------------------------------------
Property and equipment, net (Note 1) 3,258,083 3,018,729
--------------------------------------------------------------------------------------------------------------------
Other assets
Notes receivable, officer (Note 3) 363,070 463,519
Claims and accounts receivable (Note 7) 676,203 676,203
Other (Note 3) 381,570 230,393
--------------------------------------------------------------------------------------------------------------------
Total other assets 1,420,843 1,370,115
--------------------------------------------------------------------------------------------------------------------
$12,741,643 $13,214,787
====================================================================================================================
F-4
Smith-Midland Corporation
and Subsidiaries
Consolidated Balance Sheets
(continued)
====================================================================================================================
December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ 600,000 $ -
Accounts payable - trade 2,568,012 1,694,386
Accrued expenses and other liabilities 498,921 934,271
Current maturities of notes payable (Note 2) 445,226 412,112
Note payable - related parties 26,668 -
Customer deposits 88,940 71,265
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,227,767 3,112,034
Reserve for contract loss (Note 7) 1,001,682 1,001,682
Notes payable - less current maturities (Note 2) 4,161,260 3,816,393
Notes payable - related parties (Note 3) - 43,707
--------------------------------------------------------------------------------------------------------------------
Total liabilities 9,390,709 7,973,816
--------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 7)
Stockholders' equity (Note 6)
Preferred stock, $.01 par value; authorized 1,000,000
shares, none outstanding - -
Common stock, $.01 par value; authorized 8,000,000
shares; 4,449,548 and 4,432,948 issued and outstanding 44,495 44,329
Additional paid-in capital 4,189,388 4,178,649
Retained earnings (deficit) (780,649) 1,120,293
--------------------------------------------------------------------------------------------------------------------
3,453,234 5,343,271
Treasury stock, at cost, 40,920 shares (102,300) (102,300)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,350,934 5,240,971
--------------------------------------------------------------------------------------------------------------------
$12,741,643 $13,214,787
====================================================================================================================
F-5
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Operations
====================================================================================================================
Year Ended December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------
Revenue
Products sales and leasing $17,676,460 $22,029,805
Royalties 487,323 575,153
--------------------------------------------------------------------------------------------------------------------
Total revenue 18,163,783 22,604,958
Cost of goods sold 15,497,959 16,931,807
--------------------------------------------------------------------------------------------------------------------
Gross profit 2,665,824 5,673,151
--------------------------------------------------------------------------------------------------------------------
Operating expenses
General and administrative expenses 3,375,306 2,956,952
Selling expenses 1,500,012 1,383,611
--------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,875,318 4,340,563
--------------------------------------------------------------------------------------------------------------------
Operating income (loss) (2,209,494) 1,332,588
--------------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest expense and loan fees (289,173) (301,888)
Interest income (Note 3) 32,107 78,959
Other, net 73,618 69,852
--------------------------------------------------------------------------------------------------------------------
Total other income (expense) (183,448) (153,077)
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) (2,392,942) 1,179,511
Income tax expense (benefit) (Note 4) (492,000) 579,000
====================================================================================================================
Net income (loss) $(1,900,942) $ 600,511
====================================================================================================================
Basic and diluted earnings (loss) per share (Note 8) $ (.43) $ .16
--------------------------------------------------------------------------------------------------------------------
F-6
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
====================================================================================================================
Additional Retained
Common Paid-In Earnings Treasury
Stock Capital (Deficit) Stock Total
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $31,710 $3,494,854 $ 519,782 $(102,300) $3,944,046
Warrants exercised 12,619 683,795 - - 696,414
Net income - - 600,511 - 600,511
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 44,329 4,178,649 1,120,293 (102,300) 5,240,971
Options exercised 166 10,739 - - 10,905
Net loss - - (1,900,942) - (1,900,942)
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $44,495 $4,189,388 $ (780,649) $(102,300) $3,350,934
====================================================================================================================
F-7
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
====================================================================================================================
Year Ended December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Cash received from customers $19,241,650 $23,752,774
Cash paid to suppliers and employees (19,456,368) (22,697,023)
Income taxes paid, net (396,379) (110,226)
Interest paid (289,173) (301,888)
Other 967 1,164
--------------------------------------------------------------------------------------------------------------------
Net cash (absorbed) provided by operating activities (899,303) 644,801
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (769,452) (756,763)
Proceeds from sale of fixed assets 72,348 1,972
Repayments on officer note receivable 100,449 94,763
--------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (596,655) (660,028)
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from borrowings 562,258 223,294
Repayments of borrowings (184,277) (597,786)
Net proceeds from line of credit 600,000 -
Repayments on borrowings - related parties, net (17,039) (25,070)
Proceeds from options/warrants exercised 10,905 696,414
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 971,847 296,852
--------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (524,111) 281,625
Cash, beginning of year 1,223,756 942,131
--------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 699,645 $ 1,223,756
====================================================================================================================
continued...
F-8
Smith-Midland Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
====================================================================================================================
Year Ended December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) $(1,900,942) $ 600,511
Adjustments to reconcile net income (loss) to net cash
(absorbed) provided by operating activities
Depreciation and amortization 463,614 407,563
Deferred taxes (44,000) 44,000
(Gain) loss on sale of fixed assets (5,864) 1,164
(Increase) decrease in
Accounts receivable - billed 748,693 597,078
Accounts receivable - unbilled 329,174 106,295
Inventories (473,030) (361,223)
Prepaid expenses and other assets (83,730) 332,107
Income tax receivable (433,169) -
Increase (decrease) in
Accounts payable - trade 873,626 (1,020,930)
Accrued expenses and other liabilities (391,350) 133,687
Customer deposits 17,675 (195,451)
--------------------------------------------------------------------------------------------------------------------
Net cash (absorbed) provided by operating activities $ (899,303) $ 644,801
--------------------------------------------------------------------------------------------------------------------
F-9
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
================================================================================
Nature of Business Smith-Midland Corporation and its
wholly-owned subsidiaries (the "Company")
develop, manufacture, license, sell and
install precast concrete products for the
construction, transportation and utilities
industries primarily in the Mid-Atlantic
region.
Principles of The accompanying consolidated financial
Consolidation statements include the accounts of
Smith-Midland Corporation and its
wholly-owned subsidiaries. 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.
Equipment Expenditures for ordinary maintenance and
repairs are charged to income as incurred.
Costs of betterments, renewals, and major
replacements are capitalized. At the time
properties are retired or otherwise disposed
of, the related cost and allowance for
depreciation are eliminated from the accounts
and any gain or loss on disposition is
reflected in income.
Depreciation is computed using the
straight-line method over the following
estimated useful lives:
Years
---------------------------------------------
Buildings 10-33
Trucks and automotive equipment 3-10
Shop machinery and equipment 3-10
Land improvements 10-15
Office equipment 3-10
Income Taxes 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-10
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
================================================================================
Stock Options The Company has elected to use the intrinsic
value method of accounting as prescribed by
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations, for stock options
granted to the Company's employees. This
method does not result in the recognition of
compensation expense when employee stock
options are granted if the exercise price of
the option equals or exceeds the fair market
value of the stock at the date of grant.
Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123), establishes
alternative methods of accounting for stock
options. If the fair value method prescribed
by SFAS 123 had been adopted, the effect on
earnings would have been as follows:
2003 2002
---------------------------------------------------------------------------------------------
Net income (loss), as reported $(1,900,942) $600,511
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (32,067) (58,100)
---------------------------------------------------------------------------------------------
Proforma net income (loss) $(1,933,009) $542,411
=============================================================================================
Basic earnings (loss) per share:
Reported $ (.43) $ .16
Proforma (.44) .14
Diluted earnings (loss) per share:
Reported $ (.43) $ .16
Proforma (.44) .14
The Company granted 140,000 stock options
during the year ended December 31, 2003. 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 35%, risk-free interest rate of
4.29% and expected lives of seven to nine
years. The weighted average fair value of
options granted during the year ended
December 31, 2003 was $.23. No options were
granted in 2002. Substantially all options
become vested and exercisable ratably over a
five-year period.
At December 31, 2003, the Company had no
warrants outstanding.
F-11
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. 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. Management reviews
accounts receivable on a monthly basis to
determine the probability of collection. Any
accounts receivable that are deemed to be
uncollectible along with a general reserve,
which is calculated based upon the aging
category of the receivable, is included in
the overall allowance for doubtful accounts.
Management believes the allowance for
doubtful accounts at December 31, 2003 is
adequate. However, actual write-offs may
exceed the recorded allowance.
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 carrying value for each of the Company's
Financial Instruments financial instruments (consisting of cash,
accounts receivable and accounts payable)
approximates fair value because of the
short-term nature of those instruments. The
estimated fair value of the long-term debt
approximates carrying value based on current
rates offered to the Company for debt of the
same maturities.
F-12
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
================================================================================
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.
Earnings Per Share Earnings per share is based on the
weighted average 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.
Long-Lived Assets 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. When any such
impairment exists, the related assets will be
written down to fair value. No impairment
losses have been recorded through December
31, 2003.
Recent Accounting In June 2002, the FASB issued SFAS No. 146,
Pronouncements "Accounting for Costs Associated with Exit or
Disposal Activities". This statement
addresses financial accounting and reporting
for costs associated with exit or disposal
activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a
Restructuring)". This Statement requires that
a liability for a cost associated with an
exit or disposal activity be recognized when
the liability is incurred. This statement
also establishes that fair value is the
objective for initial measurement of the
liability. The provisions of this statement
are effective for exit or disposal activities
that are initiated after December 31, 2002.
The adoption of SFAS 146 did not have an
effect on the Company's financial statements.
F-13
Smith-Midland Corporation
and Subsidiaries
Summary of Significant Accounting Policies
(continued)
================================================================================
Recent Accounting In May 2003, the FASB issued SFAS No. 150,
Pronouncements "Accounting for Certain Financial
(continued) Instruments with Characteristics of Both
Liabilities and Equity" (SFAS 150). This
Statementestablishes standards for how an
issuer classifies and measures certain
financial instruments with characteristics of
both liabilities and equity. This Statement
requires many instruments previously
classified as equity to be classified as
liabilities. Such as mandatorily redeemable
shares and repurchase obligations related to
an issuer's equity shares. The adoption of
SFAS 150 did not have a material impact on
the financial statements.
In December 2003, the FASB issued a revised
Interpretation No. 46, "Consolidation of
Variable Interest Entities (VIE)", which
clarifies the application of ARB No. 51 and
replaces Interpretation No. 46. This
Interpretation addresses the consolidation by
business enterprises of variable interest
entities as defined in the Interpretation. A
nonpublic enterprise shall apply this
Interpretation to all entities that are
subject to this Interpretation by the
beginning of the first annual period
beginning after December 15, 2004. The
Interpretation requires certain disclosures
in financial statements issued after December
31, 2003 if it is reasonably possible that
the Company will consolidate or disclose
information about variable interest entities
when the Interpretation becomes effective.
The Company does not believe that it has any
VIE for consolidation.
Reclassifications Certain reclassifications have been made in
the prior year consolidated financial
statements and notes to conform to the
December 31, 2003 presentation.
F-14
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Property and Property and equipment consist of the following:
Equipment
December 31, 2003 2002
--------------------------------------------------------------------------------------------
Land and land improvements $ 806,555 $ 682,092
Buildings 2,344,866 2,412,198
Machinery and equipment 6,442,789 5,855,101
Rental equipment 160,144 160,144
============================================================================================
9,754,354 9,109,535
Less: accumulated depreciation 6,496,271 6,090,806
--------------------------------------------------------------------------------------------
$3,258,083 $3,018,729
--------------------------------------------------------------------------------------------
2. Notes Payable Notes payable consist of the following:
December 31, 2003 2002
---------------------------------------------------------------------------------------------
Note payable to UPS Capital, maturing June
2021; with monthly payments of $37,087 of
principal and interest, interest at prime
plus 1.5% (5.75% at December 31, 2003);
collateralized by
principally all assets of the Company. $3,578,966 $3,695,778
Note payable to UPS Capital, maturing January
1, 2005; with monthly payments of $10,961 of
principal and interest at prime plus 1.75%
(6.0% at December 31, 2003); collateralized
by blanket lien on
Company assets. 116,348 226,851
F-15
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
2. Notes Payable December 31, 2003 2002
-------------------------------------------------------------------------------------------
(continued)
Installment notes and capitalized leases,
collateralized by certain machinery and
equipment maturing at various dates,
primarily July 2003 through October
2007, with interest at 7.25% through 11.07%. $ 911,172 $ 305,876
---------------------------------------------------------------------------------------------
4,606,486 4,228,505
Less current maturities 445,226 412,112
---------------------------------------------------------------------------------------------
$4,161,260 $3,816,393
=============================================================================================
The Company has a mortgage loan, with a
balance of $3,578,966 at December 31, 2003,
which is guaranteed in part by the U.S.
Department of Agriculture Rural Business -
Cooperative Services (USDA). The loan
agreement includes certain restrictive
covenants, which require the Company to
maintain minimum levels of tangible net worth
and limits on total outstanding indebtedness
and annual capital expenditures. At December
31, 2003 and 2002, the Company was in
violation of covenants related to fixed asset
expenditures, however, the Company was
granted a waiver of the covenants by the USDA
and the bank.
The Company also has a $1,000,000 line of
credit, under which there was $600,000
outstanding at December 31, 2003. The line
matures April 1, 2004.
The aggregate amounts of notes payable
maturing in each of the next five years and
thereafter are as follows:
Year Ending December 31, Amount
-------------------------------------------------
2004 $ 445,226
2005 421,443
2006 265,455
2007 236,445
2008 155,179
Thereafter 3,082,738
-------------------------------------------------
$4,606,486
=================================================
F-16
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
3. Related Party The Company currently leases three and one
Transactions half 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, which mature on December 15, 2004
and bear interest at 10%. Total interest
expense related to these notes was $2,971 and
$2,361 for the years ended December 31, 2003
and 2002, respectively.
At December 31, 2003, the Company held an
unsecured note receivable for $363,070 from
its President and majority shareholder,
accruing interest at a rate of 6% per annum.
Principal payments on the note were $100,449
for the year ended December 31, 2003 and
$94,763 for the year ended December 31, 2002.
Total interest income on this note was
$27,811 and $33,500 for the years ended
December 31, 2003 and 2002, respectively.
The Company was the beneficiary of individual
life insurance policies on the life of the
President with a total cash surrender value
of approximately $204,782 and $183,000 as of
December 31, 2003 and 2002, respectively.
Borrowings of $190,997 and $153,000 were
outstanding against the cash surrender value
at December 31, 2003 and 2002, respectively.
4. Income Taxes Income tax expense (benefit) is comprised of
the following:
Year Ended December 31, 2003 2002
---------------------------------------------------------------------------------------------
Federal
Current $(814,000) $442,000
Deferred 393,000 37,000
---------------------------------------------------------------------------------------------
(421,000) 479,000
---------------------------------------------------------------------------------------------
State
Current (126,000) 93,000
Deferred 55,000 7,000
---------------------------------------------------------------------------------------------
(71,000) 100,000
---------------------------------------------------------------------------------------------
$(492,000) $579,000
=============================================================================================
F-17
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
4. Income Taxes The provision for income taxes differs from
(continued) the amount determined by applying the
federal statutory tax rate to pre-tax income
as a result of the following:
Year Ended December 31, 2003 2002
---------------------------------------------------------------------------------------------
Amount Percent Amount Percent
---------------------------------------------------------------------------------------------
Income taxes at statutory rate $(814,000) (34%) $401,000 34%
Increase (decrease) in taxes
resulting from:
Change in valuation allowance 465,000 19 - -
State income taxes,
net of federal benefit (83,000) (4) 59,000 5
Revision to estimated net
operating loss
carryforward, net - - 78,000 7
Other (60,000) (2) 41,000 3
---------------------------------------------------------------------------------------------
$(492,000) (21%) $579,000 49%
=============================================================================================
Deferred tax assets (liabilities) are as
follows:
December 31, 2003 2002
---------------------------------------------------------------------------------------------
Net operating loss carryforward $507,000 $ -
Depreciation (204,000) (196,000)
Provision for doubtful accounts 88,000 93,000
Vacation accrued 54,000 46,000
Deferred income 20,000 13,000
---------------------------------------------------------------------------------------------
Net deferred tax asset (liability) 465,000 (44,000)
Deferred tax asset valuation allowance (465,000) -
---------------------------------------------------------------------------------------------
$ - $(44,000)
=============================================================================================
Net operating loss carryforward for tax
purposes at December 31, 2003 was
approximately $1,300,000 and expires in 2023.
At December 31, 2003, the Company offset the
deferred tax asset with a valuation allowance
since it could not predict the timing of the
generation of future taxable income.
The net deferred tax liability at December
31, 2002 is included in accrued expenses and
other liabilities in the consolidated balance
sheet.
F-18
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
5. Employee Benefit The Company has a 401(k) retirement plan
Plans (the "Plan") covering substantially all
employees. Participants may contribute up to
10% of their compensation to the Plan. The
Company contributes 50% 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, 2003 and 2002 were approximately
$69,400 and $35,600, respectively.
6. Stock Options On August 5, 1994, the Board of Directors and
Stockholders of the Company adopted the 1994
Stock Option Plan (the "1994 Plan"), which
allows the Company to grant options to
employees, officers, directors and
consultants to purchase shares of the
Company's Common Stock. 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 maximum
aggregate number of options which may be
granted under the 1994 Plan was increased to
575,000 and was subsequently increased to
1,025,000 on July 22, 2002. The following
tables summarize activity of the Plan and the
stock options outstanding at December 31,
2003:
Weighted
Average Vested
Exercise Options and
Price Outstanding Exercisable
-------------------------------------------------------------------------------------------
Balance, December 31, 2001 $1.04 506,425 145,091
Granted - - -
Forfeited 1.08 (4,500) (500)
Vested - - 123,002
---------------------------------------------------------------------------------------------
Balance, December 31, 2002 1.04 501,925 267,593
Granted .83 140,000 -
Forfeited 1.20 (18,230) (5,517)
Exercised .66 (16,620) (16,620)
Vested - - 120,286
---------------------------------------------------------------------------------------------
Balance, December 31, 2003 $1.00 607,075 365,742
=============================================================================================
F-19
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
6. Stock Options The following table summarizes options
(continued) outstanding at December 31, 2003:
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------
Weighted Average
Number of Remaining Contractual Number
Exercise Prices Shares Life (Years) of Shares
------------------------------------------------------------------------------------------
$.56 78,000 5.0 78,000
.80 - .81 332,000 8.4 127,994
1.00 - 1.39 177,075 6.6 139,748
3.50 20,000 1.5 20,000
------------------------------------------------------------------------------------------
607,075 365,742
==========================================================================================
7. Commitments a) In 1999, the Company, through the
and Contingencies general contractor, filed claims, in the
amount of 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
$1,002,000 due to the general contractor
included in reserve for contract loss at
December 31, 2003 and 2002, respectively.
F-20
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
7. Commitments On March 26, 2004, the parties, with the
and Contingencies assistance of the Court-appointed
(continued) Mediator, reached agreement to settle
this matter and, as a result, all claims
by or againstSmith-Midland asserted in
the action will be dismissed with
prejudice. Smith Midland's only
obligation in connection with the
settlement will be the payment of the sum
of $30,000 to Seacoast, in exchange for
which Smith Midland will receive a
complete release of liability in
connection with the Project. It is
probable there will also be a non-cash
gain recorded by the Company as a result
of netting the amount recorded for Claims
Receivable against the amount recorded
for Estimated Contract Loss.
b) 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. In October 2002, the
United States District Court dismissed
the claim, however, the case was appealed
and the original verdict was upheld on
appeal.
In March 2004, the Company received
notice of a personal injury lawsuit filed
by Thomas Hergenroeder in the Circuit
Court for Baltimore City. Mr.
Hergenroeder was working at a
construction site located at the
Baltimore Washington Airport located in
Anne Arundel County, Maryland for another
subcontractor. On or about August 2,
2002, Mr Hergenroeder suffered injuries
when he slipped and fell on acid and
water that had been sprayed by the
Company. The suit seeks $1,000,000 in
damages plus interest and costs of suit
herein. Management believes the case to
be without merit; it is being defended by
the Smith Midland's Insurance Company.
F-21
Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
8. Earnings Per Share Earnings per share is calculated as follows:
Year ended December 31, 2003 2002
---------------------------------------------------------------------------------------------
Basic earnings
Income (loss) available to common shareholder $(1,900,942) $ 600,511
=============================================================================================
Weighted average shares outstanding 4,442,490 3,774,291
=============================================================================================
Basic earnings (loss) per share $ (.43) $ .16
=============================================================================================
Diluted earnings per share
Income (loss) available to common shareholder $(1,900,942) $ 600,511
=============================================================================================
Weighted average shares outstanding 4,442,490 3,774,291
Dilutive effect of stock options - 89,068
---------------------------------------------------------------------------------------------
Total weighted average shares outstanding 4,442,490 3,863,359
=============================================================================================
Diluted earnings (loss) per share $ (.43) $ .16
=============================================================================================
For the year ended December 31, 2003, the
effect of the Company's outstanding stock
options would have been anti-dilutive and
therefore, excluded from dilutive earnings
per share.
F-22