-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NolAw24fpAHIqZdiBgPKWFcPbP865TE0YuOhs0uqOujj78I0vz2PSxCSqKfG3faN pbShcY80Zj/LDZcHR7PnIQ== 0001127264-03-000046.txt : 20030331 0001127264-03-000046.hdr.sgml : 20030331 20030331153100 ACCESSION NUMBER: 0001127264-03-000046 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH MIDLAND CORP CENTRAL INDEX KEY: 0000924719 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE PRODUCTS, EXCEPT BLOCK & BRICK [3272] IRS NUMBER: 541727060 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13752 FILM NUMBER: 03630187 BUSINESS ADDRESS: STREET 1: ROUTE 28 STREET 2: P O BOX 300 CITY: MIDLAND STATE: VA ZIP: 22728 BUSINESS PHONE: 5404393266 MAIL ADDRESS: STREET 1: RT 28 STREET 2: PO BOX 300 CITY: MIDLAND STATE: VA ZIP: 22728 10KSB 1 smith_10k.txt FORM 10-K 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, 2002 Commission File Number 1-13752 SMITH-MIDLAND CORPORATION (Name of Small Business Issuer in its Charter) Delaware 54-1727060 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box 300, 5119 Catlett Road, Midland, Virginia 22728 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (540) 439-3266 (Issuer's Telephone Number, Including Area Code) Securities Registered Under Section 12(b) of the Exchange Act: Name of Each Exchange on Title of Each Class Which Registered - ------------------- ------------------------ Common Stock, $.01 par value per share Boston Stock Exchange Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 par value per share (Title of Class) Preferred Stock Purchase Rights (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 $22,604,958. The aggregate market value of the shares of Common Stock, held by non-affiliates, based upon the closing price for such stock on March 20, 2003, was $3,869,855. As of March 20, 2003, the Company had outstanding 4,432,948 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 high level of indebtedness and ability to satisfy the same, o our significant loss in 1998 under a material contract, and the litigation arising out of that contract, o our limited recent history of profitable operations, 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 other factors and information disclosed and discussed in other sections of this report. Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3 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. 4 Products Precast concrete products are cast at a manufacturing facility and delivered to a site for installation, as contrasted to ready-mix concrete, which is produced in a "batch plant," put into a mixer truck where it is mixed thoroughly and delivered to a construction site to be poured and set at the site. Precast concrete products are used primarily as parts of buildings or highway structures, and may be used architecturally, as in a decorative wall of a building, or structurally. Structural uses include building walls, frames, floors, or roofs. The Company currently manufactures and sells a wide variety of products for use in the construction, transportation and utility industries. Easi-Set Slenderwall(TM) Lightweight Construction Panels -------------------------------------------------------- Each Slenderwall(TM) system is a prefabricated, energy-efficient, lightweight exterior cladding system that is offered as a cost-effective alternative to the traditional, piecemeal construction of the exterior walls of buildings. The Company's Slenderwall system combines the essential components of a wall system into a single unit ready for interior dry wall mounting immediately upon installation. The base design of each Slenderwall panel consists of a galvanized or stainless steel stud frame with an exterior sheath of approximately two-inch thick, steel-reinforced, high-density, precast concrete, with various available architectural surfaces. The exterior concrete sheath is attached to the interior frame by strategically placed epoxy coated steel connectors that suspend the exterior concrete approximately one-half inch away from the steel frame. Slenderwall panels are approximately one-half the weight of brick walls of equivalent size, permanence and durability. This lighter weight translates into reduced construction costs resulting from less onerous structural and foundation requirements as well as lower shipping costs. Additional savings result from Slenderwall's reduced installation time and ease of erection, and from the use of smaller cranes for installation. The Company custom designs and manufactures each Slenderwall exterior cladding system. The exterior of the Slenderwall systems can be produced in a variety of attractive architectural finishes, such as concrete, exposed stone, granite or thin brick. Easi-Set Sierra Wall(TM) --------------------- The Easi-Set Sierra Wall(TM)(the "Sierra Wall") combines the strength and durability of precast concrete with a variety of finishes to provide an effective and attractive sound and sight barrier for use around residential, industrial, and commercial properties and alongside highways. With additional reinforcement, the Sierra Wall can also be used as a retaining wall to retain earth in both highway and residential construction. The Sierra Wall is typically constructed of four-inch thick, steel-reinforced concrete panels that are securely joined at an integral column by a tongue and groove connection system. This tongue and groove connection system makes the Sierra Wall easy to install and move if boundaries change or highways are relocated after the completion of a project. 5 The Company custom designs and manufactures each Sierra Wall to conform to the specifications provided by the contractor. The width, height, strength, and exterior finish of each wall varies depending on the terrain and application. In addition, the Company offers increased noise abatement benefits through the use of DuriSol(R), an optional, durable and patented sound-absorbing, material that can be cast onto the exterior of the Sierra Wall. The Company is a party to a licensing agreement with DuriSol, Inc. of Ontario, Canada, ("DuriSol") permitting the Company to utilize the DuriSol(R) sound-absorbing technology until December 31, 2003 and expects to be able to renew this agreement. Under the Company's licensing agreement with DuriSol, the Company has an exclusive license to use DuriSol in Virginia and a right of first refusal for any new proprietary products developed by DuriSol. The Company pays a royalty to DuriSol equal to $.25 per square foot of product manufactured using DuriSol. 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, having received NCHRP-350 approval in March 1999. The proprietary feature of the J-J Hooks Barrier is the design of its positive connection. Protruding from each end of a J-J Hooks Barrier section is a fabricated bent steel connector, rolled in toward the end of the barrier (it resembles the letter "J" when viewed from directly above). The connector protruding from each end of the barrier is rolled identically so that when one end of a barrier faces the end of another, the resulting "hooks" face each other. To connect one section of a J-J Hooks Barrier to another, a contractor merely positions the hook of an elevated section of the barrier above the hook of a set section and lowers the elevated section into place. The positive connection is automatically engaged. The Company believes that the J-J Hooks Barrier connection design is superior to those of earlier highway safety barriers that were positively connected through the "eye and pin" technique. Barriers incorporating this technique have eyes or rings protruding from each end of the barrier, which must 6 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. 7 o Utilities Installations -- for electrical switching stations and transformer housing, gas control shelters and valve enclosures, water and sewage pumping stations, and storage of contaminated substances or flammable materials which require spill containment. o Commercial and Industrial Locations -- for electrical and mechanical housing, cemetery maintenance storage, golf course vending enclosures, mechanical rooms, 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 $20,000 to $50,000. License royalties vary depending on the product licensed, but the range is typically between 4% to 6% of the sales of the licensed product. In addition, Easi-Set Precast Building and 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. 8 The Company has entered into 32 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. The Company completed its first licensing arrangement for its SlenderwallTM exterior cladding system in 2001 which resulted in additional start-up fees and royalties of $83,727. Additional licensees were added in 2002: 2 agreements amounting to $45,000. 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. 9 The Company believes that the principal competitive factors for its products are price, durability, ease of use and installation, speed of manufacture and delivery time, ability to customize, FHWA and state approval, and customer service. The Company believes that its plants in both Midland, Virginia and Reidsville, North Carolina compete favorably with respect to each of these factors in the Northeast and Mid-Atlantic regions of the United States. Finally, the Company believes it offers a broad range of products that are unique and technologically superior to competing products. Patents and Proprietary Information The Company holds U.S. and Canadian patents for the J-J Hooks Barrier and the Easi-Set Precast Building, and a U.S. patent for the Slenderwall exterior cladding system. The European patent for J-J Hooks Barrier was allowed in December 1997 and has been registered in eleven European countries. The earliest of the issued patents considered material to the Company's business 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 licenses the rights to another (DuriSol(R)). The Company licenses the technology used in DuriSol(R) products pursuant to an agreement that expires on December 31, 2003. While the Company intends to vigorously enforce its patent rights against infringement by third parties, no assurance can be given that the patents or the Company's patent rights will be enforceable or provide the Company with meaningful protection from competitors or that its patent applications will be allowed. Even if a competitor's products were to infringe patents held by the Company, enforcing the patent rights in an enforcement action would be very costly, and assuming the Company has sufficient resources, would divert funds and resources that otherwise could be used in the Company's operations. No assurance can be given that the Company would be successful in enforcing such rights, that the Company's products or processes do not infringe the patent or intellectual property rights of a third party, or that if the Company is not successful in a suit involving patents or other intellectual property rights of a third party, that a license for such technology would be available on commercially reasonable terms, if at all. Government Regulation The Company frequently supplies products and services pursuant to agreements with general contractors who have entered into contracts with federal or state governmental agencies. The successful completion of the Company's obligations under such contracts is often subject to the satisfactory inspection or approval of such products and services by a representative of the contracting agency. Although the Company endeavors to satisfy the requirements of each such contract to which it is a party, no assurance can be given that the necessary approval of its products and services will be granted on a timely basis or at all and that the Company will receive any payments due to it. Any failure to obtain such approval and payment may have a material adverse effect on the Company's business. 10 The Company's operations are subject to extensive and stringent governmental regulations including regulations related to the Occupational Safety and Health Act (OSHA) and environmental protection. The Company believes that it is substantially in compliance with all applicable regulations. The cost of maintaining such compliance is not considered by the Company to be significant. The Company's employees in its manufacturing division operate complicated machinery that may cause substantial injury or death upon malfunction or improper operation. The Company's manufacturing facilities are subject to the workplace safety rules and regulations of OSHA. The Company believes that it is in compliance with the requirements of OSHA. During the normal course of its operations, the Company uses and disposes of materials, such as solvents and lubricants used in equipment maintenance, that are classified as hazardous by government agencies that regulate environmental quality. The Company attempts to minimize the generation of such waste as much as possible, and to recycle such waste where possible. Remaining wastes are disposed of in permitted disposal sites in accordance with applicable regulations. 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, 2002, the Company had 117 full-time and 8 part-time employees, 101 of which are located at the Company's Midland facility, and 24 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. 11 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, 2002, had a balance of $3.7 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 for (the "Seacoast Agreement"). The cost overruns over the course of the entire project totaled approximately $1.6 million and the total loss to the Company on the job, before recovery on any claims by the Company, totaled approximately $1.45 million, which was recognized in fiscal 1999. Seacoast has filed claims in 1999 on the Company's behalf, in the amount of $1.1 million. All conditions for claim recognition have been satisfied and as of December 31, 2002 and 2001, $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, 12 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. 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 is currently on appeal. The Company plans to vigorously defend its position, and believes that any settlement will be covered under the Company's general liability insurance and therefore will not adversely affect the financial statements. In January 2001, the Company received notice of a wrongful death lawsuit filed by the Estate of Joy V. Snyder and her surviving children. The suit was settled during 2002 with an award to the plaintiff of $50,000 that was paid by insurance. The Company is not presently involved in any other litigation of a material nature. Item 4. Submission of Matters to Vote of Security Holders - None. --------------------------------------------------------- 13 PART II - ------- Item 5. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- The Company's Common Stock has traded on the Boston Stock Exchange ("BSE") under the symbol "SMC" 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 22, 2003, there were approximately 78 record holders of the Company's Common Stock. Management believes there are at least 411 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. High Low ---- --- 2002 First Quarter $ 2.04 $1.40 Second Quarter $ 2.37 $1.50 Third Quarter $ 1.78 $1.20 Fourth Quarter $ 1.33 $ .98 2001 First Quarter $ .88 $ .56 Second Quarter $ 1.15 $ .62 Third Quarter $ .95 $ .67 Fourth Quarter $1 .48 $ .70 In 1999, the stockholders of the Company approved an amendment of the Company's Certificate of Incorporation to affect a one-for-three, one-for-two, three-for-five, two-for-three or three-for-four reverse stock split of the Common Stock of the Company, but as of the date of this report, the Board of Directors has taken no action in this regard and does not at this time intend to take any action. The reverse stock split was then contemplated as a means of retaining the Company's NASDAQ listing. Instead, the Company intends to apply for a listing on the BBX which will be a significant upgrade for both current and potential investors. 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 earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. The Company's current loan agreement with First International Bank prohibits the payment of dividends to stockholders without the bank's prior written consent, except for dividends paid in shares of the Company's Common Stock. 14 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 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. 15 Results of Operations Year ended December 31, 2002 compared to the year ended December 31, 2001 For the year ended December 31, 2002, the Company had total revenue of $22,604,958 compared to total revenue of $26,855,190 for the year ended December 31, 2001, a decrease of $4,250,232, or 16%. Sales include revenues from product sales, royalty income, barrier rental income, installation income and shipping income. Total product sales were $17,823,449 for the year ended December 31, 2002, compared to $20,470,542 for the same period in 2001, a decrease of $2,647,093, or 13%. Sales of Soundwall and SlenderwallTM increased due to strong product demand that partially compensated for the static or decreased sales in the other products. Barrier rental revenue decreased to $519,469 for the year ended December 31, 2002 from $1,722,696 for the year ended December 31, 2001. The majority of this decrease came from two large contracts for special events than totaled $1,446,588 in FY 2001. Shipping and installation revenue was $3,686,887 for the year ended December 31, 2002 and $3,815,341 for the same period in 2001, a decrease of $128,454, or 3%. The decrease is attributable to the overall decrease in product and other sales. Royalty income totaled $575,153 for the year ended December 31, 2002, compared to $846,611 for the same period in 2001. The decrease of $271,458, or 32%, was due in part to both a decrease in royalties earned of $135,761 and a decrease in start-up fees of $78,138. The Company believes that this decrease in royalties is a result of weak economic conditions and that for the future, royalty income will increase overall and become a larger part of the Company's overall revenues. Construction activity has weakened in the Company's primary markets in line with general economic conditions. The Company's unfilled order backlog for products is significantly less compared to last year. The Company's bid activity does remain high and we expect the backlog to build up in the event that the economy improves in 2003. Total cost of goods sold for the year ended December 31, 2002 was $16,931,807, a decrease of $3,533,797, or 17%, from $20,465,604 for the year ended December 31, 2001. 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, also decreased to 75% for the year ended December 31, 2002, from 76% for the year ended December 31, 2001, as the Company benefited from the implementation of numerous operations and production improvements. For the year ended December 31, 2002, the Company's general and administrative expenses increased $11,440, or .4%, to $2,727,567, from $2,716,127 during the same period in 2001. This leveling off of expense was due to marginally higher personnel expense partially offset by decreases in professional fees. Selling expenses for the year ended December 31, 2002 increased $195,898, or 16%, to $1,383,611 from $1,187,713 for the year ended December 31, 2001. The overall increase was due to adding more sales staff and increases in advertising and professional fees offset in part by lower sales commissions earned based on the reduced sales. The Company's operating income for the year ended December 31, 2002 was $1,561,973, compared to operating income of $2,485,746 for the year ended December 31, 2001, a decrease of $923,773, or 37%. The lower operating income for the current year resulted from the decreased sales volume and higher operating expenses partially offset by a slightly higher gross profit margin percentage. 16 Interest expense and loan fees was $301,888 for the year ended December 31, 2002, compared to $459,250 for the year ended December 31, 2001. The decrease of $157,362, or 34%, was due to lower levels of debt outstanding in the 2002 period with significantly lower average interest rates. Other expense, net of other income, totaled $159,533 in the year ended December 31, 2002 versus other expense of $51,234 for the year ended December 31, 2001. The increase of $108,299 or 211% was primarily the result of the recognition of Virginia state use taxes, a level of expense that is not expected to be sustained. Income tax expense was $579,000 in the year ended December 31, 2002 compared to $28,613 for the year ended December 31, 2001, an increase of $550,387. The increase was primarily the result of the utilization of all remaining net operating loss carryforwards in 2001 for which the Company had not previously recorded a benefit. Income tax expense for 2002 also included an approximately $78,000 net effect of a revision in the estimate of the net operating loss carryforwards from 2001. Net income was $600,511 for the year ended December 31, 2002, compared to net income of $1,993,993 for the same period in 2001. Basic net income per share for the current year was $.16 compared to basic net income per share of $.65 for the year ended December 31, 2001 with 3,774,291 weighted average shares outstanding in the 2002 period versus 3,090,465 in the 2001 period. Diluted net income per share for the current year was $.16 compared to $.58 for the same period last year. Liquidity and Capital Resources The Company has financed its capital expenditures, operating requirements and growth to date primarily with proceeds from operations, supplemented by bank and other borrowings.The Company had $4,301,205 of total indebtedness at December 31, 2002, of which $456,256 was scheduled to mature within twelve months. Schedule of Contractual Obligations Less than Total 1 year 1 to 3 years 4 to 5 years Over 5 years ----- ------ ------------ ------------ ------------ Long term debtand $4,228,505 $412,112 $624,224 $456,334 $2,735,835 capital leases Debt to related parties $43,707 $17,039 $26,668 $0 $0 Operating leases $28,993 $27,105 $992 $896 $0 Total contractual $4,301,205 $456,256 $651,884 $457,230 $2,735,835 obligations
The Company has a $3,695,778 note with First International Bank ("FIB"), formerly the First National Bank of New England, 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 17 of Agriculture Rural Business-Cooperative Service's loan guarantee. Under the terms of the note, the Company's unfinanced fixed asset expenditures are limited to $300,000 per year for a five year period. In addition, FIB will permit chattel mortgages on purchased equipment not to exceed $200,000 on an annual basis so long as the Company is not in default. At December 31, 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 $500,000 line of credit, under which there were no outstanding borrowings at December 31, 2002. At December 31, 2002, the Company had cash totaling $1,223,756 compared to cash totaling $942,131 at December 31, 2001. During 2002, the financing activities provided $296,852 (net) in cash which resulted from the exercise of the Company's publicly traded warrants and the repayment of debt; used $660,028 in its investing activities, primarily for the purchase of new equipment. The Company's operating activities provided cash of $644,801 (net) after deducting the resources required to fund the Company's growth in infrastructure. Capital spending increased to $756,763 in 2002, from $403,528 in 2001 for various improvements in the plant and the existing infrastructure. The Company intends to continue to fund capital improvements that enable productivity increases or reduce product costs. As a result of the Company's debt burden, the Company is especially sensitive to changes in the prevailing interest rates. Increases in such interest rates may materially and adversely affect the Company's ability to finance its operations either by increasing the Company's cost to service its current debt, or by creating a more burdensome refinancing environment. The Company's cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 45 to 75 days after the products are produced. This payment schedule has resulted in liquidity problems for the Company because it must bear the cost of production for its products before it receives payment. Although no assurance can be given, the Company believes that anticipated cash flow from operations with adequate project management on jobs, and existing credit facilities will be sufficient to finance the Company's operations for at least the next 12 months. In the event cash flow from operations and existing credit facilities are not adequate to support operations, the Company is currently investigating alternative sources of financing, for which there can be no assurance of obtaining. 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 18 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 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 experiences lower profits, or losses, during the winter months, and as such, must have sufficient working capital to fund its operations at a reduced level until the spring construction season. The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company. 19 Inflation To date, management believes that the Company's operations have not been materially affected by inflation. 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 will not have an effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company expects to continue using the intrinsic value method for accounting for its employee stock options. 20 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, 2002 and 2001.......... F-4-5 Consolidated Statements of Operations for the years ended December 31, 2002 and 2001 .................................................. F-6 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002 and 2001 ............................... F-7 Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001 .................................................... 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. 21 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; ------------------------------------------------------------- Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- Director Or Executive Name Age Officer Since Position - ---- --- ------------- -------- Rodney I. Smith 64 1970 Chief Executive Officer, President and Chairman of the Board of Directors Ashley B. Smith 40 1994 Vice President of Sales and Marketing and Director Wesley A. Taylor 55 1994 Vice President of Administration and Director Andrew G. Kavounis 77 1995 Director James W. Dean 65 2000 Vice President of Engineering Smith-Midland Corp. (Virginia) John K. Johnson 52 2003 Chief Financial Officer Michel Catteau 36 2001 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. Mr. Smith is the past President of the National Precast Concrete Association. Mr. Smith has served on the Board of Trustees of Bridgewater College in Bridgewater, Virginia since 1986. Ashley B. Smith. Vice President of Sales and Marketing and Director. Ashley B. Smith has served as Vice President of Sales and Marketing of the Company since 1990 and as a Director since 1994. Mr. Smith holds a Bachelor of Science degree in Business Administration from Bridgewater College. Mr. Ashley B. Smith is the son of Mr. Rodney I. Smith. 22 Wesley A. Taylor. Vice President of Administration and Director. Wesley A. Taylor has served as Vice President of Administration of the Company since 1989 and as a Director since 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 to 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 with the business and industry section. Mr. Johnson received a BBA from Southern Methodist University in 1972 and served as a commissioned officer in the United States Air Force from 1972 - 1977. He received an MSBA from Boston University in 1987. Michel Catteau. Chief Operating Officer. Mr. Catteau has served as Chief Operating Officer since February 2002. Prior to that he held the position of Vice-President of Operations. Before joining Smith-Midland Mr. Catteau worked as a Plant Manager and Project Manager for Precast Manufacturing Company in Saudi Arabia from 1997 to 2000. From 1990 to 1997 he worked as a Manager at Catteau Precast in Lier, Belgium. He holds a Bachelor of Science degree in Construction Engineering from Louvain University, Belgium, and a Bachelor of Arts degree as a translator English - Russian from the Hogeschool, Antwerp, Belgium. 23 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. 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 2002: 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 2002 170,962 189,081* 0 0 0 0 0 President, Chief 2001 175,000 189,081 0 0 120,000 0 0 Executive Officer 2000 175,000 54,500 0 0 0 0 0 and Chairman of the Board. Michael Catteau 2002 100,352 13,670 0 0 0 0 0 Chief Operating Officer 2001 70,498 450 0 0 20,000 0 0 2000 N/A N/A N/A N/A N/A N/A N/A Wesley A. Taylor 2002 82,963 33,120 0 0 0 0 0 Vice President of 2001 68,879 1,788 0 0 20,000 0 0 Administration and 2000 62,831 2,544 0 0 0 0 0 Director Ashley B. Smith 2002 85,388 23,800 0 0 0 0 0 Vice President Sales and 2001 89,165 2,005 0 0 20,000 0 0 Marketing and Director 2000 75,549 2,408 0 0 0 0 0 James W. Dean 2002 89,837 21,135 0 0 0 0 0 Vice President of 2001 97,117 0 0 0 20,000 0 0 Engineering 2000 7,428 0 0 0 0 0 0
*portion used to pay down note receivable Compensation of Directors All non-employee Directors receive $500 per meeting as compensation for their services as Directors and are reimbursed for expenses incurred in connection with the performance of their duties. All employee Directors, except Rodney I Smith, receive $250 per meeting as compensation for their services and are reimbursed for expenses incurred in connection with the performance of their duties. Rodney I. Smith receives no compensation as a Director, but is reimbursed for expenses incurred in connection with the performance of his duties as a Director. 24 Option Grants in Last Fiscal Year There were no option grants during 2002. Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values Number of Shares Underlying Shares Value of Unexercised Acquired Unexercised Options In-the-Money Options on Value at Fiscal Year End (#) at Fiscal Year-End ($)(1) Exercise Realized ---------------------- ------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Rodney I. Smith 0 0 73,334 86,666 29,084 25,466 Michael Catteau 0 0 6,666 13,334 1,300 2,600 Wesley A. Taylor 0 0 32,916 13,334 12,850 2,600 Ashley B. Smith 0 0 36,116 13,334 14,333 2,600 James W. Dean 0 0 6,666 13,334 1,300 2,600
- -------- (1) Value is based on the closing sales price of the Company's Common Stock on December 31, 2002 ($1.19), the last trading day of 2002, less the option exercise price. 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, 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 upaid 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 25 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 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. --------------------------------------------------------------- The following table sets forth, as of March 20, 2003, 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) 689,132 15.3 Ashley B. Smith(1)(3)(4)(6) 126,583 2.8 Wesley A. Taylor(1)(7) 32,916 * Andrew Kavounis(1)(8) 3,000 * Michael Catteau (1)(9) 6,666 * James Dean (1)(10) 12,335 * All directors, executive officers and key employees as a group (6 persons)(2)(11) 870,632 19.0 - ------------------------------- * Less than 1% (1) The address for each of Messrs. Rodney I. Smith, Ashley B. Smith, Taylor, Kavounis, Catteau and Dean 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 73,334 shares. 27 (6) Includes options to purchase 36,116 shares. (7) Includes options to purchase 32,916 shares. (8) Includes options to purchase 3,000 shares. (9) Includes options to purchase 6,666 shares. (10) Includes options to purchase 6,666 shares. (11) Includes options to purchase 158,698 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 listed 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)) Equity compensation plans approved by 501,925 $1.04 523,075 security holders Equity compensation plans not approved 0 $0 0 by security holders Total 501,925 $1.04 523,075
Item 12. Certain Relationships and Related Transactions. ----------------------------------------------- At December 31, 2002, the Company owned an unsecured note for approximately $463,519 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 were $94,763 for the year ended December 31, 2002 and $72,418 the year ended December 31, 2001. Total interest received on this note was approximately $33,497 and $37,800 for the years ended December 31, 2002 and 2001, respectively. 28 Item 13. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits. (1) The following exhibits are filed herewith: 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, 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). 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). 29 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). 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. 99.1 Certification of Rodney I. Smith pursuant to 18 U.S.C. Section 1350. 99.2 Certification of John K. Johnson pursuant to 18.U.S.C. Section 1350. (b) Reports on Form 8-K. None. Item 14. Controls and Procedures. ------------------------ Our principal executive and financial officers have concluded, based on their evaluation as of a date within 90 days before the filing of this Form 10-KSB, that our disclosure controls and procedures under Rule 13a-14 of the Securities Exchange Act of 1934 are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect these internal controls. 30 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: March 28, 2003 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 March 28, 2003 - ------------------------------ Rodney I. Smith /s/ Wesley A. Taylor Director March 28, 2003 - ------------------------------ Wesley A. Taylor /s/ Ashley Smith Director March 28, 2003 - ------------------------------ Ashley Smith /s/ Andrew Kavounis Director March 28, 2003 - ------------------------------ Andrew Kavounis 31 CERTIFICATIONS I, Rodney I. Smith, certify that: 1. I have reviewed this annual report on Form 10-KSB of Smith-Midland Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Rodney I. Smith ------------------- Rodney I. Smith Chairman of the Board, Chief Executive Officer and President 32 I, John K. Johnson, certify that: 1. I have reviewed this annual report on Form 10-KSB of Smith-Midland Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ John K. Johnson ------------------- John K. Johnson Chief Financial Officer 33 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, 2002 and 2001, 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, 2002 and 2001, 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 10, 2003 F-3 Smith-Midland Corporation and Subsidiaries Consolidated Balance Sheets =============================================================================================== December 31, 2002 2001 - ----------------------------------------------------------------------------------------------- Assets (Note 2) Current assets Cash $ 1,223,756 $ 942,131 Accounts receivable Trade - billed, (less allowance for doubtful accounts of $242,739 and $371,895) 4,950,528 5,934,359 Trade - unbilled 351,986 458,281 Inventories Raw materials 498,984 585,736 Finished goods 1,490,635 1,042,660 Prepaid expenses and other assets 310,054 188,836 - ----------------------------------------------------------------------------------------------- Total current assets 8,825,943 9,152,003 - ----------------------------------------------------------------------------------------------- Property and equipment, net (Note 1) 3,018,729 2,672,665 - ----------------------------------------------------------------------------------------------- Other assets Notes receivable, officer (Note 3) 463,519 558,282 Claims and accounts receivable (Note 7) 960,254 1,020,183 Other (Note 3) 230,393 237,036 - ----------------------------------------------------------------------------------------------- Total other assets 1,654,166 1,815,501 - ----------------------------------------------------------------------------------------------- $13,498,838 $13,640,169 =============================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements F-4 Smith-Midland Corporation and Subsidiaries Consolidated Balance Sheets (continued) ======================================================================================================= December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Accounts payable - trade $ 1,978,437 $ 2,999,367 Accrued expenses and other liabilities 934,271 732,710 Current maturities of notes payable (Note 2) 412,112 604,135 Customer deposits 71,265 266,716 - ------------------------------------------------------------------------------------------------------- Total current liabilities 3,396,085 4,602,928 Reserve for contract loss (Note 7) 1,001,682 1,025,556 Notes payable - less current maturities (Note 2) 3,816,393 3,998,862 Notes payable - related parties (Note 3) 43,707 68,777 - ------------------------------------------------------------------------------------------------------- Total liabilities 8,257,867 9,696,123 - ------------------------------------------------------------------------------------------------------- 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; 4,432,948 and 3,171,051 issued and outstanding 44,329 31,710 Additional paid-in capital 4,178,649 3,494,854 Retained earnings 1,120,293 519,782 - ------------------------------------------------------------------------------------------------------- 5,343,271 4,046,346 Treasury stock, at cost, 40,920 shares (102,300) (102,300) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 5,240,971 3,944,046 - ------------------------------------------------------------------------------------------------------- $13,498,838 $13,640,169 ======================================================================================================= See accompanying summary of accounting policies and notes to consolidated financial statements F-5 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Operations ===================================================================================== Year Ended December 31, 2002 2001 - ------------------------------------------------------------------------------------- Revenue Products sales and leasing $22,029,805 $26,008,579 Royalties 575,153 846,611 - ------------------------------------------------------------------------------------- Total revenue 22,604,958 26,855,190 Cost of goods sold 16,931,807 20,465,604 - ------------------------------------------------------------------------------------- Gross profit 5,673,151 6,389,586 - ------------------------------------------------------------------------------------- Operating expenses General and administrative expenses 2,727,567 2,716,127 Selling expenses 1,383,611 1,187,713 - ------------------------------------------------------------------------------------- Total operating expenses 4,111,178 3,903,840 - ------------------------------------------------------------------------------------- Operating income 1,561,973 2,485,746 - ------------------------------------------------------------------------------------- Other income (expense) Interest expense and loan fees (301,888) (459,250) Interest income (Note 3) 78,959 47,344 Other, net (159,533) (51,234) - ------------------------------------------------------------------------------------- Total other income (expense) (382,462) (463,140) - ------------------------------------------------------------------------------------- Income before income tax 1,179,511 2,022,606 Income taxes (Note 4) 579,000 28,613 - ------------------------------------------------------------------------------------- Net income $ 600,511 $ 1,993,993 ===================================================================================== Basic earnings per share (Note 8) $ .16 $ .65 ===================================================================================== Diluted earnings per share (Note 8) $ .16 $ .58 ===================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements 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, 2000 $30,917 $3,453,222 $(1,474,211) $(102,300) $1,907,628 Warrants exercised 793 41,632 - - 42,425 Net income - - 1,993,993 - 1,993,993 - --------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements F-7 Smith-Midland Corporation and Subsidiaries Consolidated Statements of Cash Flows ================================================================================================= Year Ended December 31, 2002 2001 - -------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Cash received from customers $23,752,774 $24,436,973 Cash paid to suppliers and employees (22,697,023) (22,782,393) Income taxes paid, net (110,226) (28,613) Interest paid (301,888) (459,250) Other 1,164 (3,890) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 644,801 1,162,827 - -------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Purchases of property and equipment (756,763) (403,528) Proceeds from sale of fixed assets 1,972 70,972 Repayments on officer note receivable 94,763 72,418 - -------------------------------------------------------------------------------------------------- Net cash absorbed by investing activities (660,028) (260,138) - -------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Proceeds from borrowings 223,294 234,285 Repayments of borrowings (597,786) (437,121) Repayments on borrowings - related parties, net (25,070) (18,411) Proceeds from warrants exercised 696,414 42,425 - -------------------------------------------------------------------------------------------------- Net cash provided (absorbed) by financing activities 296,852 (178,822) - -------------------------------------------------------------------------------------------------- Net increase in cash 281,625 723,867 Cash, beginning of year 942,131 218,264 - -------------------------------------------------------------------------------------------------- Cash, end of year $ 1,223,756 $ 942,131 ================================================================================================= F-8 continued... Smith-Midland Corporation and Subsidiaries Consolidated Statements of Cash Flows (continued) ================================================================================================== Year Ended December 31, 2002 2001 - -------------------------------------------------------------------------------------------------- Reconciliation of net income to net cash provided by operating activities Net income $ 600,511 $1,993,993 Adjustments to reconcile net income to net cash Provided by operating activities Depreciation and amortization 407,563 363,732 Deferred taxes 44,000 - (Gain) loss on sale of fixed assets 1,164 (18,923) (Increase) decrease in Accounts receivable - billed 597,078 (1,812,241) Accounts receivable - unbilled 106,295 (455,876) Inventories (361,223) 423,982 Prepaid expenses and other assets 332,107 (113,616) Increase (decrease) in Accounts payable - trade (1,020,930) 517,129 Accrued expenses and other liabilities 133,687 414,747 Customer deposits (195,451) (150,100) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 644,801 $1,162,827 ================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements 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 statements Consolidation 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: 2002 2001 --------------------------------------------------------------------------------------------- Net income, as reported $600,511 $1,993,993 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (58,100) (63,109) --------------------------------------------------------------------------------------------- Proforma net income $542,411 $1,930,884 ============================================================================================= Basic earnings per share: Reported $ .16 $ .65 Proforma .14 .62 Diluted earnings per share: Reported $ .16 $ .58 Proforma .14 .56 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. F-11 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) ================================================================================ Revenue Recognition Certain sales of Soundwall and Slenderwall (continued) 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, 2002 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. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) ================================================================================ 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, 2002. 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 will not have an effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company expects to continue using the intrinsic value method for accounting for its employee stock options. F-13 Smith-Midland Corporation and Subsidiaries Summary of Significant Accounting Policies (continued) ================================================================================ Reclassifications Certain reclassifications have been made in the prior year consolidated financial statements and notes to conform to the December 31, 2002 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, 2002 2001 -------------------------------------------------------------------------------------------- Land and land improvements $ 682,092 $ 649,575 Buildings 2,412,198 2,333,311 Machinery and equipment 5,855,101 5,311,048 Rental equipment 160,144 143,296 -------------------------------------------------------------------------------------------- 9,109,535 8,437,230 Less: accumulated depreciation 6,090,806 5,764,565 -------------------------------------------------------------------------------------------- $3,018,729 $2,672,665 -------------------------------------------------------------------------------------------- 2. Notes Payable Notes payable consist of the following: December 31, 2002 2001 --------------------------------------------------------------------------------------------- Note payable to First International Bank, maturing June 2021; with monthly payments of $37,087 of principal and interest, interest at prime plus 1.5% (5.75% at December 31, 2002); collateralized by principally all assets of the Company. $3,695,778 $3,806,428 Note payable to First International Bank, maturing January 1, 2005; with monthly payments of $10,961 of principal and interest at prime plus 1.75% (6.0% at December 31, 2002); collateralized by blanket lien on Company assets. 226,851 337,610 Line of credit with First International Bank, maturing May 1, 2002; interest payable monthly at prime plus 1% (5.8% at December 31, 2001); collateralized by accounts receivable and inventory. - 300,000 F-15 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 2. Notes Payable December 31, 2002 2001 -------------------------------------------------------------------------------------------- (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%. $ 305,876 $ 152,967 Note payable to individual, maturing March 2003; with monthly payments of $432 of principal and interest, interest at 12%; collateralized by a drop-deck trailer. - 5,992 -------------------------------------------------------------------------------------------- 4,228,505 4,602,997 Less current maturities 412,112 604,135 -------------------------------------------------------------------------------------------- $3,816,393 $3,998,862 -------------------------------------------------------------------------------------------- The Company has a mortgage loan, with a balance of $3,695,778 at December 31, 2002, which is guaranteed in part by the U.S. Department of Agriculture Rural Business - Cooperative Services. 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, 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 $500,000 line of credit, under which there were no outstanding borrowings at December 31, 2002. F-16 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 2. Notes Payable The aggregate amounts of notes payable maturing in (continued) each of the next five years and thereafter are as follows: Year Ending December 31, Amount -------------------------------------------------- 2003 $ 412,112 2004 379,134 2005 245,090 2006 235,673 2007 220,661 Thereafter 2,735,835 -------------------------------------------------- $4,228,505 -------------------------------------------------- 3. Related Party The Company currently leases three and one half Transactions acres of its Midland, Virginia property from its President, on a month-to-month basis, as additional storage space for the Company's finished work product. The lease agreement calls for annual rent of $6,000. Notes payable - related parties are unsecured, with no specified maturity date (but no earlier than January 1, 2004) and bear interest at 10%. Total interest expense related to these notes was $2,361 and $1,589 for the years ended December 31, 2002 and 2001, respectively. At December 31, 2002, the Company held an unsecured note receivable for approximately $463,500 from its President and majority shareholder, accruing interest at a rate of 6% per annum. Principal payments on the note were $94,763 for the year ended 2002 and $72,418 for the year ended December 31, 2001. Total interest income on this note was approximately $33,500 and $37,800 for the years ended December 31, 2002 and 2001, 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 $183,000 as of December 31, 2002 and 2001. Borrowings of approximately $153,000, were outstanding against the cash surrender value at December 31, 2002 and 2001. F-17 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 4. Income Taxes Income tax expense is comprised of the following: Year Ended December 31, 2002 2001 ------------------------------------------------------------------------- Federal Current $442,000 $24,100 Deferred 37,000 - ------------------------------------------------------------------------- 479,000 24,100 ------------------------------------------------------------------------- State Current 93,000 4,513 Deferred 7,000 - ------------------------------------------------------------------------- 100,000 4,513 ------------------------------------------------------------------------- $579,000 $28,613 ------------------------------------------------------------------------- The provision for income taxes differs from the amount determined by applying the federal statutory tax rate to pre-tax income as a result of the following: Year Ended December 31, 2002 2001 ---------------------------------------------------------------------------------------------- Amount Percent Amount Percent ---------------------------------------------------------------------------------------------- Income taxes at statutory rate $401,000 34% $688,000 34% Increase (decrease) in taxes resulting from: Reduction in valuation allowance - - (785,000) (39) State income taxes, net of federal benefit 59,000 5 81,000 4 Revision to estimated net operating loss carryforward, net 78,000 7 - - Other 41,000 3 44,613 2 ---------------------------------------------------------------------------------------------- $579,000 49% $ 28,613 1% ---------------------------------------------------------------------------------------------- F-18 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 4. Income Taxes Deferred tax assets (liabilities) are as follows: (continued) December 31, 2002 2001 ------------------------------------------------------------------------------------ Depreciation $(196,000) $(135,000) Provision for doubtful accounts 93,000 141,000 Vacation accrued 46,000 46,000 Deferred income 13,000 21,000 ------------------------------------------------------------------------------------ Net deferred tax asset (liability) (44,000) 73,000 Deferred tax asset valuation allowance - (73,000) ------------------------------------------------------------------------------------ $ (44,000) $ - ------------------------------------------------------------------------------------ The net deferred tax liability at December 31, 2002 is included in accrued expenses and other liabilities in the consolidated balance sheet. At December 31, 2001, 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. 5. Employee Benefit The Company has a 401(k) retirement plan (the Plans "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, 2002 and 2001 were approximately $35,600 and $110,000, respectively. F-19 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 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, 2002: Weighted Average Vested Exercise Options and Price Outstanding Exercisable ------------------------------------------------------------------------------ Balance, December 31, 2000 $1.07 174,975 102,255 Granted 1.02 343,000 - Forfeited 1.00 (11,550) (366) Vested - - 43,202 ------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------ The following table summarizes options outstanding at December 31, 2002: Options Outstanding Options Exercisible ---------------------------------------------- ------------------------ Weighted Average Number of Remaining Contractual Number Exercise Prices Shares Life (Years) of Shares ------------------------------------------------------------------------------------------ $.56 88,000 5.0 79,000 .80 - .81 204,000 8.3 68,001 1.00 - 1.39 189,925 3.7 100,592 3.50 20,000 3.5 20,000 ------------------------------------------------------------------------------------------ 501,925 267,593 ------------------------------------------------------------------------------------------ F-20 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) =============================================================================== 6. Stock Options The Company granted 343,000 stock options during (continued) the year ended December 31, 2001. 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 88%, risk-free interest rate of 5.07% and expected lives of seven to nine years. Substantially all options become vested and exercisable ratably over a five year period. At December 31, 2001, the Company had 1,421,052 warrants outstanding with exercise prices ranging from $.60 to $1.00. During 2002, 1,261,897 warrants were exercised and the remaining shares expired in August 2002. 7. Commitments a) In 1999, the Company, through the general and Contingencies 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, 2002. The Company's outside counsel has provided the Company with an opinion that a legal basis exists for a claim against the general contractor and Rutgers. All conditions for claim recognition have been satisfied, and as of December 31, 2002, approximately $574,000 of the potential $1,100,000 contract claim is included in claims receivable, as such amounts are probable (subject to negotiations and legal proceedings). The Company believes that, based on prior experience in claims settlement, it will ultimately collect the recorded claim receivable. In addition, approximately $386,000 of amounts due from the general contractor that are being disputed are included in claims receivable at December 31, 2002 and 2001. b) In January 2001, the Company received notice of a wrongful death lawsuit filed by the Estate of Joy V. Snyder and her surviving children. The suit was settled during 2002 with an award to the plaintiff of $50,000 that was paid by insurance. F-21 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 7. Commitments c) In June 2000, the Company received notice of and Contingencies a personal injury lawsuit filed by Kenneth R. (continued) 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 is currently on appeal. The Company plans to vigorously defend its position, and believes that any settlement will be covered under the Company's general liability insurance and therefore will not adversely affect the financial statements. 8. Earnings Per Share Earnings per share is calculated as follows: Year ended December 31, 2002 2001 --------------------------------------------------------------------------------------------- Basic earnings Income available to common shareholder $ 600,511 $1,993,993 --------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,774,291 3,090,465 --------------------------------------------------------------------------------------------- Basic earnings per share $ .16 $ .65 --------------------------------------------------------------------------------------------- Diluted earnings per share Income available to common shareholder $ 600,511 $1,993,993 --------------------------------------------------------------------------------------------- Weighted average shares outstanding 3,774,291 3,090,465 Dilutive effect of stock options 89,068 32,948 Dilutive effect of warrants - 338,364 --------------------------------------------------------------------------------------------- Total weighted average shares outstanding 3,863,359 3,461,777 --------------------------------------------------------------------------------------------- Diluted earnings per share $ .16 $ .58 ---------------------------------------------------------------------------------------------
F-22 Smith-Midland Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) ================================================================================ 9. Subsequent Event In January 2003, the Company's Board of Directors adopted a Shareholder Rights Plan (the "Plan") under which, 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. 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. The Rights will expire on January 20, 2013. F-23 EX-10.10 3 ex_1010.txt EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND RODNEY I. SMITH Exhibit 10.10 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into as of this 30th day of September, by and among SMITH-MIDLAND CORPORATION, a Delaware corporation (the "Company"), and RODNEY I. SMITH (the "Executive"). WHEREAS, the Executive is currently employed as President and Chief Executive Officer of the Company; WHEREAS, the parties hereto wish to enter into the arrangements set forth herein with respect to the terms and conditions of the Executive's continued employment with the Company from and after the date first written above. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. Employment Agreement. On the terms and conditions set forth in this Agreement, the Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the Employment Period set forth in Section 2 hereof and in the position and with the duties set forth in Section 3 hereof. Terms used herein with initial capitalization are in some cases defined in Section 21 below. This Agreement shall be effective as of the first date written above (the "Effective Date"), and shall replace and supersede any employment agreement between the Executive and the Company (the "Current Agreement"). 2. Term. Unless earlier terminated pursuant to Section 8, the term of the Executive's employment hereunder shall commence on the Effective Date and shall conclude on the fourth anniversary of the Effective Date (the "Employment Period"); provided, however, that commencing on the date one year after the Effective Date, and on each annual anniversary of the Effective Date thereafter, the Employment Period shall automatically be extended for one additional year, unless either party gives written notice, no less than 30 days prior to the anniversary date, to the other party that it no longer wishes such automatic extensions to continue (a "Notice of Non-Renewal"). 3. Position and Duties. The Executive shall serve as President and Chief Executive Officer of the Company during the Employment Period, and shall serve as a member of the Board during the Employment Period. As the President and Chief Executive Officer of the Company, the Executive shall render executive, policy and other management services to the Company of the type customarily performed by persons serving in a similar capacity and as reasonably determined by the Board with regard to the Executive's status and position within the Company. It is also contemplated that the Executive will engage in the development of new, and/or enhancement of existing, products or technologies of the Company. The Executive shall devote the Executive's reasonable best efforts to the performance of the Executive's duties hereunder and the advancement of the business and affairs of the Company during the Employment Period (provided that the Executive may devote time to managing his personal investments and to charitable and community activities, and, with the consent of the Board, take up other offices and positions during the Employment Period). 1 4. Place of Performance. During the Employment Period, the Executive's primary place of employment and work location shall be Midland, Virginia, except for reasonable travel on Company business and as otherwise consented to by the Executive. 5. Compensation. (a) Base Salary. The Company initially shall pay to Executive an annual base salary (the "Base Salary") of $99,000. The Base Salary shall be reviewed by the Board no less frequently than annually and may be increased (but not decreased) at the discretion of the Board. If the Executive's Base Salary is increased, the increased amount shall be the Base Salary for the remainder of the Employment Period. The Base Salary shall be payable monthly or in such other installments as shall be consistent with the Company's payroll procedures in effect from time to time. (b) Royalties. (i) In addition to the Base Salary, commencing on the Effective Date, the Company shall pay to the Executive an annual royalty fee (the "Royalty") of $99,000. The Royalty shall be in consideration for the Executive's assignment, and/or future obligation to assign, to the Company all of his rights, title and interest in and to all of the Patents described in Section 5(b)(ii) hereof. The Royalty shall be payable monthly. Payment of the Royalty shall continue for so long as the Company is using the inventions underlying the non-expired Patents and shall survive the Employment Term. (ii) The "Patents" shall include (A) all Patents owned by the Executive for inventions created by the Executive subsequent to the Company's initial public offering and on or before the Effective Date and used by the Company; such Patents shall be assigned by the Executive to the Company reasonably promptly after the Effective Date, and (B) all future Patents for inventions created by the Executive during the Employment Period which shall be assigned by the Executive to the Company upon the mutual determination by the Executive and the Company that such inventions underlying the Patents are beneficial or appropriate for use by the Company. The Executive shall take such actions, at the cost of the Company, as reasonably requested by the Company to effectuate the intent of this Section. (c) Bonus. During the Employment Period, the Company shall pay to the Executive bonuses as follows (the "Bonus"): (i) an annual performance bonus in an amount determined at the discretion of the Board for each calendar year and (ii) a quarterly bonus in an amount ($27,000) equal to one-twentieth (1/20) of the current outstanding principal balance of the loan made by the Company to the Executive in the aggregate amount of $540,000 (the "Loan"), and the unpaid interest accrued thereon during such quarter, and a cash amount which reimburses the Executive for the federal, state and local taxes (including as a result of the payment of this cash amount, but deducting any savings from deducting state and local taxes for federal tax purposes) payable by the Executive as a result 2 of the bonus payable pursuant to this subparagraph (ii). The payment of the Bonuses that are equal to one-twentieth (1/20) of the Loan and the quarterly interest thereon shall be paid in the form of foregiveness of such principal and interest. Once the Loan has been fully repaid, no further Bonus under subparagraph (ii) shall be payable. (d) Benefits. During the Employment Period, the Executive will be entitled to all employee benefits and perquisites (including health, welfare, life insurance, pension and incentive plans and other arrangements) made available to similarly situated executives of the Company. Nothing contained in this Agreement shall prevent the Company from terminating plans, changing carriers or from effecting modifications in employee benefits coverage for the Executive as long as such modifications are Company-wide modifications that affect all similarly situated employees of the Company. The Company shall reimburse the Executive for costs incurred by the Executive for medical or dental expenses to the extent such expenses are not covered by the medical or dental insurance offered by the Corporation. (e) Vacation; Holidays. During the Employment Period, the Executive shall be entitled to all public holidays observed by the Company and to four (4) weeks paid vacation per annum. (f) Withholding Taxes and Other Deductions. To the extent required by law, the Company shall withhold from any payments due to the Executive under this Agreement any applicable federal, state or local taxes and such other deductions as are prescribed by law. 6. Expenses. The Executive is expected and is authorized, subject to the business expense policies as determined by the Board, to incur reasonable expenses in the performance of his duties hereunder, including the costs of entertainment, travel and similar business expenses. The Company shall promptly reimburse the Executive for all such expenses upon periodic presentation by the Executive of an accounting of such expenses. 7. Confidentiality. (a) The Executive agrees to keep confidential, except as the Company may otherwise consent in writing, and, except for the Company's benefit, not to disclose or make any use of at any time either during or subsequent to his employment, any trade secrets, confidential information, knowledge, data or other information of the Company relating to products, processes, know-how, techniques, methods, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Company or any of its affiliates, which the Executive may produce, obtain or otherwise acquire during the course of his employment, unless and to the extent that the aforementioned matters become generally known to the public other than as a result of the Executive's acts or omissions and except as required by law or a court of competent jurisdiction. The Executive further agrees not to deliver, reproduce or in any way allow any such trade secrets, confidential information, knowledge, data or other information, or any documentation relating thereto, to be delivered to or used by any third parties without specific direction or consent of a duly authorized representative of the Company. (b) Enforcement. The Executive acknowledges that the restrictions contained in this Section 7 are reasonable and necessary, in view of the nature of the Company's business, in order to protect the legitimate interests of the 3 Company, and that any violation thereof would result in irreparable injury to the Company. Therefore, the Executive agrees that in the event of a breach or threatened breach by the Executive of the provisions of this Section 7, the Company shall be entitled to obtain from any court of competent jurisdiction, preliminary or permanent injunctive relief restraining the Executive from disclosing or using any such confidential information. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including, without limitation, recovery of damages from the Executive. 8. Termination of Employment. Any termination of the Employment Period by the Company or the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon, if any, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employment Period under the provision so indicated. Termination of the Employment Period shall take effect on the Date of Termination. The Employment Period shall be terminated under the following circumstances: (a) Death. The Employment Period shall terminate upon the Executive's death; (b) By the Company. The Company may terminate the Employment Period (i) if the Executive shall have been unable to perform all of the Executive's duties hereunder by reason of illness, physical or mental disability or other similar incapacity, which inability shall continue for more than six consecutive months, or any nine months in a twelve-month period (a "Disability"); or (ii) with or without Cause; (c) By the Executive. The Executive may terminate the Employment Period (i) at any time for Good Reason or without Good Reason; or (ii) within six (6) months of his becoming aware of a Change of Control of the Company; or (d) Non-Renewal. The Employment Period may terminate pursuant to the terms of Section 2. 9. Compensation upon Termination. (a) Death. If the Employment Period terminates as a result of the Executive's death, the Company shall promptly pay to the Executive's estate, or as may be directed by the legal representatives of such estate, after the Date of Termination as a lump sum payment an amount equal to one times the combined Base Salary and Bonus paid to the Executive pursuant to Sections 5(a) and (c) hereof during the immediately preceding full calendar year preceding the Date of Termination, as well as any accrued but unpaid Base Salary and Bonus through the Date of Termination, and all other unpaid amounts, if any, which the Executive has accrued and is entitled to as of the Date of Termination including in connection with any fringe benefits pursuant to Section 5(d) hereof. In addition, upon the Date of Termination, the outstanding principal balance of the Loan, and any accrued interest thereon, shall be forgiven in full, and the Company shall make a cash payment to the Executive's estate equal to the 4 federal, state and local taxes payable as a result of the forgiveness (including as a result of this cash payment, but deducting any tax savings as a result of deducting state and local taxes for federal tax purposes). The Company shall have no further obligations to the Executive under this Agreement or otherwise (other than pursuant to Section 5(b) hereof and any employee benefit plan and any life insurance, death in service or other equivalent policy for the benefit of the Executive). (b) Disability. If the Company terminates the Employment Period because of the Executive's Disability, the Company shall promptly pay to the Executive after the Date of Termination the Executive's Base Salary and Bonus pursuant to Sections 5(a) and (c) hereof at the time and in the manner provided for herein for a period of one (1) year commencing on the Date of Termination, any accrued but unpaid Base Salary and Bonus through the Date of Termination, and all other unpaid amounts, if any, which the Executive has accrued and is entitled to as of the Date of Termination including in connection with any fringe benefits pursuant to Section 5(d) hereof. In addition, upon the Date of Termination, the outstanding principal balance of the Loan, and any accrued interest thereon, shall be forgiven in full, and the Company shall make a cash payment to the Executive equal to the federal, state and local tax payable as a result of the forgiveness (including as a result of this cash payment, but deducting any tax savings as a result of deducting state and local tax for federal tax purposes). The Company shall have no further obligations to the Executive under this Agreement or otherwise (other than pursuant to Section 5(b) hereof and any employee benefit plan and any disability or other medical insurance policy for the benefit of the Executive). (c) By the Company for Cause; By the Executive Without Good Reason. If the Company terminates the Employment Period for Cause or if the Executive terminates the Employment Period without Good Reason, the Company shall promptly pay to the Executive after the Date of Termination any accrued but unpaid Base Salary and Bonus pursuant to Sections 5(a) and (c) through the Date of Termination and all other unpaid amounts, if any, which the Executive has accrued and is entitled to as of the Date of Termination including in connection with any fringe benefits pursuant to Section 5(d) hereof. The Company shall have no further obligations to the Executive under this Agreement (other than pursuant to Section 5(b) hereof). (d) By the Company Without Cause; By the Executive for Good Reason. If the Company terminates the Employment Period other than for Cause, Disability or death, or the Executive terminates the Employment Period for Good Reason, the Company shall promptly pay to the Executive after the Date of Termination as a lump sum payment an amount equal to three (3) times the combined Base Salary and Bonus paid to the Executive pursuant to Sections 5(a) and (c) during the immediately preceding full calendar year preceding the Date of Termination, as well as any accrued but unpaid Base Salary and Bonus through the Date of Termination, and all other unpaid amounts, if any, which the Executive has accrued and is entitled to as of the Date of Termination. The Company shall also continue to provide benefits pursuant to Section 5(d) hereof to the Executive for a two year period commencing on the Date of Termination (or, to the extent such benefits cannot be provided, the Company shall make a cash payment to the Executive in an amount sufficient (on an after tax basis) to allow the Executive to obtain comparable benefits for such period), unless and until the Executive receives any such or similar benefits while employed in any capacity by any 5 other employer during such two year period. In addition, all unvested options to purchase Company stock and shares of restricted Company stock held by the Executive shall become fully vested and, in the case of options, fully exercisable on the date of Date of Termination, and the Executive shall be entitled to exercise all such options for three years following the Date of Termination. Other than as set forth herein, the Company shall have no further obligations to the Executive under this Agreement or otherwise (except pursuant to Section 5(b) hereof and any employee benefit plans and as otherwise set forth in this Agreement). (e) Change of Control. If the Executive terminates the Employment Period within six (6) months of his becoming aware of a Change of Control of the Company, Executive shall have the right to immediately after the Date of Termination receive as a lump sum payment an amount equal to three (3) times the amount of the five year average of the Executive's combined total annual compensation as reported by the Company for federal income tax purposes, which includes the Base Salary and Bonus paid by the Company pursuant to Sections 5(a) and (c) hereof, less one dollar ($1.00), and all other unpaid amounts, if any, which the Executive has accrued and is entitled to as of the Date of Termination. The Company shall also continue to provide benefits pursuant to Section 5(d) hereof to the Executive for a two year period commencing on the Date of Termination (or, to the extent such benefits cannot be provided, the Company shall make a cash payment to the Executive in an amount sufficient (on an after tax basis) to allow the Executive to obtain comparable benefits for such period), unless and until the Executive receives any such or similar benefits while employed in any capacity by any other employer in any capacity by any other employer during such two year period. In addition, all unvested options to purchase Company stock and shares of restricted Company stock held by the Executive shall become fully vested and, in the case of options, fully exercisable on the date of Date of Termination, and the Executive shall be entitled to exercise all such options for three years following the Date of Termination. Other than as set forth herein, the Company shall have no further obligations to the Executive under this Agreement or otherwise (except pursuant to Section 5(b) hereof and any employee benefit plans and as otherwise set forth in this Agreement). (f) No Excise Tax. If the Executive is to receive any payment or benefit from the Company pursuant to the Section 9 which would subject any of the payments or benefits to the Executive to the excise tax imposed by Section 4999 (or any successor section) of the Internal Revenue Code of 1986, as amended (the "Code"), the amount payable shall be reduced by the least amount necessary to avoid such tax. The Company shall have no obligation hereunder to make any payment or provide any benefit to Executive after the payment of the a required severance payment which would subject any of such payments or benefits to the excise tax imposed by Section 4999 of the Code. 10. Noncompetition and Nonsolicitation. (a) Noncompetition. The Executive acknowledges that in the course of his employment with the Company and its Affiliates, he has and will continue to become familiar with the trade secrets of, and other confidential information concerning, the Company and its Affiliates, that the Executive's services will be of special, unique and extraordinary value to the Company and its Affiliates and that the Company's ability to accomplish its purposes and to successfully pursue its business plan and compete in the marketplace depends substantially on the skills and expertise of the Executive. Therefore, and in further consideration of the compensation being paid to the Executive hereunder, the 6 Executive agrees that, during the Employment Period and for a period of one year following Executive's termination of employment with the Company for any reason (the "Restricted Period"), he shall not directly or indirectly own, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with the businesses of the Company or its Affiliates, in any country where the Company or its Affiliates conducts business; provided, however, that passive investments amounting to no more than three percent of the voting equity of a business shall not be prohibited hereby. (b) Nonsolicitation. During the Restricted Period, the Executive shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of the Company or any Affiliate to leave the employ of the Company or such Affiliate, or in any way willfully interfere with the relationship between the Company or any Affiliate and any employee thereof; or (ii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company or any Affiliate to cease doing business with the Company or such Affiliate, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any Affiliate. (c) Enforcement. If, at the time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum duration, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum duration, scope and area permitted by law. If the provisions of this Section 10 shall be deemed illegal by any jurisdiction, the provisions in this Section 10 shall be deemed ineffective within such jurisdiction. Because the Executive's services are unique and because the Executive has access to confidential information, the parties hereto agree that money damages would be an inadequate remedy for any breach of any provision of this Agreement. Therefore, in the event of a breach or threatened breach by the Executive of any provision of this Agreement, the Company may, in addition to other rights and remedies existing in its favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). 11. Notices. All notices, demands, requests or other communications required or permitted to be given or made hereunder shall be in writing and shall be delivered, telecopied or mailed by first class registered or certified mail, postage prepaid, addressed as follows: (a) If to the Company: Smith-Midland Corporation 5119 Catlett Road Route 28, P.O. Box 300 Midland, Virginia 22728 Fax: (540) 439-1232 Attention: Chief Financial Officer 7 With a copy to: Kaufman & Moomjian, LLC 50 Charles Lindbergh Blvd., Suite 206 Mitchel Field, New York 11553 Fax: (516) 222-5110 Attention: Gary T. Moomjian, Esq. (b) If to the Executive: Rodney I. Smith [______________] [______________] or, at the address on the books and records of the Company at the time of such notice, or to such other address as may be designated by either party in a notice to the other. Each notice, demand, request or other communication that shall be given or made in the manner described above shall be deemed sufficiently given or made for all purposes three days after it is deposited in the U.S. mail, postage prepaid, or at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the answer back or the affidavit of messenger being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 12. Severability. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. 13. Survival. It is the express intention and agreement of the parties hereto that the provisions of Sections 5(b), 7, 9, 10 and 11 hereof shall survive the termination of employment of the Executive. In addition, all obligations of the Company to make payments hereunder shall survive any termination of this Agreement on the terms and conditions set forth herein. 14. Assignment. The rights and obligations of the parties to this Agreement shall not be assignable or delegable, except that (i) in the event of the Executive's death, the personal representative or legatees or distributees of the Executive's estate, as the case may be, shall have the right to receive any amount owing and unpaid to the Executive hereunder; and (ii) the rights and obligations of the Company hereunder shall be assignable and delegable in connection with any subsequent merger, consolidation, sale of all or substantially all of the assets of the Company and any similar event with respect to any successor corporation. 15. Binding Effect. Subject to any provisions hereof restricting assignment, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties and their respective heirs, devisees, executors, administrators, legal representatives, successors and assigns. 8 16. Amendment; Waiver. This Agreement shall not be amended, altered or modified except by an instrument in writing duly executed by the parties hereto. Neither the waiver by either of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure of either of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder. 17. Headings. Section and subsection headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. 18. Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of Virginia (but not including the choice of law rules thereof). 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties respecting the employment of the Executive and supersedes the Current Agreement upon commencement of the Employment Period, there being no representations, warranties or commitments between the parties except as set forth herein. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which shall be deemed to constitute one and the same instrument. 21. Definitions "Affiliates" means any entity directly or indirectly controlling or controlled by or under common control with the Company. For purposes of this definition, "control" means the power to direct the management and policies of such entity, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meaning correlative to the foregoing. "Board" means the board of directors of the Company. "Cause" means (a) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 3) with the Company or any Affiliate company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board that specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (b) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. 9 For purposes of this definition, no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interest of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive, if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in (i) or (ii) above, and specifying the particulars thereof in detail. "Change of Control" means: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) (or any successor sections or rules to such Sections or Rule) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Agreement, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company (unless a "reverse acquisition" of the Company), (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliates or (iv) any acquisition by any corporation pursuant to a transaction that complies with subparagraphs (c)(i), (c)(ii) and (c)(iii). (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial 10 owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. "Date of Termination" means (i) if the Executive's employment is terminated by the Executive's death, the date of the Executive's death; (ii) if the Executive's employment is terminated because of the Executive's Disability, thirty days after Notice of Termination, provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such thirty-day period; (iii) if the Executive's employment is terminated by the Company for Cause, the date specified in the Notice of Termination; or (iv) if the Executive's employment is terminated during the Employment Period for any other reason, the date on which Notice of Termination is given. "Good Reason" means, in the absence of a written consent of the Executive: (i) the assignment to the Executive (other than an isolated, insubstantial or inadvertent assignment not occurring in bad faith) of any duties inconsistent with, or material reduction in or material change of, the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3 of this Agreement and which is not remedied by the Company within ten days after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an isolated, insubstantial or inadvertent failure not occurring in bad faith and which is remedied by the Company within ten days after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than thirty miles from that 11 identified in Section 4 hereof; or (iv) the Company's delivery of a Notice of Non-Renewal to the Executive. Any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (i) through (iv) shall not affect the Executive's ability to terminate employment for Good Reason. 12 IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or have caused this Agreement to be duly executed on their behalf, as of the day and year first hereinabove written. SMITH-MIDLAND CORPORATION By: /s/ Rodney I. Smith ----------------------------------------------- Name: Rodney I. Smith Title: President /s/ Rodney I Smith --------------------------------------------------- RODNEY I. SMITH 13 Smith-Midland Corporation P.O. Box 300 Midland, Virginia 22728 (540) 439-3266 Metro (703) 323-5533 Fax (540) 439-1232 September 20, 2002 The undersigned members of the Compensation Committee of the Board of Directors of Smith-Midland Corporation of Midland, Virginia, have reviewed and approved the September 30, 2002, Employment Agreement of Rodney I. Smith, the company President, and recommend its approval to the full Board of Smith- Midland. It is duly noted that Mr. Smith has not received a raise in his base pay since 1996. Wes Taylor, Vice President, Director /s/ Wes Taylor ---------------------------------- Andy Kavounis, Director /s/ Andy Kavounis ---------------------------------- 10-11-02 Manufacturers of ERSI-SET(C) Precast Products 14 Smith-Midland Corporation P.O. Box 300 Midland, Virginia 22728 (540) 439-3266 Metro (703) 323-5533 Fax (540) 439-1232 September 20, 2002 The undersigned members of the Board of Directors of Smith-Midland Corporation of Midland, Virginia, have received the recommendation of the Board of Directors Compensation Committee regarding the September 30, 2002, Employment Contract of Rodney I. Smith, President. It is duly noted that Mr. Smith has not received a base pay raise since 1996. Rodney I. Smith, President, Director /s/ Rodney I. Smith -------------------------------- Wes Taylor, Vice President, Director /s/ Wes Taylor -------------------------------- Ashley Smith, Vice President, Director /s/ Ashley Smith -------------------------------- Andy Kavounis, Director /s/ Andy Kavounis -------------------------------- 10-11-02 Manufacturers of ERSI-SET(C) Precast Products 15 EX-23 4 ex_23.txt CONSENT OF BDO SEIDMAN, LLP Consent of Independent Certified Public Accountants Board of Directors Smith-Midland Corporation We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-102892 and 333-88200) of our report dated March 10, 2003, relating to the consolidated financial statements of Smith-Midland Corporation appearing in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002. BDO Seidman, LLP Richmond, Virginia March 31, 2003 EX-99.1 5 ex_991.txt CERTIFICATION OF RODNEY I. SMITH Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Smith-Midland Corporation (the "Company") on Form 10-KSB for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rodney I. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Rodney I. Smith --------------------------------- Rodney I. Smith Chief Executive Officer and President Dated: March 28, 2003 A signed original of this written statement required by Section 906 has been provided to Smith Midland Corporation and will be retained by Smith Midland Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 6 ex_992.txt CERTIFICATION OF JOHN K. JOHNSON Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Smith-Midland Corporation (the "Company") on Form 10-KSB for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John K. Johnson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John K. Johnson --------------------------------- John K. Johnson Chief Financial Officer Dated: March 28, 2003 A signed original of this written statement required by Section 906 has been provided to Smith Midland Corporation and will be retained by Smith Midland Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----