10-K 1 smid-12312013x10k.htm 10-K SMID-12.31.2013-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2013
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number 1-13752
Smith-Midland Corporation
(Exact Name of Registrant as Specified 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
(Registrant's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Act:  None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer
o
 
Accelerated filer
o
 
 
 
 
 
 
 
Non-accelerated Filer
o
 
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o  No x
The aggregate market value of the shares of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity as of June 28, 2013 (the last business day of the Company’s most recently completed second fiscal quarter) was $6,273,223.  For the sole purpose of making this calculation, the term “non-affiliate” has been interpreted to exclude directors, officers and holders of 10% or more of the Company’s common stock.
As of March 4, 2014, the Company had outstanding 4,840,628 shares of Common Stock, $.01 par value per share, net of treasury shares.

1




Documents Incorporated By Reference
None



FORWARD-LOOKING STATEMENTS

This Annual Report and related documents include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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:

no assurance of profitable operations; in this respect, although the Company was profitable for the year, it incurred a loss for the second quarter of 2013; it also incurred a loss for the fourth quarter of 2012 and a loss for the year ended December 31, 2011,
while the level of our indebtedness is decreasing, the ability to satisfy the same cannot be assured,
the continued availability of financing in the amounts, at the times, and on the terms required, to support our future business and capital projects,
the extent to which we are successful in developing, acquiring, licensing or securing patents for proprietary products,
changes in economic conditions specific to any one or more of our markets (including the availability of public funds and grants for construction),
changes in general economic conditions, such as the continued weakness in construction activity in 2013 in the Company’s primary service area,
adverse weather which inhibits the demand for our products,
our compliance with governmental regulations,
the outcome of future litigation,
on material construction projects, our ability to produce and install product that conforms to contract specifications and in a time frame that meets the contract requirements ,
the cyclical nature of the construction industry,
our exposure to increased interest expense payments should interest rates change,
the Company’s Board of Directors, which is composed of five members, has only two outside, independent directors, and
the other factors and information disclosed and discussed in other sections of this report.

Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I


Item 1    Business

General

Smith-Midland Corporation (the "Company") invents, develops, manufactures, markets, leases, licenses, sells, and installs a broad array of precast concrete products for use primarily in the construction, highway, utilities and farming industries through its five wholly-owned subsidiaries. The Company's precast and barrier rental customers are primarily general contractors and federal, state, and local transportation authorities located in the Mid-Atlantic, Northeastern, Midwestern and Southeastern regions of the United States. The Company's operating strategy has involved producing innovative and proprietary products, including SlenderWall™, a patented, lightweight, energy efficient concrete and steel exterior wall panel for use in building construction; J-J Hooks® Highway Safety Barrier, a patented, positive-connected highway safety barrier; SoftSound™, a proprietary sound absorptive finish used on the face of sound barriers to absorb some of the traffic noise; Sierra Wall™, a sound barrier primarily for roadside use; Easi-Set™ and Easi-Span™ transportable concrete buildings with patented features; and Beach Prisms™ erosion mitigating modules.  In addition, the Company's precast subsidiaries produce farm products such as cattleguards and water and feed troughs as well as custom order precast concrete products with various architectural surfaces, as well as generic highway sound barriers, retaining walls and utility vaults.

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. The Company’s wholly owned subsidiaries consist of Smith-Midland Corporation, a Virginia corporation; Smith-Carolina Corporation, a North Carolina corporation; Easi-Set Industries, Inc., a Virginia corporation; Concrete Safety Systems, Inc., a Virginia corporation; and Midland Advertising and Design, Inc., a Virginia corporation doing business as Midland Advertising + Design.

Market

The Company's precast and barrier rental 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, Northeastern, Midwestern and Southeastern states. Due to the lightweight characteristics of the SlenderWall™ exterior cladding system, the Company has expanded its competitive services outside of the Mid-Atlantic states.  The Company's licensing subsidiary licenses its proprietary products to precast concrete manufacturers nationwide and internationally in Canada, Belgium, New Zealand, Australia, Mexico, Spain, and Chile.

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.

Products

The Company's precast concrete products are cast in manufacturing facilities 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. 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™ Lightweight Construction Panels

The SlenderWall™ system is a prefabricated, energy-efficient, lightweight exterior cladding system that is offered as a cost-effective alternative to the traditional cladding used for the exterior walls of buildings. The Company's SlenderWall system

3



combines the essential components of a wall system into a single panel ready for interior dry wall mounting immediately upon installation. The base components of each SlenderWall™ panel consists of a galvanized or stainless steel stud frame with an exterior surface of approximately two-inch thick, PVA fiber reinforced, high-density, precast concrete (with integral water repellent) and various architectural surfaces. The exterior architectural concrete facing is attached to the interior steel frame by use of coated stainless steel headed anchors that position the exterior concrete approximately one-half inch away from the steel frame.

SlenderWall™ panels are approximately one-third the weight of traditional precast concrete walls of equivalent size, permanence and durability, and are also significantly improved as to permanence and durability.  The 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 reduced installation time and ease of erection and from the use of smaller cranes for installation. Closed-cell foam insulation and windows can be plant-installed further reducing cost and construction schedules.

The Company custom designs, manufactures, installs and licenses the SlenderWall™ exterior cladding system. The exterior of the SlenderWall™ system can be produced in a variety of attractive architectural finishes, such as concrete, exposed stone, granite or thin brick.

Easi-Set Sierra Wall

The Easi-Set Sierra Wall™ ("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, Sierra Wall™ can also be used as a retaining wall to retain earth in both highway and residential construction. Sierra Wall™ is typically constructed of four-inch thick, steel-reinforced concrete panels with an integral column creating a tongue and groove connection system.  This tongue and groove connection system and its welded post to foundation connection make Sierra Wall™ easy to install and move if boundaries change or highways are relocated after the completion of a project.  The newly patented one-piece extended post and panel design reduces installation time and cost.

The Company custom designs and manufactures Sierra Wall™ components to conform to the specifications provided by the contractor. The width, height, strength, and exterior finish of each wall varies depending upon the terrain and application.  The Company also produces generic post and panel design sound barrier wall systems.  These systems are constructed of steel or precast concrete columns (the Company manufactures the precast columns) with precast concrete panels which slide down into the groove in each column.

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® Highway Safety Barrier

The Easi-Set J-J Hooks® highway safety barriers (the "J-J Hooks Barriers") are crash-tested (privately funded), positively connected, safety barriers that the Company sells, rents, delivers, installs and licenses for use on roadways to separate lanes of traffic, either temporarily (free-standing, bolted, or pinned) 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.   J-J Hooks Barriers interlock without the need for 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 or MASH crash test requirements.  J-J Hooks Barriers meet NCHRP-350 and MASH TL3 requirements and are approved by the FHWA.  In November 2009, the Company was issued a patent which contains deflection limitation blocks which improve the J-J Hooks connection performance and has a patent pending on the bolt pocket steel reinforcement.

The Company has applied for “design protection” of the “end taper” on each end of the barrier sections and the “J-Hook” in the United States, Canada, Australia and New Zealand.  If successful, these features cannot be copied by others. The United States has issued a "trade dress" registration for the "end taper" design feature.

The proprietary feature of J-J Hooks Barriers 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"

4



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 loops protruding from each end of the barrier, which must be aligned during the setting process.  Once set, a crew inserts pins or long bolts through the eyes which connects and bolts the barrier sections together. Compared to this technique, the J-J Hooks Barriers are 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 free-standing J-J Hooks Barrier and in December 2012 the pinned and bolted J-J Hooks for use on federally aided highway projects following the successful completion of crash testing based on criteria from the National Cooperative Highway Research Program and from the Manual for Assessing Safety Hardware.

J-J Hooks free-standing barrier has been approved for use in state funded projects by 42 states, plus Washington, D.C. The Company is in various stages of the application process in additional 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, J-J Hooks Barrier has been approved by the appropriate authorities for use in the countries of Canada (Nova Scotia, New Brunswick and Ontario), Australia, New Zealand, Spain, Portugal, Belgium, Germany and Chile.

Easi-Set Precast Building and Easi-Span™  Expandable Precast Building

Easi-Set Precast Buildings are transportable, prefabricated, single-story, all concrete 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. Easi-Set Precast Buildings are available in a variety of exterior finishes and in many standard sizes, or can be custom sized. The roof and floor of each Easi-Set Building is manufactured using the Company's patented second generation post-tensioned system, which helps seal the buildings against moisture. As freestanding units, the Easi-Set Buildings require no poured foundations or footings and can be easily installed within a few hours. After installation the buildings can be moved, if desired, and reinstalled in a new location.

The Company also offers Easi-Span™, a line of expandable precast concrete buildings.  Easi-Span™ incorporates the technology of the Easi-Set Buildings, but are available in larger sizes and, through its modular construction, can be combined in varied configurations to permit expansion capabilities.  Since these larger buildings have less competition from other materials and methods, they produce higher profit margins.  Both the Easi-Span and Easi-Set Buildings offer lines of fully-outfitted restrooms with over a dozen standard models.

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.
 
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.



5




Easi-Set Utility Vault

The Company produces a line of precast concrete underground utility vaults ranging in size from 27 to 1,008 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.

SoftSound™ Soundwall Panels

SoftSound™ soundwall panels, recently developed by the Company, utilize a “wood aggregate” sound absorptive material applied to the face of soundwall panels, which is used to absorb highway noise.  SoftSound™ is a proprietary product developed and tested by the Company and is currently approved for use in Virginia, Maryland and Maine with approvals pending in six additional states and the provinces of Ontario and Quebec, Canada.  The Company introduced this product line into its licensing program and is in the process of seeking to obtain approvals in all 50 states and the Canadian Provinces.

Beach Prisms™ Erosion Control Modules

In 2006, the Company began production and launched full-scale advertising and promotional efforts for its product, Beach Prisms™, a shoreline erosion control product that uses the preferred natural "soft" approach as opposed to the "hard" approach of seawalls and jetties, to solve this worldwide problem.  This product is expected to provide a higher margin than many of the Company’s other product lines. Beach Prisms™ work by reducing the amount of energy in incoming waves before the waves reach the shoreline.  Waves pass through the specially designed slots in the triangular 3 - 4 foot tall by 10 foot long Beach Prisms™ modules.  The success of a Beach Prisms ™ installation is dependent on the prevailing wind in relation to the shoreline, the tides, the fetch and the availability of sand in the surf. Beach Prisms™ are primarily for river- and bay-front property owners who want an alternative to traditional armor stone, or groins and jetties.  The Company applied for “design protection” in the United States for the Beach Prisms™ in 2009 and received that protection in July 2010.

The Company currently has orders and is also accepting new orders with deposits for the Beach Prism product, and the Company is working with the states of Virginia, Maryland and New Jersey to secure approval of each state’s environmental agency.  Such approval is meeting resistance from the environmental agencies, however, the Company believes approval will be forthcoming. In 2011, the Company installed its first Beach Prism protection on Virginia's Chesapeake Bay shoreline.

H2Out™ Secondary Drainage System

The Company was issued a patent in February 2010 for H2Out™, the first "in the caulk joint" secondary drainage and street level leak detection product for panelized exterior cladding. A second line of caulking and drainage strip located behind the exterior line of caulking exits all water leakage to the exterior of the building preventing moisture and mold, and hence deterring lawsuits from tenants and owners of buildings.  H2Out™ has been added as a feature of the SlenderWall™ system and is being included in the product literature, website, and all sales presentations.

Although the Company is optimistic about the success of Beach Prisms™ and H2Out™, there can be no assurance of the commercial acceptance of these products. The Company has its first commercial project to provide the H2Out secondary drainage system on the recladding of an existing building using the SlenderWall panel system.

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, particularly in light of the slowdown in the construction industry.







6



Licensing

The Company presently grants licenses through its 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, SlenderWall™, SoftSound™ and Beach Prisms™ 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 administration and training license fee ranging from approximately $25,000 to $60,000.  License royalties vary depending upon the product licensed, but the range is typically 4% to 6% of the net sales of the licensed product.  In addition, Easi-Set™/Easi-Span™ buildings and SlenderWall™ licensees pay the Company a monthly fee for co-op advertising and promotional programs.  The Company produces and distributes advertising and promotional materials and promotes the licensed products through its own advertising subsidiary, Midland Advertising + Design.

The Company has entered into 50 licensing agreements in the United States, ten in Canada, two in Mexico and one each in Belgium, New Zealand, Australia and Trinidad, for a total of 66 licensees worldwide.

The Company is currently negotiating several new license arrangements and, although no assurance can be given, expects to increase its licensing activities.  Two additional licensees were added in 2013 with aggregate initial licensee fees of $70,500 compared to $92,000 for 2012.

Marketing and Sales

The Company's precast subsidiaries use 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™/Easi-Span™ buildings  and SlenderWall™ licensees combine resources to promote certain precast concrete products.  Licensees pay a 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 precast subsidiaries 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 precast and barrier rental 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 also 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, several large companies dominate the precast concrete market.  However, due to the weight and costs of delivery of precast concrete products, competition in the industry tends to be limited by geographical location and distance from the construction site and is fragmented with numerous manufacturers in a large local area.

The Company believes that the principal competitive factors for its precast 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 Midland, Virginia and Reidsville, North Carolina compete favorably with respect to each of these factors in the Mid-Atlantic regions of the United States.  Finally, the Company believes it offers a broad range of products that are very competitive in these markets.


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Patents and Proprietary Information

The Company currently owns U.S., Canadian, Australian and New Zealand patents for J-J Hooks® highway barrier and U.S. and Canadian patents for Easi-Set™ Precast Building features and for SlenderWall™ exterior cladding system features and a U.S. patent for H2Out™ .  In 1997, a European patent for J-J Hooks was allowed and it has been registered in the U.K. and Belgium.  Additionally, the Company has “trade dress” applications for J-J Hooks features filed in the U.S., Australia, and New Zealand and “distinguishing guise” applications for J-J Hooks features filed in Canada.  A U.S. “trade dress” application for Beach Prisms and the J-J Hooks "end taper" have been issued in the U.S.

The Company owns U.S. registered trademarks for Smith-Midland (logo), Smith Cattleguard (words), Excellence in Precast Concrete (words), Easi-Set (logo & words), Easi-Span (words), Easi-Set Industries (words), J-J Hooks (logo), SlenderWall (logo), Thermaguard (words) and J-J Hooks "V" taper (trade-dress). The J-J Hooks logo is registered in Canada, European Community, Australia, and New Zealand.

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.  During 2012, the Company instituted a lawsuit for the infringement of its intellectual properties by a company producing its J-J Hooks highway barrier without a license. The Company successfully settled this matter by requiring the defendant's acceptance of becoming a licensee and thereby paying royalties on all J-J Hooks® highway barrier sales. 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.

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.

.




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Employees

As of March 4, 2014, the Company had 133 full-time, 4 part-time employees and 9 temporary workers, of which 128 are located at the Company's Midland, Virginia facility, and 18 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 1A.              Risk Factors

Not applicable


Item 1B               Unresolved Staff Comments

Not applicable


Item 2.                 Properties

Facilities

The Company operates two manufacturing facilities.  The primary manufacturing operations are conducted in a 44,000 square foot manufacturing plant located on approximately 22 acres of land in Midland, Virginia, of which the Company owns approximately 19 acres and three acres are leased from Rodney I. Smith, the Company's Chief Executive Officer, at an annual rental rate of $24,000.  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, a quality control center and a recently enlarged and covered steel reinforcing fabrication area of approximately 8,000 square feet.  The Company's Midland facility also includes a large storage yard for inventory and stored materials.

The Company's second manufacturing facility is located in Reidsville, North Carolina on ten acres of owned land and includes an 8,000 square foot manufacturing plant and administrative offices.

Expansion Plans

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 various notes payable, which notes as of December 31, 2013 had a balance of approximately $2.5 million.


Item 3.    Legal Proceedings

The Company is not presently involved in any litigation of a material nature.


Item 4.    Mine Safety Disclosures

Not applicable


9



PART II


Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.


The Company's Common Stock trades on the OTC Bulletin Board System under the symbol "SMID".

As of March 4, 2014, there were approximately 60 record holders of the Company's Common Stock. Management believes there are at least 400 beneficial owners of the Company's Common Stock.

The following table sets forth the high and low closing prices on the OTC Bulletin Board System for the Company's Common Stock for the periods indicated.  The prices were obtained from the NASDAQ website.  These market quotations reflect inter-dealer prices, without retail markup, markdown, or commission.

 
 
High
 
Low
2013
 
 
 
 
First Quarter
 
$
1.92

 
$
1.78

Second Quarter
 
1.94

 
1.51

Third Quarter
 
2.15

 
1.67

Fourth Quarter
 
2.15

 
1.72

2012
 
 

 
 

First Quarter
 
$
1.65

 
$
1.37

Second Quarter
 
1.51

 
1.09

Third Quarter
 
1.55

 
1.20

Fourth Quarter
 
1.97

 
1.38


Dividends

On December 5, 2013, the Company declared a special dividend of $.03 per share of Common Stock for holders of record as of December 20, 2013, which was paid on December 27, 2013 and on December 11, 2012, the Company declared a special dividend of $.05 per share of Common Stock for holders of record as of December 14, 2012, which was paid on December 31, 2012. The dividends paid by the Company in calendar years 2012 and 2013, were the only dividends paid by the Company since the Company's inception and, accordingly, the Company may not pay any dividends again 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.  Except for dividends paid in shares of the Company’s Common Stock, the Company’s current loan agreement prohibits the payment of dividends to stockholders without the bank’s prior written consent, which the Company received prior to the payment of each of the 2012 and 2013 dividends.



Item 6.    Selected Financial Data

Not applicable.


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations


The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this report.


10



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™, a patented, lightweight, energy efficient concrete and steel exterior wall panel for use in building construction; J-J Hooks® Barrier, a positive-connected highway safety barrier; Sierra Wall™, a sound barrier primarily for roadside use; transportable concrete buildings; and SoftSound™, a highway sound attenuation system.  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.

Overview

Overall, the Company’s financial performance improved in 2013 as compared to 2012. The Company had net income in 2013 in the amount of $691,502 as compared to $376,691 for 2012, or an increase of 83.6%.  The increase in net income for the year ended December 31, 2013 was due primarily to management's decision to emphasize the marketing of its proprietary product Slenderwall. Slenderwall sales increased almost $4.0 million over 2012 as approximately seven Slenderwall jobs were in production during the year. As Slenderwall is a proprietary product, gross margins are slightly higher than our other products. While Slenderwall sales were up significantly, many of our other products continue to face stiff competition from our competitors forcing prices to remain relatively low and gross margins to be thinner.


Results of Operations

Year ended December 31, 2013 compared to the year ended December 31, 2012

For the year ended December 31, 2013, the Company had total revenue of $27,710,542 compared to total revenue of $24,893,613 for the year ended December 31, 2012, an increase of $2,816,929, or 11.3%.  Sales include revenues from product sales, royalty income, barrier rental income and shipping and installation income.  Product sales are further divided into wall panel sales, which include Soundwall, architectural and Slenderwall™ panels, highway barrier, beach prisms, Easi-Set® and Easi-Span® buildings, utility and farm products and miscellaneous precast products.  The following table summarizes the sales by product type and a comparison for the years ended December 31, 2013 and 2012:

Sales By Product Type
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
Change
 
% of
Change
Product Sales:
 
 
 
 
 
 
 
 
Soundwall Sales
 
$
1,854,406

 
$
2,390,041

 
$
(535,635
)
 
(22.4)%
Architectural Panel Sales
 
2,325,891

 
2,307,053

 
18,838

 
0.8%
Slenderwall Sales
 
4,499,584

 
603,801

 
3,895,783

 
645.2%
Miscellaneous Wall  Sales
 
669,152

 
235,823

 
433,329

 
183.8%
Total Wall Panel Sales
 
9,349,033

 
5,536,718

 
3,812,315

 
68.9%
Barrier Sales
 
4,026,439

 
3,828,341

 
198,098

 
5.2%
Beach Prisms
 
59,083

 

 
59,083

 
100.0%
Easi-Set and Easi-Span Building Sales
 
3,516,364

 
3,297,433

 
218,931

 
6.6%
Utility and Farm Product Sales
 
1,662,898

 
1,532,092

 
130,806

 
8.5%
Miscellaneous Product Sales
 
964,371

 
2,041,281

 
(1,076,910
)
 
(52.8)%
Total Product Sales
 
19,578,188

 
16,235,865

 
3,342,323

 
20.6%
Royalties income
 
1,545,378

 
1,360,725

 
184,653

 
13.6%
Barrier Rentals
 
2,319,507

 
2,117,577

 
201,930

 
9.5%
Shipping and Installation
 
4,267,469

 
5,179,446

 
(911,977
)
 
(17.6)%
Total Service Revenue
 
8,132,354

 
8,657,748

 
(525,394
)
 
(6.1)%
Total Sales
 
$
27,710,542

 
$
24,893,613

 
$
2,816,929

 
11.3%



11



Wall Panel Sales – Wall panel sales are generally medium to large contracts issued by general contractors for production and delivery of a specific wall panel product for a specific construction project.  Changes in the mix of wall panel sales depend on what contracts are in production during the period.  Soundwall sales decreased moderately in 2013 due primarily to a large soundwall contract for a road project started in mid 2012 for which production was completed in the first quarter of 2013. The Company is currently producing another large soundwall contract that should complete in late 2014.  Architectural sales remained relatively flat in 2013 as continued downward price pressure on architectural projects made it difficult for the Company to bid competitively on these projects. Management continues to believe that it will be at least another year before architectural projects will return to higher profit margin levels. Slenderwall™ sales increased greatly in 2013 due to continuing increased marketing efforts by the Company which resulted in seven new Slenderwall projects in production during 2013. The Company is currently in production of a large Slenderwall contract that started in the second quarter of 2013 and will be completed in late 2014. The Company has also bid on several Slenderwall projects recently and expects to be awarded one or more of these contracts. Miscellaneous wall sales are mainly retaining walls which are used to hold back earth on sloped land. These types of projects increased significantly in 2013 due to several contracts for the production of special cladding panels and several small retaining wall panel jobs.

Barrier Sales – Barrier sales are dependent on the number of highway projects active during the period and whether customers are more prone to buy barrier than to rent.  In 2013 barrier sales increased by $198,098 from the previous year. This increase relates to a major highway project that was funded in 2013 and began construction in the summer of the same year.  It is anticipated by the Company that barrier sales will remain at the current levels until the project is completed in 2014. The Company is now in production of two large barrier contracts for this major highway project.

Beach Prisms – The Company made its first sale of beach prisms in 2009 and continued to make minor sales in 2010 and 2011.  There were no sales in 2012. The Company is still in the process of seeking to acquire the necessary permits from the states of Maryland and Virginia, which has been more difficult than originally estimated. The Company did receive a permit in the state of Virginia during 2011 and anticipates that further permits will occur and additional sales will be forthcoming, however, this cannot be assured. The Company sold $59,000 in Beach Prisms in the state of New Jersey to a local governmental entity to assist with the recovery from hurricane Sandy. Several projects are in the permit phase, and if granted, will result in sales. Future sales of Beach Prisms cannot be accurately predicted because of continued difficulty in obtaining the needed state permits.

Easi-Set® and Easi-Span® Building Sales – Easi-Set® and Easi-Span® building sales increased by 6.6% in 2013 compared to the same period in 2012.  The increase in sales was primarily due to the sale of several buildings and restroom buildings under our GSA (Government Services Administration) contract. The Company has developed a proprietary line of restroom buildings for parks, athletic fields and other outdoor venues and is currently marketing these products with a highly visible advertising campaign. Bidding activity for buildings and restrooms continued to increase during 2013, leading management to believe building sales should continue to increase in 2014. Our new building salesperson is beginning to make inroads in building and restroom sales in our geographic sales area.

Utility and Farm Sales – Utility and farm product sales increased by 8.5% in 2013 compared to 2012. Utility and farm products are mainly underground utility vaults used in infrastructure construction and consequently, when construction is weak so are utility vault sales. The Company continues to see more bidding opportunities for utility products and believes this activity will lead to increased sales in 2014. The recently funded major highway project discussed above also uses utility vaults for underground placement of utilities.

Miscellaneous Product Sales – Miscellaneous products are products that are produced and sold that do not meet the criteria defined for other revenue categories.  Examples would include underground steam tunnels, highway slabs or bridge slabs.  Miscellaneous sales decreased significantly in 2013 as compared to 2012. The decrease is due primarily to the lower number of miscellaneous jobs being bid as a result of the weakened construction economy. Among other contracts in production during 2013 were shooting range baffle panels and precast veneer building panels. The Company believes, but there can be no assurance, it will be awarded the bid for a large miscellaneous contract, to be awarded early in 2014, for the production of trenching panels to begin in mid 2014.

Royalty Income – Royalty revenues increased slightly in 2013, with barrier royalties being up significantly over 2012 and also making up the largest percent of total royalties. Building royalties remained relatively flat for the period and Slenderwall™ royalties were slightly lower for the period. The Company signed two new licensees in 2013, one SoftSound™ license and one Slenderwall license. With both barrier royalties and barrier sales up for the year, the Company believes this may be a sign of improvement in infrastructure spending by federal, state and local governments.


12



Barrier Rentals – Barrier rentals increased by 9.5% in 2013 compared to 2012 due mainly to the major highway project discussed above. Management believes barrier rentals will continue to increase in 2014 due to increased activity in the Company's geographical area on several highway projects now underway. The Company was once again awarded the contract to supply rental barrier for the Presidential Inauguration held in Washington, D.C in January 2013. The Company continues to pursue its rental barrier expansion plans for its local geographical sales area.

Shipping and Installation – Shipping revenue is earned when the product sold is physically shipped to the customer and in many instances, shipping does not occur until the customer is ready to begin installation. Installation revenue is not earned until the wall panels, in the case of architectural or Slenderwall contracts, are physically attached to the building; and in the case of our Easi-Set buildings, until the building is assembled and on site. Shipping and installation revenue decreased by 17.6% in 2013 due mainly to production of soundwall and architectural panels in 2013 that are being held in our storage yard, under stored materials contracts, pending shipping and installation as required by the owners. Because of the amount of product stored in our yard at December 31, 2013, management believes shipping and installation revenue will increase in 2014.  

Cost of Goods Sold – Total cost of goods sold for the year ended December 31, 2013 was $21,138,628 an increase of $1,691,509, or 9%, from $19,447,119 for the year ended December 31, 2012.  Total cost of goods sold, as a percentage of total revenue, decreased to 76% for the year ended December 31, 2013 from 78% for the year ended December 31, 2012.  The reduction in the cost of sold as a percentage of total revenue was, in part, because of the increased sales for the period while fixed overhead costs remained relatively flat. Raw material costs increased slightly in 2013 and 2012 with very little inflationary pressures for the Company. The Company is currently experiencing continued aggressive pricing by its competitors on many of its product lines, negatively affecting its gross margin, and the Company believes this pressure will continue through the end of 2014. The Company is actively seeking new vendor partnerships to help develop a price advantage for its raw materials as well as a continuous supply of these materials. Management continues to improve its effectiveness through the use of lean manufacturing principals and has recently hired a new Vice President of Production for its Virginia production facility who has excellent lean credentials and will have a major impact on our production processes and costs.

General and Administrative Expenses – For the year ended December 31, 2013, the Company's general and administrative expenses increased by $425,541, or 16%, to $3,088,403 from $2,662,862 during the same period in 2012.  The increase in general and administrative expenses resulted primarily from an increase in use tax expense, an increase in employee costs and an increase in professional fees all partially offset by an decrease in other general and administrative office expenses.  General and administrative expense as a percent of total revenue were 11% for the years ended December 31, 2013 and 2012.

Selling Expenses – Selling expenses for the year ended December 31, 2013 increased by $117,794, or 5%, to $2,322,837 from $2,205,043 for the year ended December 31, 2012.  The increase was due to increased sales salaries and commissions on increased sales and increased advertising expense related to Slenderwall and Easi-Set buildings and restrooms.  

Operating Income – The Company had operating income for the year ended December 31, 2013 of $1,279,670 compared to operating income of $687,762 for the year ended December 31, 2012, an increase of $591,908.  The increase in operating income was primarily the result of a decrease in cost of goods sold for the year ended December 31, 2013 as a percentage of revenue as discussed above.

Interest Expense – Interest expense was $132,026 for the year ended December 31, 2013 compared to $134,828 for the year ended December 31, 2012.  The decrease of $2,802, or 2%, was due primarily to lower balances on notes payable outstanding.

Income Tax Expense – The Company had income tax expense of $391,000 for the year ended December 31, 2013 compared to $182,000 for the year ended December 31, 2012, due primarily to the increase in pretax income.

Net Income – The Company had net income of $691,502 for the year ended December 31, 2013, compared to net income of $376,691 for the same period in 2012.  The basic and diluted earnings per share for 2013 was $0.14, compared to basic and diluted net earnings per share of $0.08 for the year ended December 31, 2012.  There were 4,839,205 basic and 4,880,453 diluted weighted average shares outstanding in 2013 and 4,826,182 basic and 4,867,475 diluted weighted average shares outstanding in the 2012.

Liquidity and Capital Resources

The Company financed its capital expenditures and operating requirements in 2013 with cash flows from operations and cash balances on hand.


13



The Company refinanced its note payable with SonaBank on September 12, 2013 with a new note payable to Summit Community Bank (the "Bank") in the amount of $2,100,000 with a term of approximately eight years and a fixed interest rate of 3.99% annually with monthly payments of $25,642. The note payable is secured by substantially all of the assets of the Company.  Under the terms of the note payable, the Company is limited to $1,000,000 for annual capital expenditures unless approved by the Bank in advance, the Company is not allowed to pay cash dividend without prior approval from the Bank and the Company is required to maintain a net worth of at least $5,000,000.  At December 31, 2013, the Company was in compliance with all covenants pursuant to the loan agreement except for the payment of cash dividends on December 27, 2013, for which the Company received approval from the Bank prior to payment. The outstanding balance on this note payable was $2,043,832 as of December 31, 2013.

At December 31, 2013, the Company had cash totaling $3,136,063 and $915,341 of investment securities available for sale compared to cash totaling $4,367,474 and no investment securities available for sale at December 31, 2012.  During 2013, the Company’s operating activities provided $819,846 due mainly to the net income for the period as well as changes in current asset and current liability accounts during 2013.  In 2013, investing activities used $1,870,964 primarily for the purchase of investment securities available for sale and the purchase of capital equipment.  In 2013, financing activities used $180,293 in cash, which resulted primarily from payment of a cash dividend in the amount of $144,489.

Capital spending, including financed additions, increased from $110,275 in 2012 to $908,609 in 2013. Capital expenditures in 2013 included spending for vehicles and a forklift, rental barrier and manufacturing equipment.  In 2014, the Company intends to continue to make capital improvements which may include cranes, vehicles, manufacturing equipment and other items as necessary.  The Company anticipates capital spending for 2014 to be approximately $750,000.

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 and with some architectural contracts, retainage may be held until the entire project is completed.  This payment schedule could result in liquidity problems for the Company because it must bear the cost of production for its products before it receives payment.  The Company's days sales outstanding (DSO) in 2013 was 91 days compared to 80 days in 2012. The increase in the DSO is due primarily to two larger customers who were paying steady but not within the terms of their agreement. Additionally, they have made payments subsequent to the end of 2013. Although no assurance can be given, the Company believes that anticipated cash flow from operations with adequate project management on jobs will be sufficient to finance the Company’s operations and necessary capital expenditures for at least the next 12 months.

The Company’s inventory at December 31, 2013 was $1,939,478 and at December 31, 2012 was $2,104,106, or a decrease of $164,628.  The annual inventory turns for December 31, 2013 and 2012 were 7.9 and 7.8, respectively.

Significant Accounting Policies and Estimates

The Company’s significant accounting policies are more fully described in its Summary of Accounting Policies to the Company’s consolidated financial statements.  The preparation of financial statements in conformity with accounting principles generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes.  In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality.  The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below, however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and as a result, actual results could differ from these estimates.

The Company evaluates the adequacy of its allowance for doubtful accounts at the end of each quarter.  In performing this evaluation, the Company analyzes the payment history of its significant past due accounts, subsequent cash collections on these accounts and comparative accounts receivable aging statistics.  Based on this information, along with other related factors, 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 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 collectability is in doubt, in which event revenue is recognized as cash is received.  Certain sales of Soundwall, Slenderwall, and other architectural concrete products are recognized upon completion of units produced under

14



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 may be inhibited by adverse weather during the winter.  As a result, the Company may experience reduced revenues from December through February and realize the substantial part of its revenues during the other months of the year.  The Company may experience lower profits, or losses, during the winter months, and as such, must have sufficient working capital to fund its operations at a reduced level until the spring construction season.  The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company.

Inflation

Management believes that the Company's operations were not significantly affected by inflation in 2013 and 2012, particularly in the purchases of certain raw materials such as steel and fuel.  The Company believes that raw material pricing will see some modest increases in 2014 as the economy continues its slow recovery, although no assurance can be given regarding future pricing.

Other Comments

As of March 4, 2014 the Company's sales backlog of inventoried products and unbilled construction contracts was approximately $10.6 million as compared to approximately $6.7 million at approximately the same time in 2013.  The increase in the backlog relates to the Company's emphasis on its proprietary product, Slenderwall, which saw an increase of just under $4.0 million in sales and also represents a large part of the sales backlog. A substantial majority of the projects relating to the sales backlog as of March 4, 2014 are scheduled to be shipped during 2014.

The Company also maintains a regularly occurring repeat customer business, which should be considered in addition to the orders in the sales backlog described above.  These orders typically have a quick turn around and represent purchases of the Company’s inventoried standard products, such as highway safety barrier, utility and Easi-Set building products.  Historically, this regularly occurring segment of our customer base is equal to approximately $5,000,000 to $7,000,000 annually.

The risk exists that recessionary economic conditions may adversely affect the Company more than it has experienced to date.  To mitigate these economic and other risks, the Company has a broader product offering than most competitors and has historically been a leader in innovation and new product development in the industry.  The Company is continuing this strategy through the development, marketing and sales efforts for two still emerging products for the industry.  In addition to new product development strategy, in 2014 the Company begins its sixth year of a long-term commitment to lean manufacturing and continuous improvements in manufacturing.  As a by-product of our commitment to lean manufacturing, the Company believes this strategy will help reduce its overall future manufacturing costs.

The Company is continuing its marketing, advertising and promotional efforts for both Beach Prisms™, a shoreline erosion control product that uses the preferred natural "soft" approach as opposed to the "hard" approach of seawalls and jetties, to solve this worldwide problem and H2Out™, the world’s first “in the caulk joint” secondary drainage and street level leak detection product for panelized exterior cladding.  While the Company has received a permit to install Beach Prisms™ at a specific site in Virginia, the Company is still in the process of seeking to secure additional site permit approvals in Virginia and the support of the appropriate environmental agencies in neighboring states for its Beach Prisms™.  Although the Company is optimistic about the success of Beach Prisms™ and H2Out™, there can be no assurance of the commercial acceptance of these products.



Item 7A.    Quantitative and Qualitative Disclosures about Market Risk


Not applicable.



15





Item 8.    Financial Statements and Supplementary Data


The following consolidated financial statements, which appear at the back portion of the report, are filed as part of this report:

 
Page
Report of Independent Registered Public Accountants
 
 
Consolidated Balance Sheets as of December 31, 2013 and 2012
 
 
Consolidated Statements of Income for the years ended December 31, 2013 and 2012
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012
 
 
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2013 and 2012
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
 
 
Summary of Significant Accounting Policies
 
 
Notes to Consolidated Financial Statements


Item 9.        Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.


Item 9A.    Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  This process includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

The Chief Executive Officer and Chief Financial Officer of the Company assessed the effectiveness of our internal control over financial reporting based on the framework in “Internal Control – Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) as of December 31, 2013, and concluded that its controls were effective as of such date.

16




This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Securities and Exchange Commission rules that permit the Company to provide only management’s report in this annual report.


Disclosure controls and procedures

We carried out our evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  Based on our evaluation, our principal executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.


Item 9B.    Other Information

None.

17



PART III


Item 10.    Directors, Executive Officers and Corporate Governance

Certain information with respect to our Directors and executive officers is set forth below.

Name
 
Age
 
Director or
Executive
Officer Since
 
Position
Rodney I. Smith
 
75
 
1970
 
Chief Executive Officer and Chairman of the Board of Directors
 
 
 
 
 
 
 
Ashley B. Smith
 
51
 
1994
 
President and Director
 
 
 
 
 
 
 
Wesley A. Taylor
 
66
 
1994
 
Vice President of Administration, Secretary and Director
 
 
 
 
 
 
 
Frederick L. Russell, Jr.
 
54
 
2012
 
Director
 
 
 
 
 
 
 
G. E. "Nick" Borst
 
73
 
2013
 
Director
 
 
 
 
 
 
 
William A. Kenter
 
67
 
2008
 
Chief Financial Officer
 
 
 
 
 
 
 
Steve Ott
 
47
 
2005
 
Vice President of Engineering, Smith-Midland - Virginia

Background

The following is a brief summary of the background of each Director and executive officer of the Company:

Rodney I. Smith.  Chairman of the Board of Directors, Chief Executive Officer.  Rodney I. Smith co-founded the Company in 1960 and became its President and Chief Executive Officer in 1965.  He has served on the Board of Directors and has been its Chairman since 1970.  Mr. Smith is the principal developer and inventor of the Company’s proprietary and patented products.  He is the past President of the National Precast Concrete Association.  Mr. Smith has served on the Board of Trustees of Bridgewater College in Bridgewater, Virginia since 1986.  The Company believes that Mr. Smith’s extensive experience in the precast concrete products industry and his knowledge of the marketplace gives him the qualifications and skills necessary to serve in the capacity as the Chairman of the Board of Directors.

Ashley B. Smith.  President and Director.  Ashley B. Smith has served as President of the Company since 2012 and as the Vice President of the Company from 1990 to 2011 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.  The Company believes that Mr. Smith’s education, experience in the precast concrete industry and business experience give him the qualifications and skills necessary to serve in the capacity as a director.

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.  The Company believes that Mr. Taylor’s education, business experience and his extensive experience in the precast concrete industry gives him the qualifications and skills necessary to serve in the capacity as a director.

Frederick L. Russell, Jr.  Managing Partner at Virginia Capital Partners. Frederick L. Russell has been a member of the Board of Directors since 2012. Mr. Russell has been Managing Partner at Virginia Capital Partners, a private equity fund, since its inception in 1996. Mr. Russell has more than 25 years of venture capital and private equity experience. Mr. Russell is on the Board of substantially all of Virginia Capital's active venture capital investments and is the Chairman of several of these companies. He is on the Board of Kinsale Capital, Virginia Business Media, SC Business Media, Tall Cotton Partners, Clear

18



Signal Towers, Car Pool and Sewickley Partners. Mr. Russell was previously with a $1 billion private equity firm in Washington and a $100 million venture capital fund before that. The Company believes that Mr. Russell's current and past investment experience as well as his service as a director of many boards provides him with the knowledge and skills necessary to serve in the capacity of director for the Company. 

G. E. (Nick) Borst. Director. G. E. Nick Borst served as an member of the Board of Directors of the Company since 2013. For more than the past five years, Mr. Borst has been engaged in the private practice of law, advising clients in corporate legal matters. Prior thereto, he served as a trial attorney with the federal government. Mr. Borst previously served as president of the Fauquier County Bar Association and as a three-year treasurer of the Fauquier County Chamber of Commerce. In private law practice, Mr. Borst advised clients on business organization and governance. Mr. Borst is also a co-founder and past president of Hospice of Fauquier County and is co-founder and long-time board member of Verdun Adventure Bound, an organization that provides experiential learning programs to over 2,000 young people a year. The Company believes that Mr. Borst's current and past business-related experience provides him with the knowledge and skills necessary to serve in the capacity as a director of the Company.

William A. Kenter.  Chief Financial Officer.  William A. Kenter has served as Chief Financial Officer of the Company since September 2008.  Prior to joining the Company, Mr. Kenter was Controller for the Mount Vernon Printing division of Consolidated Graphics, Inc., a commercial printing company, from September 2007 to September 2008.  Mr. Kenter served as President and CEO of PenGraphix Printing Solutions, a commercial printing company, from January 2000 to August 2007.

Steve Ott.  Vice President of Engineering, Smith Midland Corp.(Virginia).  Mr. Ott has served as Vice President of Engineering of Smith-Midland Corp. (Virginia), the Company's primary operating subsidiary, since 2005. Prior to joining the Company, Mr. Ott served as Engineering Manager for the Shockey Precast Group in Fredericksburg, Virginia from June 2001 to October 2005. Mr. Ott worked at Shockey Precast Group’s Winchester plant from 1998 to 2001. From 1991 through 1997 Mr. Ott worked in Belgium for a consulting structural engineering firm and for a precast concrete manufacturer. From 1988 to 1991 Mr. Ott worked at Brandow and Johnston Structural Engineers in Los Angeles California. Mr. Ott holds a Bachelor of Science degree in Structural Engineering from the University of California at San Diego and a Masters of Business Administration from the University of Mary Washington

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, the Company believes that all Section 16(a) filing requirements applicable to its executive officers, Directors and greater than ten percent (10%) beneficial owners were satisfied during 2013 except that (i) Wesley A. Taylor filed a Form 4 (two transactions) one day late, (ii) Rodney I. Smith filed a Form 4 (two transactions) six days late and (iii) G. E. "Nick" Borst was late in filing his Form 3.

Code of Ethics

The Company adopted a code of ethics that applies to the Chief Executive Officer, Chief Financial Officer, Accounting Manager and persons performing similar functions.  The Board of Directors approved the code of ethics at their meeting on December 17, 2003.  A copy of the code of ethics was filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 2003, and a copy may be obtained without charge by requesting one in writing from Secretary, Smith-Midland Corporation, P.O. Box 300, 5119 Catlett Road, Midland, VA 22728.

Audit Committee

The Company currently has a standing Audit Committee with the members being Frederick L. Russell, Jr. and Nick Borst.  Frederick L. Russell, Jr. is designated the committees' financial expert because of his 25 years experience in the finance industry as described more fully in Item 10. above. Mr. Russell and Mr. Borst are considered to be independent when using the definition of the New York Stock Exchange.


19



 
Item 11.    Executive Compensation

The following table sets forth the compensation paid by the Company for services rendered for 2013 and 2012 to the principal executive officer and the Company’s two most highly compensated executive officers (the “named executive officers”) whose total compensation exceeded $100,000 during 2013:


Summary Compensation Table

Name and Principal
Position
 
Year
 
Salary
($)(1)
 
Bonus
($)(2)
 
Stock
Awards
($)
 
Option
Awards
($)
 
Non Eq-uity
Incentive
Plan
Compen-sation  ($)
 
  Non qual-ified  
Deferred
Compen-sation
Earning  ($)
 
All Other
Compen-
sation
($)
 
Total
($)
Rodney I. Smith
 
2013
 
119,547

 
59,733

 
 
 
 
 
 
 
23,400

 
104,000

 
306,680

Chief Executive Officer
 
2012
 
92,348

 

 
 
 
 
 
 
 

 
100,000

 
192,348

and Chairman of the Board (3)
 
 
 
 

 
 

 
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ashley B. Smith
 
2013
 
144,389

 

 
 
 
 
 
 
 
 
 
3,000

 
147,389

President (4)
 
2012
 
131,877

 

 
 
 
 
 
 
 
 
 
1,000

 
132,877

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
William A. Kenter
 
2013
 
113,026

 

 
 
 
 
 
 
 
 
 

 
113,026

Chief Financial Officer
 
2012
 
95,692

 

 
 
 
 
 
 
 
 
 

 
95,692


(1)  Represents salaries paid in 2013 and 2012 for services provided by each named executive officer serving in the capacity listed. Salaries of all executive officers were reduced in early 2012 and repaid in part and reinstated at the end of 2012.

(2)  Represents amount paid in 2013 for annual performance-based bonus related to operations in 2013.

(3)  Mr. Rodney Smith was paid $99,000 in each of 2013 and 2012, which is included in the column titled “All Other Compensation”, for royalty payments due under his employment contract with the Company, which is more fully described in the following section titled “Employment Contracts and Termination of Employment and Change in Control Arrangements”.  Mr. Rodney Smith received director’s compensation in the amount of $4,000 and $1,000 for the years 2013 and 2012, respectively.

(4)  Mr. Ashley Smith received director’s compensation in the amount of $3,000 and $1,000 for the years 2013 and 2012, respectively.

Outstanding Equity Awards At Fiscal Year-End

The following table sets forth information for the named executive officers regarding any common share purchase options, stock awards or equity incentive plan awards that were outstanding as of December 31, 2013.


20



Name
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
 
Option
Exercise  Price
($/Sh)
 
Option
Expiration Date
Rodney I. Smith
 
20,000

 

 
2.52

 
9/29/2015
 
 
20,000

 

 
2.25

 
5/21/2016
 
 
20,000

 

 
2.15

 
5/21/2017
 
 
40,000

 

 
1.21

 
6/29/2018
TOTAL
 
100,000

 

 
 

 
 
Ashley B. Smith
 
10,000

 

 
2.52

 
9/29/2015
 
 
7,000

 

 
2.25

 
5/21/2016
 
 
7,000

 

 
2.15

 
5/21/2017
 
 
14,800

 

 
1.21

 
6/29/2018
TOTAL
 
38,800

 

 
 

 
 
TOTAL
 
138,800

 

 
 

 
 

All stock options vest on a prorated basis annually over three years from the date of grant and expire ten years from the date of grant.

Compensation of Directors

All Directors receive $1,000 per meeting as compensation for their services as Directors and are reimbursed for expenses incurred in connection with the performance of their duties.

Fiscal 2013 Director Compensation

Name
 
Fees  Earned
or Paid in
Cash ($)
 
Stock
Awards ($)
 
Option
Awards  ($)
 
Non-Equity
Incentive
Plan
Compen-
sation
 
Non-
Qualified
Deferred
Compen-
sation
Earnings
 
All Other
Compen-
sation
 
Total ($)
 
Rodney I. Smith
 
4,000

 

 

 

 

 

 
4,000

(1)
Andrew G. Kavounis (2)
 
2,000

 

 

 

 

 

 
2,000

 
Ashley B. Smith
 
3,000

 

 

 

 

 

 
3,000

(1)
Wesley A. Taylor
 
4,000

 

 

 

 

 

 
4,000

(1)
Frederick L. Russell, Jr.
 
4,000

 

 

 

 

 

 
4,000

 
G. E. "Nick" Borst
 
2,000

 

 

 

 

 

 
2,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Reflected in Summary Compensation Table above.
(2)
Mr. Kavournis' term as a director expired in September 2013.





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 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

21



provided for therein.  The agreement provides for an annual base salary of $99,000 (“Base Salary”), which is 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 Patents.  Mr. Smith is also entitled to a performance-based bonus as determined by the Board each calendar year.

Mr. Smith’s employment agreement provides further that if Mr. Smith (i) voluntarily leaves the employ of the Company within six months of his becoming aware of a Change of Control (as defined in the agreement) of the Company, then he shall be entitled to receive a lump sum amount equal to three times the five-year average of his combined total annual compensation, which includes the Base Salary and bonus, less one dollar ($1.00), and certain other unpaid accrued amounts as of the date of his termination, or (ii) is terminated by the Company without Cause (as defined in the agreement) or leaves the Company with Good Reason (as defined in the agreement), Mr. Smith shall be entitled to a lump sum payment equal to three times the combined Base Salary and bonus paid during the immediately preceding calendar year, and such other unpaid accrued amounts. In any of such cases, the Company will provide Mr. Smith with certain Company fringe benefits for two years, subject to certain conditions as provided for in the agreement, and all of Mr. Smith’s unvested options to purchase Company stock shall become fully vested and exercisable on the date of termination. Mr. Smith will be entitled to exercise all such options for three years from the date of termination. The Company will have no further obligations to Mr. Smith, other than with respect to the payment of royalties.

In the event Mr. Smith’s employment by the Company is terminated as a result of Mr. Smith’s (i) death, his estate shall be entitled to a lump sum payment of one times the combined Base Salary and bonus, and certain other 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 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 employment agreement also contains Non-competition and Non-solicitation covenants for one year following Mr. Smith’s termination of employment for any reason.

On December 31, 2008, the board of directors approved an amendment to the Employment Agreement to include changes required to be in compliance with Section 409A, nonqualified deferred compensation.


Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of March 4, 2014, 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.


22



Name and Address of Beneficial Owner
 
Number of Shares
Beneficially
Owned (2)
 
Percentage
of Class
Rodney I. Smith (1)(3)(4)(5)
 
773,398

 
15.7%
 
 
 
 
 
Ashley B. Smith (1)(3)(4)(6)
 
163,417

 
3.3%
 
 
 
 
 
Frederick L. Russell, Jr. (8)
 
567,363

 
11.7%
 
 
 
 
 
G. E. "Nick" Borst (9)
 
81,000

 
1.7%
 
 
 
 
 
William A. Kenter (1)
 

 

 
 
 
 
 
Tall Cotton Partners, LLC (8)
 
567,363

 
11.7%
 
 
 
 
 
Henry Partners, L.P. (10)
 
537,000

 
11.1%
 
 
 
 
 
Wax Asset Management, LLC (11)
 
376,683

 
7.8%
 
 
 
 
 
All directors and executive officers as a group (6 persons)(2)(12)
 
1,647,928

 
32.9%


(1)     The address for each of Messrs. Rodney I. Smith, Ashley B. Smith, Wesley A. Taylor, Andrew G. Kavournis and William A. Kenter 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 options to purchase 16,000 shares held by Matthew Smith and Roderick Smith and an aggregate of 86,489 shares of Common Stock held by Matthew Smith and Roderick Smith.  Matthew Smith and Roderick Smith are sons of Rodney I. Smith, and brothers of Ashley B. Smith.  Also, does not include 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 20,000 shares of Common Stock held by Hazel Bowling, former wife of Rodney I. Smith, and mother of Mr. Smith’s children. Mr. Smith disclaims beneficial ownership of the shares held by Hazel Bowling.  Includes options to purchase 100,000 shares.

(6)     Includes options to purchase 38,800 shares.

(7) Includes options to purchase 31,000 shares.

(8) Address of holder is 1801 Libbie Avenue, Suite 201, Richmond, VA 23226. Frederick L. Russell, Jr., a director of the Company, is deemed to beneficially own the securities owned of record by Tall Cotton Partners, L.P. by virtue of his control over the manager of this entity.

(9) Address of holder is P.O. Box 351, Ophelia, VA 22530.
(10) Address of holder is 255 South 17th Street, Suite 2608, Philadelphia, PA 19103.

(11) Address of holder is 45 Prospect Street, Greenwich, CT 06830.    

23




(12) Includes options to purchase 169,800 shares for all directors and executive officers as a group.


 
EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information as of December 31, 2013, regarding the Company's equity compensation plans.

Plan Category 
 
(a) Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
 
(b) Weighted
average exercise
price of
outstanding
options,
warrants and
rights
 
(c) Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1)
 
370,599

 
1.96

 
500,000

Equity compensation plans not approved by security holders
 

 

 

Total
 
370,599

 
1.96

 
500,000


(1) A brief description of the Company's 2008 Stock Option Plan is contained in Note 6 of the Notes to Consolidated Financial Statements.


Item 13.    Certain Relationships and Related Transactions, and Director Independence

There are two independent directors of the Company, Frederick L. Russell, Jr. and G.E. "Nick" Borst.  The test utilized for the determination of independence is that of the New York Stock Exchange.

On an ongoing basis, the Company reviews all “related party transactions” (those transactions that are required to be disclosed by SEC Regulation S-K, Item 404), if any, for potential conflicts of interest and all such transactions must be approved by the Board of Directors. No transactions meet the criteria for disclosure.


Item 14.    Principal Accountant Fees and Services

The aggregate fees billed for each of the past two fiscal years for professional services rendered by BDO USA, LLP, the principal accountant for the audit of the Company; for assurance and related services related to the audit; for tax compliance, tax advice, and tax planning; and for all other fees for products and services are shown in the table below.

Audit Fees. Fees charged as audit fees are for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Forms 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.

Audit-Related Fees. Fees paid to BDO USA, LLP for the audit of the Company’s 401(k) benefit plan.

Tax Fees. Tax fees are for professional services rendered by BDO USA, LLP for tax compliance, tax advice, and tax planning.

The Company currently has a standing Audit Committee with the members being Frederick L. Russell, Jr. and G. E. "Nick" Borst.  Frederick L. Russell, Jr. is designated as the committees' financial expert because of his 25 years experience in the finance industry as described in more fully in Item 10. above. Mr. Russell and Mr. Borst are considered to be independent when using the definition of the New York Stock Exchange.

24




 
 
2013
 
2012
Audit Fees
 
$
135,800

 
$
139,650

Tax Fees
 
25,991

 
22,850

Audit-Related Fees
 
5,450

 
9,800

All Other Fees
 

 

Total Fees
 
$
167,241

 
$
172,300

 
 
 
 
 

25



PART IV


Item 15.    Exhibits and Financial Statements Schedules

(1)
The financial statements of the Company are included in Part II, Item 8, page 16 of this Form 10-K:
(2)
Schedules have been omitted since they are either not applicable, not required or the information is included elsewhere herein.
(3)
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).
 
 
 
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 Form SB-2 (No. 33-89312) declared effective by the Commission on December 13, 1995).
 
 
 
10.3
 
Employment Agreement, dated September 30, 2002, between the Company and Rodney I. Smith.  (Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003).
 
 
 
10.4
 
Amendment No. 1 to Employment Agreement, dated as of December 31, 2008, between the Company and Rodney I. Smith (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
 
 
 
10.5
 
2004 Stock Option Plan (Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004).
 
 
 
10.6
 
2008 Stock Option Plan (Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-155920) filed on December 4, 2008).
 
 
 
10.7
 
Promissory Note, dated April 20, 2011 and executed on April 26, 2011, in the amount of $575,000 issued by the Company to Summit Community Bank (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2011).
 
 
 
10.8
 
A Credit Line Deed of Trust, dated April 20, 2011 and executed on April 26, 2011, between the Company and Summit Commit Community Bank (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2011.
 
 
 
10.9
 
Promissory Note, dated September 12, 2013, in the amount of $2,100,000 issued by the Company to Summit Community Bank (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 

26



 
 
 
10.10
 
Credit Line Deed of Trust dated September 12, 2013, related to the Promissory note dated September 12, 2013. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 
10.11
 
Commitment Letter related to the promissory note dated September 12, 2013. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 
10.12
 
Promissory Note for a line of credit, dated September 12, 2013, in the amount $2,000,000 issued by the Company to Summit Community Bank. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 
10.13
 
Commercial Security Agreement related to the line of credit dated September 12, 2013. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 
10.14
 
Commitment Letter related to the line of credit dated May 23, 2013. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 
10.15
 
Commitment Letter related to the guidance line of credit dated May 23, 2013. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2013).
 
 
 
14.1
 
Code of Professional Conduct (Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003).
 
 
 
21.1
 
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).
 
 
 
23.1
 
Consent of BDO USA, LLP.
 
 
 
31.1
 
Certification of Chief Executive Officer.
 
 
 
31.2
 
Certification of Principal Financial Officer.
 
 
 
32.1
 
Certification pursuant 18 U.S.C. Section 1350 as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.




27



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    
 
 
 
SMITH-MIDLAND CORPORATION
 
 
 
 
 
Date:  
March 27, 2014
 
By:
/s/ Rodney I. Smith
 
 
 
 
Rodney I. Smith, CEO
 
 
 
 
(principal executive officer)
 
 
 
 
 
 
 
 
 
 
Date:  
March 27, 2014
 
By:
/s/ William A. Kenter
 
 
 
 
William A. Kenter, CFO
 
 
 
 
(principal financial and accounting officer)
 
 
 
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934, 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 27, 2014
Rodney I. Smith
 
 
 
 
 
 
 
 
 
/s/ Wesley A. Taylor
 
Director
 
March 27, 2014
Wesley A. Taylor
 
 
 
 
 
 
 
 
 
/s/ Ashley B. Smith
 
Director
 
March 27, 2014
Ashley B. Smith
 
 
 
 
 
 
 
 
 
/s/ Frederick L. Russell, Jr.
 
Director
 
March 27, 2014
Frederick L. Russell, Jr.
 
 
 
 
 
 
 
 
 
/s/ G. E. Borst
 
Director
 
March 27, 2014
G. E. Borst
 
 
 
 

28



Smith-Midland Corporation
and Subsidiaries

Consolidated Financial Statements
Years Ended December 31, 2013 and 2012



Smith-Midland Corporation
and Subsidiaries

Contents
 
 
Report of Independent Registered Public Accountants
 
 
Consolidated Financial Statements
 
 
 
Balance Sheets
 
 
Statements of Income
 
 
Statements of Comprehensive Income
 
 
Statements of Stockholders' Equity
 
 
Statements of Cash Flows
 
 
Summary of Significant Accounting Policies
 
 
Notes to Consolidated Financial Statements

F-2



Report of Independent Registered Public Accountants

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, 2013 and 2012 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2013 and 2012, 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 USA, LLP
 
Richmond, Virginia
March 27, 2014

F-3



Smith-Midland Corporation
and Subsidiaries

Consolidated Balance Sheets

 
December 31,
 
2013
 
2012
ASSETS (Note 2)
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
3,136,063

 
$
4,367,474

Investment securities, available-for-sale, at fair value
915,341

 

Accounts receivable, net
 
 
 
Trade - billed, (less allowance for doubtful accounts of $285,305 and $230,749)
7,296,792

 
4,752,729

Trade - unbilled
41,859

 
356,525

Inventories, net
 
 
 
Raw materials
861,129

 
472,149

Finished goods
1,078,349

 
1,631,957

Prepaid expenses and other assets
231,365

 
287,002

Prepaid income taxes

 
173,155

Deferred taxes (Note 4)
475,000

 
438,000

 
 
 
 
Total current assets
14,035,898

 
12,478,991

 
 
 
 
Property and equipment, net (Note 1)
4,322,995

 
4,049,478

 
 
 
 
Other assets
297,915

 
289,335

 
 
 
 
Total assets
$
18,656,808

 
$
16,817,804

 
 
 
 

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,
 
2013
 
2012
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable - trade
$
1,517,625

 
$
922,091

Accrued expenses and other liabilities
1,331,675

 
1,140,234

Income taxes payable
302,263

 

Current maturities of notes payable (Note 2)
364,204

 
329,529

Customer deposits
547,789

 
204,991

 
 
 
 
Total current liabilities
4,063,556

 
2,596,845

 
 
 
 
Notes payable - less current maturities (Note 2)
2,544,809

 
2,661,228

Deferred tax liability (Note 4)
630,000

 
694,000

 
 
 
 
Total liabilities
7,238,365

 
5,952,073

 
 
 
 
Commitments and contingencies (Note 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; 4,881,548 and 4,826,182 issued, respectively
48,815

 
48,262

Additional paid-in capital
5,041,438

 
4,995,278

Accumulated other comprehensive loss
(41,014
)
 

Retained earnings
6,471,504

 
5,924,491

 
 
 
 
 
11,520,743

 
10,968,031

Treasury stock, at cost, 40,920 shares
(102,300
)
 
(102,300
)
 
 
 
 
Total stockholders’ equity
11,418,443

 
10,865,731

 
 
 
 
Total liabilities and stockholders' equity
$
18,656,808

 
$
16,817,804

 
See accompanying summary of accounting policies and notes to consolidated financial statements.

F-5



                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
Smith-Midland Corporation
and Subsidiaries
 
Consolidated Statements of Income

 
Year Ended December 31,
 
2013
 
2012
Revenue
 
 
 
Products sales and leasing
$
21,897,695

 
$
18,353,442

Shipping and installation revenue
4,267,469

 
5,179,446

Royalties
1,545,378

 
1,360,725

 
 
 
 
Total revenue
27,710,542

 
24,893,613

 
 
 
 
Cost of goods sold
21,138,628

 
19,447,119

 
 
 
 
Gross profit
6,571,914

 
5,446,494

 
 
 
 
General and administrative expenses
3,088,403

 
2,662,862

Selling expenses
2,322,837

 
2,205,043

 
 
 
 
Total operating expenses
5,411,240

 
4,867,905

 
 
 
 
Gain on sale of assets
61,634

 
110,175

Other
57,362

 
(1,002
)
 
 
 
 
Operating income
1,279,670

 
687,762

 
 
 
 
Other income (expense)
 

 
 
Interest expense
(132,026
)
 
(134,828
)
Interest income
3,538

 
5,757

  Loss on investment securities available-for-sale
(68,680
)
 

 
 
 
 
Total other expense
(197,168
)
 
(129,071
)
 
 
 
 
Income before income tax expense
1,082,502

 
558,691

 
 
 
 
Income tax expense (Note 4)
391,000

 
182,000

 
 
 
 
Net income
$
691,502

 
$
376,691

 
 
 
 
Basic earnings per share (Note 8)
$
0.14

 
$
0.08

Diluted earnings per share (Note 8)
$
0.14

 
$
0.08


See accompanying summary of accounting policies and notes to consolidated financial statements

F-6



Smith-Midland Corporation
and Subsidiaries
 
Consolidated Statements of Comprehensive Income




 
Year Ended December 31,
 
2013
 
2012
Net income
$
691,502

 
$
376,691

Other comprehensive loss, net of tax: (1)
 
 
 
  Net unrealized holding loss
(83,929
)
 

  Reclassification adjustment for realized losses
42,915

 

    Comprehensive income
$
650,488

 
$
376,691

 
 
 
 

(1) Net unrealized losses on available for sale securities are shown net of income tax benefits of $53,000. Reclassification adjustment for realized losses are shown net of income tax expense of $26,000.

The accompanying notes are an integral part of the condensed consolidated financial statements.



F-7






Smith-Midland Corporation
and Subsidiaries
 
Consolidated Statements of Stockholders' Equity


 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated Other Compre-hensive Loss
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance, December 31, 2011
$
48,262

 
$
4,995,278

 
$

 
$
5,788,432

 
$
(102,300
)
 
$
10,729,672

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid on common stock

 

 

 
(240,632
)
 

 
(240,632
)
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
376,691

 

 
376,691

Balance, December 31, 2012
48,262

 
4,995,278

 

 
5,924,491

 
(102,300
)
 
10,865,731

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid on common stock

 

 

 
(144,489
)
 

 
(144,489
)
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding loss

 

 
(41,014
)
 

 

 
(41,014
)
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from options exercised
553

 
46,160

 

 

 

 
46,713

 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
691,502

 

 
691,502

Balance, December 31, 2013
$
48,815

 
$
5,041,438

 
$
(41,014
)
 
$
6,471,504

 
$
(102,300
)
 
$
11,418,443


See accompanying summary of accounting policies and notes to consolidated financial statements.

F-8




Smith-Midland Corporation
and Subsidiaries

Consolidated Statements of Cash Flows



 
Year Ended December 31,
 
2013
 
2012
Reconciliation of net  income to net cash provided by operating activities
 
 
 
 
 
 
 
Net income
$
691,502

 
$
376,691

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
634,869

 
674,160

Gain on sale of fixed assets
(61,634
)
 
(110,175
)
Realized loss on investment securities available-for-sale
68,631

 

Deferred taxes
(101,000
)
 
(234,000
)
(Increase) decrease in
 
 
 

Accounts receivable - billed
(2,544,063
)
 
2,604,342

Accounts receivable - unbilled
356,525

 
(332,215
)
Inventories
164,628

 
(164,473
)
Prepaid income taxis
173,155

 
554,285

Prepaid expenses and other assets
47,055

 
(9,015
)
Increase (decrease) in
 
 
 
Accounts payable - trade
595,536

 
67,924

Accrued expenses and other liabilities
191,441

 
354,848

Accrued income taxes payable
302,262

 

Customer deposits
300,939

 
(893,202
)
 
 
 
 
Net cash provided by operating activities
$
819,846

 
$
2,889,170



F-9



Smith-Midland Corporation
and Subsidiaries

Consolidated Statements of Cash Flows
(continued)

 
 
December 31,
 
2013
 
2012
Cash Flows From Investing Activities
 
 
 
Purchases of investment securities available-for-sale
$
(2,024,147
)
 
$

Sale of investment securities available-for-sale
1,000,000

 

Purchases of property and equipment
(908,609
)
 
(110,275
)
Proceeds from sale of fixed assets
61,792

 
112,325

 
 
 
 
Net cash provided (absorbed) by investing activities
(1,870,964
)
 
2,050

 
 
 
 
Cash Flows From Financing Activities
 

 
 

Proceeds from long-term borrowings
2,303,339

 

Repayments of long-term borrowings
(2,385,856
)
 
(413,800
)
Dividends paid on common stock
(144,489
)
 
(240,632
)
Proceeds from options exercised
46,713

 

 
 
 
 
Net cash absorbed by financing activities
(180,293
)
 
(654,432
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(1,231,411
)
 
2,236,788

Cash and cash equivalents, beginning of year
4,367,474

 
2,130,686

 
 
 
 
Cash and cash equivalents, end of year
$
3,136,063

 
$
4,367,474

 
 
 
 
Supplemental schedule of non-cash investing activities
 
 
 
Cash Payments for interest
$
132,026

 
$
134,828

Cash Payments for income taxes
$
19,600

 
$
6,000


See accompanying summary of accounting policies and notes to consolidated financial statements.

F-10



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 in the Mid-Atlantic, Northeastern, and Midwestern regions of the United States.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Smith-Midland Corporation and its wholly owned subsidiaries.  The Company’s wholly owned subsidiaries consist of Smith-Midland Corporation, a Virginia corporation, Smith-Carolina Corporation, a North Carolina corporation, Easi-Set Industries, Inc., a Virginia corporation, Concrete Safety Systems, Inc., a Virginia corporation, and Midland Advertising and Design, Inc., doing business as Midland Advertising + Design, a Virginia corporation.  All material intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all unrestricted cash and money market accounts purchased with an original maturity of three months or less as cash and cash equivalents.

Investments

Investments in marketable securities are classified as available-for-sale and are stated at market value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity until realized.

Inventories

Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market. Inventory reserves were approximately $90,000 at December 31, 2013 and 2012.

Property and Equipment

Property and equipment is stated at cost. 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-11




As of December 31, 2013, the Company has not identified any unrecognized tax positions.  The Company files tax returns in the U.S. Federal and various state jurisdictions.  The Company is no longer subject to U.S. or state tax examinations for the years prior to 2011.  The Company does not believe there will be any material changes in unrecognized tax positions over the next twelve months.

Stock Options

Stock based compensation is measured based on the fair value of the award on the date of grant and the corresponding expense is recognized over the period during which an employee is required to provide services in exchange for the award. The fair value of each stock option is estimated using a Black-Scholes option pricing model based on certain assumptions including expected term, risk-free interest rate, stock price volatility and dividend yield.  The assumption for expected term is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The historical volatility of the Company’s stock is used as the basis for the volatility assumption. See Note 6 of Notes to the Consolidated Financial Statements for additional information related to stock based compensation.  There have been no option grants since 2008.  Substantially all options become vested and exercisable ratably over a three-year period.

Revenue Recognition

The Company primarily 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 of the Company’s standard products is typically performed by the customer; however, in some circumstances, the Company will install certain products at the time of delivery and will recognize the installation revenue at that time.  The installation activities are usually completed the day of delivery or the following day.  In utility building sales, the majority of the buildings are erected on the Company’s site and delivered completely installed.

Leasing fees are paid at the beginning of the lease agreement and recorded to a deferred revenue account.  As the revenue is earned each month during the contract, the amount earned is recorded as lease income and an equivalent amount is debited to deferred revenue.

Royalties are recognized as revenue as they are earned.  The Company licenses certain other precast companies to produce its licensed products to our engineering specifications under licensing agreements.  The agreements are typically for five year terms and require royalty payments from 4% to 6% which are paid on a monthly basis.  The revenue from licensing agreements are recognized in the month earned.

Certain sales of Soundwall, architectural precast panels and Slenderwall™ concrete products revenue is recognized using the percentage of completion method for recording revenues on long term contracts under ASC 605-35.  The contracts are executed by both parties and clearly stipulate the requirements for progress payments and a schedule of delivery dates.  Provisions for estimated losses on contracts are made in the period in which such losses are determined.

Shipping revenues are recognized in the period the shipping services are provided to the customer.

Smith-Midland products are typically sold pursuant to an implicit warranty as to merchantability only.  Warranty claims are reviewed and resolved on a case by case method.  Although the Company does incur costs for these types of expense, historically the amount of expense is immaterial.

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.

Sales and Use Taxes

Use taxes on construction materials are reported gross in general and administrative expense.

Risks and Uncertainties


F-12



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 weekly 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, 2013 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 Financial Instruments

The carrying value for each of the Company’s financial instruments (consisting of cash, accounts receivable and accounts payable and short-term line of credit) 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 similar 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.

Reclassifications

Certain minor reclassifications have been made to prior year amounts to conform to the current year presentation.

Advertising Costs

The Company expenses all advertising costs as incurred. Advertising expense was approximately $530,000 and $404,000 in 2013 and 2012, respectively.

Earnings Per Share

Earnings per share are 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 reflect 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, 2013.

Subsequent Events

The Company has evaluated subsequent events after the balance sheet date through the date these financial statements were issued and did not note any events that would require disclosure or adjustment.

Recent Accounting Pronouncements

In December 2011, the FASB issued new accounting guidance regarding additional disclosures for financial instruments that are offset including the gross amount of the asset and liability as well as the impact of any net amount presented in the consolidated financial statements. These provisions were effective for fiscal and interim periods beginning on or after January 1, 2013. The impact of adoption did not have a material effect on the Company's consolidated financial statements.

F-13




In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income in certain circumstances. This ASU was effective for our quarter ended March 31, 2013. For all periods presented other comprehensive income (loss) was not significant; therefore, the adoption of this ASU did not have an impact on our consolidated financial statements.



F-14



SMITH-MIDLAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:
 
 
 
 
 
 
December 31,
 
 
2013
 
2012
Land and land improvements
 
$
598,926

 
$
553,063

Buildings
 
3,934,605

 
3,923,852

Machinery and equipment
 
8,997,995

 
8,299,962

Rental equipment
 
978,514

 
989,030

 
 
 
 
 
 
 
14,510,040

 
13,765,907

Less: accumulated depreciation
 
10,187,045

 
9,716,429

 
 
 
 
 
 
 
$
4,322,995

 
$
4,049,478


Depreciation expense was approximately $635,000 and $674,000 for the years ended December 31, 2013 and 2012, respectively.


F-15

Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)


NOTE 2. - NOTES PAYABLE

Notes payable consist of the following:

 
 
December 31,
 
 
2013
 
2012
Note payable to a Bank, maturing June 2021; with monthly payments of approximately $25,000 of principal and interest fixed at 3.99%; collateralized by principally all assets of the Company.
 
$
2,043,832

 
$

Note payable to a Bank, maturing June 2021; with monthly payments of approximately $36,000 of principal and interest at prime plus .5% (3.75% at December 31, 2012); collateralized by principally all assets of the Company. The note was paid in full in 2013 by the Bank note described above.
 

 
2,209,415

Note payable to a Bank, maturing April 2021; with monthly payments of approximately $6,200 of principal and interest at prime at variable rate (5.29% at December 31, 2013); collateralized by certain property of the Company.
 
445,882

 
499,007

A capital lease obligation, for machinery and equipment which matured in 2013, with interest at approximately 7%.
 

 
3,228

Installment notes, collateralized by certain machinery and equipment maturing at various dates, primarily through 2016, with interest at 1.0% through 6.7%.
 
419,299

 
279,107

 
 
 
 
 
 
 
2,909,013

 
2,990,757

Less current maturities
 
364,204

 
329,529

 
 
 
 
 
 
 
$
2,544,809

 
$
2,661,228


The Company’s note payable, with a balance of $2,043,832 at December 31, 2013 is secured by all of the assets of the Company.  The loan agreement includes certain restrictive covenants, which require the Company to maintain minimum levels of tangible net worth, places limits on annual capital expenditures and the payment of cash dividends.  At December 31, 2013, the Company was in compliance with all covenants pursuant to the loan agreement as amended except for the payment of a cash dividend on December 27, 2013, for which the Company received approval prior to payment.


The aggregate amounts of notes payable and capital leases maturing in each of the next five years and thereafter are as follows:

Year Ending December 31,
 
 
 
2014
$
364,204

2015
354,953

2016
359,079

2017
369,553

2018
382,052

Thereafter
1,079,172

 
 

 
$
2,909,013

 
 


NOTE 3. - RELATED PARTY TRANSACTIONS


F-16



The Company currently leases a portion of its Midland, Virginia property from its CEO, on a month-to-month basis, as additional storage space for the Company's finished work product.  The lease agreement calls for an annual rent of $24,000.  See additional items discussed in Note 7.



NOTE 4. - INCOME TAXES

Income tax expense (benefit) is comprised of the following:

 
 
December 31,
 
 
2013
 
2012
Federal:
 
 

 
 

Current
 
$
432,000

 
$
329,000

Deferred
 
(88,000
)
 
(190,000
)
 
 
344,000

 
139,000

State:
 
 

 
 

Current
 
60,000

 
87,000

Deferred
 
(13,000
)
 
(44,000
)
 
 
47,000

 
43,000

 
 
 
 
 
 
 
$
391,000

 
$
182,000

 
 
 
 
 

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:

 
 
December 31,
 
 
2013
 
2012
Income taxes at statutory rate
 
$
368,000

 
34.0
 %
 
$
190,000

 
34.0
 %
Increase (decrease) in taxes resulting from:
 
 
 
 
 
 

 
 

State income taxes, net of federal benefit
 
49,000

 
4.5
 %
 
25,000

 
4.5
 %
Other
 
(26,000
)
 
(2.4
)%
 
(33,000
)
 
(5.9
)%
 
 
 
 
 
 
 
 
 
 
 
$
391,000

 
36.1
 %
 
$
182,000

 
32.6
 %
 
 
 
 
 
 
 
 
 

Prepaid income taxes relate to amounts refundable from federal and state tax authorities for overpayment of estimated taxes that are expected to be applied towards future required payments. 


F-17

Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)




Deferred tax assets (liabilities) are as follows:

 
 
December 31,
 
 
2013
 
2012
Depreciation
 
$
(630,000
)
 
$
(694,000
)
Unrealized losses on investments available for sale
 
27,000

 

Provision for doubtful accounts
 
111,000

 
90,000

Vacation accrued
 
86,000

 
81,000

Deferred income
 
170,000

 
186,000

Other
 
81,000

 
81,000

 
 
 
 
 
Net deferred tax asset (liability)
 
(155,000
)
 
(256,000
)
 
 
 
 
 
Current portion, net
 
475,000

 
438,000

Long-term portion, net
 
(630,000
)
 
(694,000
)
 
 
 
 
 
 
 
$
(155,000
)
 
$
(256,000
)
 
 
 
 
 

NOTE 5. - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) retirement plan (the "Plan") covering substantially all employees.  Participants may contribute up to 10% of their compensation to the Plan.  The Company contributes 50% of the participant's contribution, up to 4% of the participant's compensation, as a matching contribution.  Total contributions for the years ended December 31, 2013 and 2012 were approximately $79,000 and $7,000, respectively. In order to minimize costs for 2012, the Company suspended 401(k) matching after January 31, 2012. The Company reinstated its 4% matching contribution in February 2013.

NOTE 6. - STOCK OPTIONS

On September 19, 2008, the Board of Directors and Stockholders of the Company adopted the 2008 Stock Option Plan (the "2008 Plan"), which allows the Company to grant up to 500,000 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. There were no grants of options during the years ended December 31, 2013 or 2012.

Options generally vest over a three year period.  The Company did not record any stock option expense for the years 2013 and 2012. As of December 31, 2012, the Company had recognized all remaining stock option expense for its outstanding stock options.

There were 55,366 options exercised in the year ending December 31, 2013 and there were no options exercised in 2012.  The intrinsic value of outstanding and exercisable options at December 31, 2013 was approximately $112,000.

The following tables summarize activity under the stock option plans of the Company and the stock options outstanding at December 31, 2013:




F-18

Smith-Midland Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)


 
 
Weighted
Average
Exercise
Price
 
Options
Outstanding
 
Vested and
Exercisable
Balance, December 31, 2011
 
$
1.82

 
425,965

 
425,965

Granted
 

 

 

Forfeited
 

 

 

Exercised
 

 

 

Vested