1
FRIEDMAN
INDUSTRIES,
INCORPORATED
2000
ANNUAL REPORT
2
FRIEDMAN INDUSTRIES, INCORPORATED
- --------------------------------------------------------------------------------
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FINANCIAL HIGHLIGHTS
2000 1999
------------ ------------
Net sales................................ $120,267,809 $124,719,640
Net earnings............................. $2,506,801 $3,540,811
Net earnings per share (Basic)*.......... $0.33 $0.47
Cash dividends per share*................ $0.18 $0.25
Stock dividend........................... 5% 5%
Stockholders' equity..................... $28,622,951 $27,422,779
Stockholders' equity per share
(Basic)*............................... $3.79 $3.64
Working capital.......................... $28,568,099 $25,776,002
* Adjusted for stock dividends.
V X
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
Is there much difference in the "new economy" and the "old economy"? The
workaday world is primarily about managing change. Management's attitude has
always been and continues to be to embrace and adapt to any "economy" that
evolves while remaining grounded in sound, basic business philosophies. The
Company continually pursues and employs appropriate technologies and techniques
to assure the continued progress and success of your Company.
You are cordially invited to attend the Annual Meeting of Shareholders to
be held on August 25, 2000. The meeting will be held at 11:00 a.m. in the
offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas.
Sincerely,
LOGO
Jack Friedman
Chairman of the Board
and Chief Executive Officer
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FRIEDMAN INDUSTRIES, INCORPORATED
OFFICERS
Jack Friedman
Chairman of the Board and
Chief Executive Officer
Harold Friedman
Vice Chairman of the Board
William E. Crow
President and Chief Operating Officer
Benny B. Harper
Senior Vice President -- Finance
and Secretary/Treasurer
Thomas N. Thompson
Senior Vice President -- Sales and Marketing
Ronald L. Burgerson
Vice President
Dale Ray
Vice President
Charles W. Hall
Assistant Secretary
COMPANY OFFICES AND WEB SITE
MAIN OFFICE
4001 Homestead Road
Houston, Texas 77028
713-672-9433
SALES OFFICE -- COIL PRODUCTS
1121 Judson Road
Longview, Texas 75606
903-758-3431
SALES OFFICE -- TUBULAR PRODUCTS
P.O. Box 0388
Lone Star, Texas 75668
903-639-2511
WEB SITE ADDRESS
www.friedmanindustries.com
COUNSEL
Fulbright & Jaworski L.L.P.
1301 McKinney, 51st Floor
Houston, Texas 77010
AUDITORS
Ernst & Young LLP
1221 McKinney, Suite 2400
Houston, Texas 77010
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
DIRECTORS
Jack Friedman
Chairman of the Board and
Chief Executive Officer
Harold Friedman
Vice Chairman of the Board
William E. Crow
President and Chief Operating Officer
Charles W. Hall
Partner, Fulbright & Jaworski L.L.P. (law firm)
Houston, Texas
Alan M. Rauch
President, Ener-Tex
International, Inc.
(oilfield equipment sales)
Houston, Texas
Hershel M. Rich
Private investor and
business consultant
Houston, Texas
Henry Spira
Retired; Former Vice President,
Friedman Industries, Incorporated
Houston, Texas
Kirk K. Weaver
President,
Parkans International, L.L.C.
(recycling services),
Houston, Texas;
Chairman of the Board and
Chief Executive Officer,
LTI Technologies, Inc.
(technical services)
Houston, Texas
STOCK EXCHANGE LISTING
American Stock Exchange
(Trading symbol: FRD)
APPROXIMATE NUMBER OF
SHAREHOLDERS OF RECORD
620 at May 26, 2000
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain without charge a copy of the Company's Annual Report on
Form 10-K for the year ended March 31, 2000 as filed with the Securities and
Exchange Commission. Written requests should be addressed to: Benny B. Harper,
Senior Vice President, Friedman Industries, Incorporated, P.O. Box 21147,
Houston, Texas 77226.
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FRIEDMAN INDUSTRIES, INCORPORATED
DESCRIPTION OF BUSINESS
Friedman Industries, Incorporated is in the steel processing and
distribution business. The Company has two product groups: coil processing and
tubular products.
At its facilities in Lone Star, Texas, Houston, Texas and Hickman,
Arkansas, the Company processes semi-finished, hot-rolled steel coils into flat,
finished sheet and plate, and sells these products on a wholesale,
rapid-delivery basis in competition with steel mills, importers and steel
service centers. The Company also processes customer-owned coils on a fee basis.
The Company purchases a substantial amount of its annual coil tonnage from Lone
Star Steel Company ("LSS") and Nucor Steel Company ("NSC"). Loss of LSS or NSC
as a source of coil supply could have a material adverse effect on the Company's
business.
Steel sheet and plate and coil processing services are sold directly
through the Company's own sales force to approximately 350 customers located
primarily in the midwestern, southwestern and southeastern sections of the
United States. These products and services are sold principally to steel
distributors and to customers fabricating steel products such as storage tanks,
steel buildings, farm machinery and equipment, construction equipment,
transportation equipment, conveyors and other similar products.
The Company, through its Texas Tubular Products operation located in Lone
Star, Texas, purchases, processes, manufactures and markets tubular products
("pipe"). The Company sells pipe nationally to approximately 330 customers and
sells a substantial amount of manufactured pipe to LSS. The Company purchases a
substantial portion of its annual supply of pipe and coil material used in pipe
production from LSS. Loss of LSS as a source of pipe and coil material supply or
as a customer of manufactured pipe could have a material adverse effect on the
Company's business.
Significant financial information relating to the Company's product groups
is contained in Note 6 of Notes to the Company's Consolidated Financial
Statements appearing herein.
------------------
RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK
FISCAL 2000 FISCAL 1999
----------------- -----------------
HIGH LOW HIGH LOW
---- ----- ---- -----
First Quarter............................................... 4 5/8 3 13/16 8 3/8 6 3/8
Second Quarter.............................................. 4 7/16 3 5/16 7 3/8 4 3/8
Third Quarter............................................... 3 7/8 3 1/4 5 11/16 4 1/2
Fourth Quarter.............................................. 4 1/8 3 5/16 5 3/8 3 3/4
------------------
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
FISCAL 2000 FISCAL 1999
------------------ ------------------
CASH STOCK CASH STOCK
----- ----- ----- -----
First Quarter............................................... $ .05 $ .075
Second Quarter.............................................. $ .05 $ .07
Third Quarter............................................... $ .05 $ .07
Fourth Quarter.............................................. $ .04 5% $ .06 5%
(Per share amounts above have not been adjusted to reflect stock dividends.)
3
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31
----------------------------
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 443,818 $ 3,798,935
Accounts receivable, less allowance for doubtful
accounts of $7,276 in 2000 and 1999.................. 13,533,550 8,709,728
Inventories............................................ 22,910,509 19,906,170
Other.................................................. 57,501 119,207
------------ ------------
TOTAL CURRENT ASSETS.............................. 36,945,378 32,534,040
PROPERTY, PLANT AND EQUIPMENT:
Land................................................... 221,543 221,543
Buildings and yard improvements........................ 3,346,912 3,317,088
Machinery and equipment................................ 16,075,816 15,879,803
Less accumulated depreciation.......................... (12,170,191) (11,127,089)
------------ ------------
7,474,080 8,291,345
OTHER ASSET:
Cash value of officers' life insurance................. 687,332 197,992
------------ ------------
TOTAL ASSETS...................................... $ 45,106,790 $ 41,023,377
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31
----------------------------
2000 1999
------------ ------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 6,447,538 $ 4,839,560
Current portion of long-term debt...................... 800,000 800,000
Dividends payable...................................... 287,522 410,563
Income taxes payable................................... 256,906 68,522
Contribution to profit sharing plan.................... 274,000 252,000
Employee compensation and related expenses............. 311,313 387,393
------------ ------------
TOTAL CURRENT LIABILITIES......................... 8,377,279 6,758,038
LONG-TERM DEBT, less current portion........................ 7,600,000 6,400,000
DEFERRED INCOME TAXES....................................... 393,560 329,560
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 113,000 113,000
STOCKHOLDERS' EQUITY:
Common stock, par value $1:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 7,188,213 in 2000
and 6,828,387 in 1999............................. 7,188,213 6,828,387
Additional paid-in capital............................. 26,878,477 25,725,195
Retained deficit....................................... (5,443,739) (5,130,803)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................ 28,622,951 27,422,779
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 45,106,790 $ 41,023,377
============ ============
See accompanying notes.
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED MARCH 31
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Sales.......................................... $120,267,809 $124,719,640 $148,840,724
Costs and expenses:
Cost of products sold..................... 111,602,851 114,363,659 135,981,231
Selling, general, and administrative...... 4,479,215 4,694,933 5,193,206
Interest expense.......................... 546,160 443,686 431,498
------------ ------------ ------------
116,628,226 119,502,278 141,605,935
------------ ------------ ------------
3,639,583 5,217,362 7,234,789
Interest and other income...................... 158,602 147,506 53,080
------------ ------------ ------------
EARNINGS BEFORE FEDERAL INCOME
TAXES.............................. 3,798,185 5,364,868 7,287,869
Federal income taxes:
Current................................... 1,227,384 1,884,057 2,537,877
Deferred.................................. 64,000 (60,000) (60,000)
------------ ------------ ------------
1,291,384 1,824,057 2,477,877
------------ ------------ ------------
NET EARNINGS......................... $ 2,506,801 3,540,811 $ 4,809,992
============ ============ ============
Average number of common shares outstanding:
Basic........................................ 7,547,624 7,528,702 7,512,901
Diluted...................................... 7,547,624 7,575,409 7,653,530
Net earnings per share:
Basic........................................ $ .33 $ .47 $ .64
Diluted...................................... $ .33 $ .47 $ .63
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
---------- ----------- -----------
Balance at March 31, 1997......................... $6,161,994 $22,377,246 $(5,757,281)
Net earnings...................................... -- -- 4,809,992
Exercise of stock options......................... 20,077 17,467 --
Issuance of Directors' shares..................... 2,000 16,500 --
Stock dividend (5%)............................... 307,737 1,269,415 (1,579,431)
Cash dividends ($.25 per share)................... -- -- (1,912,759)
---------- ----------- -----------
BALANCE AT MARCH 31, 1998............... 6,491,808 23,680,628 (4,439,479)
Net earnings...................................... -- -- 3,540,811
Exercise of stock options......................... 10,202 8,211 --
Issuance of Directors' shares..................... 2,000 9,000 --
Stock dividend (5%)............................... 324,377 2,027,356 (2,355,039)
Cash dividends ($0.25 per share).................. -- -- (1,877,096)
---------- ----------- -----------
BALANCE AT MARCH 31, 1999............... 6,828,387 25,725,195 (5,130,803)
Net earnings...................................... -- -- 2,506,801
Exercise of stock options......................... 16,021 36,666 --
Issuance of Directors' shares..................... 2,000 5,750 --
Stock dividend (5%)............................... 341,805 1,110,866 (1,454,108)
Cash dividends ($0.18 per share).................. -- -- (1,365,629)
---------- ----------- -----------
BALANCE AT MARCH 31, 2000............... $7,188,213 $26,878,477 $(5,443,739)
========== =========== ===========
See accompanying notes.
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings....................... $ 2,506,801 $ 3,540,811 $ 4,809,992
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation.................. 1,043,103 671,735 665,908
Loss on disposal of property,
plant, and equipment........ -- -- 26,008
Directors' shares issued...... 7,750 11,000 18,500
Provision from deferred
taxes....................... 64,000 (60,000) (60,000)
Decrease (increase) in operating
assets:
Accounts receivable........... (4,823,822) 4,495,385 (1,302,188)
Inventories................... (3,004,339) 4,680,693 (3,383,198)
Other......................... 61,706 74,672 (72,517)
(Decrease) increase in operating
liabilities:
Accounts payable and accrued
expenses.................... 1,607,978 (6,085,463) 2,812,809
Contribution to profit sharing
plan........................ 22,000 (28,000) 38,000
Employee compensation and
related expenses............ (76,080) (213,411) 208,377
Federal income taxes
payable..................... 188,384 (275,943) 48,994
----------- ----------- -----------
Net cash (used in) provided by
operating activities........ (2,402,519) 6,811,479 3,810,685
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment........................ (225,838) (2,352,122) (2,593,410)
Cash value of officers' life
insurance........................ (62,710) (117,138) (30,287)
----------- ----------- -----------
Net cash used in investing
activities.................. (288,548) (2,469,260) (2,623,697)
FINANCING ACTIVITIES
Cash dividends paid................ (1,488,670) (1,954,156) (1,795,890)
Proceeds from borrowings of
long-term debt................... 5,000,000 833,334 2,566,666
Principal payments on long-term
debt............................. (3,800,000) (800,000) (800,000)
Payments on loans against life
insurance........................ (426,630) -- --
Cash paid on fractional shares from
stock dividend................... (1,437) (2,568) (1,859)
Cash received from exercised stock
options.......................... 52,687 18,413 37,543
----------- ----------- -----------
Net cash (used in) provided by
financing activities........ (664,050) (1,904,977) 6,460
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents........ (3,355,117) 2,437,242 1,193,448
Cash and cash equivalents at
beginning of year................ 3,798,935 1,361,693 168,245
----------- ----------- -----------
Cash and cash equivalents at
end of year................. $ 443,818 $ 3,798,935 $ 1,361,693
=========== =========== ===========
See accompanying notes.
6
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FRIEDMAN INDUSTRIES, INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Friedman Industries, Incorporated, and its subsidiary (collectively,
the "Company"). All material intercompany amounts and transactions have been
eliminated.
REVENUE RECOGNITION: Revenues are recognized upon shipment of products.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents.
INVENTORIES: The following is a summary of inventory by product group:
YEAR ENDED MARCH 31
--------------------------
2000 1999
----------- -----------
Coil................................................... $11,705,839 $10,652,830
Tubular................................................ 11,204,670 9,253,340
----------- -----------
$22,910,509 $19,906,170
=========== ===========
Coil inventory consists primarily of raw materials. Tubular inventory
consists of both raw materials and finished goods. Inventories are valued at the
lower of cost or replacement market. Cost for the Company's coil inventory is
determined under the last-in, first-out ("LIFO") method. Cost for tubular
inventories is determined using the first-in, first-out method. At March 31,
2000, the replacement cost of LIFO inventories exceeded their LIFO value by
approximately $2,741,000 while, at March 31, 1999, replacement cost was
approximately the same as the LIFO value.
PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are stated
on the basis of cost. Depreciation is calculated primarily by the straight-line
method over the estimated useful lives of the various classes of assets.
Interest costs incurred during construction projects are capitalized as part of
the cost of such assets.
PER SHARE INFORMATION: All applicable per share amounts herein have been
retroactively adjusted to give effect to a 5% stock dividend distributed May 26,
2000.
SUPPLEMENTAL CASH FLOW INFORMATION: The Company paid interest of
approximately $560,000 in 2000, $777,000 in 1999, and $513,000 in 1998. The
Company paid income taxes, net of refunds, of $1,039,000 in 2000, $2,180,000 in
1999, and $2,455,000 in 1998.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS: The carrying value of the Company's financial
instruments approximates fair value.
ECONOMIC RELATIONSHIP: Lone Star Steel Company ("LSS") and Nucor Steel
Company supply a significant amount of steel products to the Company. Loss of
either of these mills as a source of supply could have a material adverse effect
on the Company. Additionally, the Company derives revenue by selling a
substantial amount of its manufactured pipe to LSS. Total sales to LSS were
approximately $11.0 million, $8.0 million, and $21.7 million in 2000, 1999, and
1998, respectively. Loss of the LSS mill as a customer could have a material
adverse effect on the Company's business.
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FRIEDMAN INDUSTRIES, INCORPORATED
2. CAPITAL STOCK AND STOCK OPTIONS
Under the Company's 1989 and 1996 Incentive Stock Option Plans, incentive
options were granted to certain officers and key employees to purchase common
stock of the Company. Pursuant to the terms of the plans, 27,959 additional
options may be granted. All options have ten-year terms and become fully
exercisable at the end of six months of continued employment. The following is a
summary of activity relative to options outstanding during the years ended March
31 (adjusted for stock dividends):
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Outstanding at beginning of year.......... 437,174 $3.98 416,053 $3.85 440,923 $3.73
Granted................................... -- -- 32,524 $4.73 -- --
Exercised................................. (17,581) $2.99 (11,403) $1.62 (24,870) $1.62
------- ------- -------
Outstanding at end of year................ 419,593 $4.02* 437,174 $3.98* 416,053 $3.85
======= ======= =======
Exercisable at end of year................ 419,593 $4.02 404,650 $3.92 416,053 $3.85
Weighted average fair value of options
granted during the year................. N/A $1.65 N/A
* Range of $1.62 to $4.73 per share and a weighted average remaining life of 7.2
years.
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), for its employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Had the Company followed the alternative
fair value accounting provided for under FASB Statement No. 123, Accounting for
Stock-Based Compensation, net earnings and earnings per share would have been
reduced by .7%, .5% and 1.3% in 2000, 1999 and 1998, respectively. The fair
value of options was estimated using a Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rates of 6.5%, a
dividend yield of 3.8%, volatility factor of the expected market price of the
Company's common stock of .28, and a weighted average expected life of the
option of four years.
The Company has 1,000,000 authorized shares of Cumulative Preferred Stock
with a par value of $1 per share. The stock may be issued in one or more series,
and the Board of Directors is authorized to fix the designations, preferences,
rights, qualifications, limitations, and restrictions of each series, except
that any series must provide for cumulative dividends and must be convertible
into common stock.
3. LONG-TERM DEBT
The Company has a credit arrangement with a bank which provides for a
revolving line of credit facility (the "revolving facility") and a term credit
facility (the "term credit facility"). Pursuant to the revolving facility which
expires April 1, 2002, the Company may borrow up to $8 million at an interest
rate no greater than the bank's prime rate. At March 31, 2000, the Company had
borrowings outstanding under the revolving facility of $6 million. The amount
outstanding under the term credit facility bears interest at a stated rate of
LIBOR plus 1.25% and requires quarterly principal payments of $200,000 plus
accrued interest through March 1, 2003. In July 1997, the Company entered into a
swap transaction with the bank pursuant to which it exchanged the term credit
facility's LIBOR-based interest rate obligation for a fixed interest rate
obligation of 8% to remain in effect for the entire term of the term credit
facility. As of March 31, 2000, the principal amount of indebtedness outstanding
under the term credit facility was $2.4 million. The annual principal payments
required on long-term debt during the next five years are as follows:
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FRIEDMAN INDUSTRIES, INCORPORATED
3. LONG-TERM DEBT (CONTINUED)
2001........................................................ $ 800,000
2002........................................................ 800,000
2003........................................................ 6,800,000
2004........................................................ --
2005........................................................ --
----------
Total.................................................. $8,400,000
==========
In July 1995, the Company borrowed $708,168 against the cash surrender
value of officers' life insurance policies (the "borrowings"). During the year
ended March 31, 2000, the Company repaid $426,630 of the borrowings, leaving a
balance owing of $281,538 at an average interest rate of approximately 6%. The
borrowings do not require specific repayment terms except that in the case of
death, the borrowings related to the life insurance policy will be deducted from
the proceeds of such policy.
4. INCOME TAXES
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amount used for tax purposes. Significant components of the Company's
consolidated deferred tax assets and liabilities are as follows:
MARCH 31
---------------------
2000 1999
--------- ---------
DEFERRED TAX LIABILITIES:
Depreciation..................................... $(513,757) $(470,625)
Other............................................ (16,536) --
--------- ---------
Total deferred tax liabilities..................... (530,293) (470,625)
DEFERRED TAX ASSETS:
Inventory capitalization......................... 74,155 85,908
Postretirement benefits other than pensions...... 38,420 38,420
Other............................................ 24,158 16,737
--------- ---------
Total deferred tax assets.......................... 136,733 141,065
--------- ---------
Net deferred tax liabilities....................... $(393,560) $(329,560)
========= =========
5. PROFIT SHARING PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company has a defined contribution plan (the "Plan") covering
substantially all employees, including officers. Company contributions, which
are made at the discretion of the Board of Directors in an amount not to exceed
15% of the total compensation paid during the year to all eligible employees,
were $274,000 for the year ended March 31, 2000, $252,000 for the year ended
March 31, 1999, and $280,000 for the year ended March 31, 1998. Contributions,
Plan earnings, and forfeitures of terminated participants' nonvested accounts
are allocated to the individual accounts of participating employees based on
compensation received during the Plan year and years of active service with the
Company.
In addition, certain health care benefits are provided for retired
employees. Employees with a minimum of 20 years of employment with the Company
who retire at age 65 or older are eligible. The Company has not funded the cost
of the postretirement health care plan.
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FRIEDMAN INDUSTRIES, INCORPORATED
5. PROFIT-SHARING PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Employees of the Company may participate in a 401(k) retirement plan (the
"401(k) plan"). Employees are eligible to participate in the 401(k) plan when
the employee has completed one year of service. Under the 401(k) plan,
participating employees may defer a portion of their pretax earnings up to
certain limits prescribed by the Internal Revenue Service. The Company provides
matching contributions under the provisions of the plan. Employees fully vest in
the Company's matching contributions upon the completion of 7 years of service.
Contribution expense related to the 401(k) plan was approximately $40,000,
$50,000 and $60,000 for the years ended March 31, 2000, 1999 and 1998,
respectively.
6. INDUSTRY SEGMENT DATA
The Company is engaged in the steel processing and distribution business.
Within the Company, there are two product groups: coil processing and tubular
products. Coil processing converts steel coils into flat sheet and plate steel
cut to customer specifications. Through its Texas Tubular Products operation,
the Company purchases, processes, manufactures, and markets tubular products.
The following is a summary of significant financial information relating to
the product groups:
YEAR ENDED MARCH 31
------------------------------------------
2000 1999 1998
------------ ------------ ------------
NET SALES:
Coil processing....................... $ 77,842,307 $ 86,409,139 $ 87,619,322
Tubular............................... 42,425,502 38,310,501 61,221,402
------------ ------------ ------------
TOTAL NET SALES............... $120,267,809 $124,719,640 $148,840,724
============ ============ ============
OPERATING PROFIT:
Coil processing....................... $ 1,950,771 $ 4,773,761 $ 1,876,097
Tubular............................... 3,414,479 2,210,841 7,593,430
------------ ------------ ------------
TOTAL OPERATING PROFIT........ 5,365,250 6,984,602 9,469,527
Corporate expenses.................... (1,179,507) (1,323,554) (1,803,240)
Interest expense...................... (546,160) (443,686) (431,498)
Interest and other income............. 158,602 147,506 53,080
------------ ------------ ------------
TOTAL EARNINGS BEFORE TAXES... $ 3,798,185 $ 5,364,868 $ 7,287,869
============ ============ ============
IDENTIFIABLE ASSETS:
Coil processing....................... $ 25,728,057 $ 24,030,442 $ 25,404,991
Tubular............................... 18,183,058 12,913,517 19,054,950
------------ ------------ ------------
43,911,115 36,943,959 44,459,941
General corporate assets.............. 1,195,675 4,079,418 1,579,420
------------ ------------ ------------
TOTAL ASSETS.................. $ 45,106,790 $ 41,023,377 $ 46,039,361
============ ============ ============
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FRIEDMAN INDUSTRIES, INCORPORATED
6. INDUSTRY SEGMENT DATA (CONTINUED)
YEAR ENDED MARCH 31
------------------------------------
2000 1999 1998
---------- ---------- ----------
DEPRECIATION:
Coil processing....................... $ 701,526 $ 326,577 $ 317,851
Tubular products...................... 327,206 335,794 337,485
Corporate and other................... 14,371 9,364 10,572
---------- ---------- ----------
$1,043,103 $ 671,735 $ 665,908
========== ========== ==========
CAPITAL EXPENDITURES:
Coil processing....................... $ 116,172 $2,316,306 $2,372,483
Tubular products...................... 49,248 33,216 200,635
Corporate assets...................... 60,418 2,600 20,292
---------- ---------- ----------
$ 225,838 $2,352,122 $2,593,410
========== ========== ==========
Operating profit is total revenue less operating expenses, excluding
general corporate expenses, interest expense, and interest and other income.
Corporate assets consist primarily of cash and cash equivalents and the cash
value of officers' life insurance. There are no sales between product groups.
7. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended March 31, 2000 and 1999 (per share amounts have been adjusted
for subsequent stock dividends):
Quarter Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
1999 1999 1999 2000
----------- ------------ ----------- -----------
Net sales............................... $26,664,262 $29,397,118 $29,894,914 $34,311,515
Gross profit............................ 2,153,321 2,279,274 1,884,084 2,348,279
Net earnings............................ 600,151 739,308 500,221 667,121
Net earnings per share(1):
Basic................................. 0.08 0.10 0.07 0.09
Diluted............................... 0.08 0.10 0.07 0.09
Quarter Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
1998 1998 1998 1999
----------- ------------ ----------- -----------
Net sales............................... $38,923,169 $32,178,289 $26,938,496 $26,679,686
Gross profit............................ 2,921,393 2,867,212 2,131,504 2,435,872
Net earnings............................ 1,022,748 1,015,084 681,700 821,279
Net earnings per share(1):
Basic................................. 0.14 0.14 0.09 0.11
Diluted............................... 0.13 0.13 0.09 0.11
(1) The sum of the quarterly net income per share amounts does not equal the
annual amount reported, as per share amounts are computed independently for
each quarter and for the full year based on the respective weighted average
common shares outstanding.
8. CONCENTRATION OF RECEIVABLES
The Company's sales are concentrated primarily in the midwestern,
southwestern, and southeastern sections of the United States, and are primarily
to customers in the steel distributing and fabricating industries. The Company
performs periodic credit evaluations of the financial conditions of its
customers and generally does not require collateral. Generally, receivables are
due within 30 days.
11
13
FRIEDMAN INDUSTRIES, INCORPORATED
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Friedman Industries, Incorporated
We have audited the accompanying consolidated balance sheets of Friedman
Industries, Incorporated as of March 31, 2000 and 1999, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2000. 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 auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Friedman
Industries, Incorporated, at March 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2000, in conformity with auditing standards generally
accepted in the United States.
Ernst & Young LLP
May 26, 2000
Houston, Texas
------------------------------------------
SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
Net sales......................... $ 120,267,809 $ 124,719,640 $ 148,840,724 $ 119,920,966 $ 106,849,181
Net earnings...................... 2,506,801 3,540,811 4,809,992 3,630,071 2,836,768
Total assets...................... 45,106,790 41,023,377 46,039,361 38,117,191 32,812,986
Long-term debt.................... 7,600,000 6,400,000 6,366,666 4,600,000 5,400,000
Stockholders' equity.............. 28,622,951 27,422,779 25,732,957 22,781,959 20,428,936
Net earnings per share:
Basic........................... 0.33 0.47 0.64 0.48 0.38
Diluted......................... 0.33 0.47 0.63 0.48 0.38
Cash dividends declared per share
adjusted for stock dividends.... 0.18 0.25 0.25 0.18 0.15
See also Note 1 of Notes to the Company's Consolidated Financial Statements
herein which describes the Company's relationship with its primary suppliers of
steel products.
12
14
FRIEDMAN INDUSTRIES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 2000 compared to year ended March 31, 1999
During the year ended March 31, 2000, sales, cost of products sold and
gross profit decreased $4,451,831, $2,760,808 and $1,691,023, respectively, from
the comparable amounts recorded during the year ended March 31, 1999. During
fiscal 2000, the Company's tubular operations generated an increase in sales
that was more than offset by a decline in sales associated with coil operations.
Tubular operations benefited from stronger demand for tubular products in fiscal
2000 and the Company recorded a 25% increase in tubular tons sold. Conversely,
coil operations were adversely affected by softer demand for these products and
a 6% decline in coil tons sold was recorded. In addition, coil operations
incurred significant increases in the costs of coil products that could not be
immediately passed along to customers. Gross profit as a percentage of sales
decreased from 8.3% in fiscal 1999 to 7.2% in fiscal 2000. Improved margins
earned on tubular sales were more than offset by a significant decline in
margins earned on coil product sales.
Interest expense increased $102,474 from the amount recorded during fiscal
1999. During fiscal 1999, certain interest costs were related to construction of
fixed assets and were capitalized.
Federal income taxes declined $532,673 from the amount recorded during
fiscal 1999. This decrease resulted from the decline in earnings before taxes as
the effective tax rates were the same for both years.
Year ended March 31, 1999 compared to year ended March 31, 1998
During the year ended March 31, 1999, sales, cost of products sold and
gross profit declined $24,121,084, $21,617,572 and $2,503,512, respectively,
from the comparable amounts recorded during the year ended March 31, 1998. These
declines were primarily attributable to the Company's tubular operations which
were adversely affected by a significant downturn in the energy sector of the
U.S. economy in fiscal 1999. This downturn had the effect of reducing demand for
tubular products and generating intense competition for available sales. An
increase in gross profit associated with coil operations was more than offset by
a decrease in gross profit relative to tubular operations. Gross profit as a
percentage of sales decreased from 8.6% in fiscal 1998 to 8.3% in fiscal 1999.
Margins earned on tubular sales declined significantly in fiscal 1999 and offset
improved margins earned on coil sales.
Selling, general and administrative expenses declined $498,273 from the
amount recorded in fiscal 1998. This decline was primarily related to a decrease
in variable expenses attributable to reduced volume and/or earnings and to a
decline in bad debt expense.
Interest and other income during fiscal 1999 increased $94,426 from the
amount recorded in fiscal 1998. This increase was primarily related to other
income associated with an increase in the cash surrender value of officers' life
insurance.
Federal income taxes decreased $653,820 from the amount recorded during
fiscal 1998 due to reduced earnings before taxes. The effective tax rate was the
same for fiscal 1999 and 1998.
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
The Company remained in a strong, liquid position at March 31, 2000.
Current ratios were 4.4 and 4.8 at March 31, 2000 and March 31, 1999,
respectively. Working capital was $28,568,099 at March 31, 2000 and $25,776,002
at March 31, 1999.
13
15
FRIEDMAN INDUSTRIES, INCORPORATED
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL (CONTINUED)
The Company has a credit arrangement with a bank which provides for a
revolving line of credit facility (the "revolving facility") and a term credit
facility (the "term facility"). Pursuant to the revolving facility which expires
April 1, 2002, the Company may borrow up to $8 million at an interest rate no
greater than the bank's prime rate. At March 31, 2000, the Company had
borrowings outstanding under the revolving facility of $6 million. The term
facility included borrowings of $1.2 million from the previous term note and
also provided for additional advances up to $3.5 million, all of which converted
to a term loan on December 31, 1998. The amount outstanding under the term
facility bears interest at a stated rate of LIBOR plus 1.25% and requires
quarterly principal payments of $200,000 plus accrued interest through March 1,
2003. In July 1997, the Company entered into a swap transaction with the bank
pursuant to which it exchanged the term facility's LIBOR-based interest rate
obligation for a fixed interest rate obligation of 8% to remain in effect for
the entire term of the term facility. As of March 31, 2000, the principal amount
of indebtedness outstanding under the term facility was $2.4 million.
The Company believes that its cash flow from operations and borrowing
capability under its line of credit and term debt facilities are adequate to
fund its expected cash requirements for the year ended March 31, 2001.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1996) and that involve risk and uncertainty. These forward-looking
statements may include, but are not limited to, future results of operations,
future production capacity and product quality. Forward-looking statements may
be made by management orally or in writing including, but not limited to, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of the Company's filings with the Securities and
Exchange Commission under the Securities Act of 1933 and the Securities Exchange
Act of 1934. Actual results and trends in the future may differ materially
depending on a variety of factors including but not limited to, the success of
the Company's capital improvements at its Hickman, Arkansas facility, changes in
the demand and prices for the Company's products and changes in the demand for
steel and steel products in general, and the Company's success in executing its
internal operating plans.
EFFECT OF YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programming being written
using two digits rather than four to define the applicable year. Any of the
Company's systems, as well as those of key vendors, payors and customers, that
have date sensitive logic may interpret a date using "00" as the year 1900
rather than 2000. This may cause inaccurate processing or possible system
failure and may potentially disrupt operations. This disruption may result in,
among other things, a temporary inability to process transactions, send bills
for services or engage in similar normal business activities. To date, the Year
2000 issue has not resulted in significant operational or financial problems for
the Company. The Company is not aware of any significant problems experienced by
its suppliers, third-party payors or customers as a result of the Year 2000
issue, but the Company will continue to communicate with such parties regarding
any possible problems. The foregoing statements are intended to be and hereby
are designated "Year 2000 Readiness Disclosure Statements" within the meaning of
the Year 2000 Information and Readiness Disclosure Act.
14
16
FRIEDMAN INDUSTRIES, INCORPORATED
TEN YEAR FINANCIAL SUMMARY
YEAR ENDED MARCH 31
--------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------ -----------
Net sales......................... $120,267,809 $124,719,640 $148,840,724 $119,920,966 $106,849,181 $97,968,805
Earnings.......................... $ 2,506,801 $ 3,540,811 $ 4,809,992 $ 3,630,071 $ 2,836,768 $ 2,458,132
Current assets.................... $ 36,945,378 $ 32,534,040 $ 39,347,548 $ 33,357,160 $ 27,524,670 $25,956,555
Current liabilities............... $ 8,377,279 $ 6,758,038 $ 13,437,178 $ 10,172,672 $ 6,410,527 $ 5,816,334
Net working capital............... $ 28,568,099 $ 25,776,002 $ 25,910,370 $ 23,184,488 $ 21,114,143 $20,140,221
Total assets...................... $ 45,106,790 $ 41,023,377 $ 46,039,361 $ 38,117,191 $ 32,812,986 $32,074,862
Stockholders' equity.............. $ 28,622,951 $ 27,422,779 $ 25,732,957 $ 22,781,959 $ 20,428,936 $18,722,781
Earnings as a percent of
Net sales..................... 2.1 2.8 3.2 3.0 2.7 2.5
Stockholders' equity.......... 8.8 12.9 18.7 15.9 13.9 13.1
Average number of common shares
outstanding: Basic(2)........... 7,547,624 7,528,702 7,512,901 7,489,943 7,446,076 7,444,041
Per share
Net earnings per share:
Basic(2)...................... $ 0.33 $ 0.47 $ 0.64 $ 0.48 $ 0.38 $ 0.33
Stockholders' equity(2)......... $ 3.79 $ 3.64 $ 3.43 $ 3.04 $ 2.74 $ 2.52
Cash dividends per common
share(2)........................ $ 0.18 $ 0.25 $ 0.25 $ 0.18 $ 0.15 $ 0.16
Stock dividend declared........... 5% 5% 5% 5% 5% 5%
YEAR ENDED MARCH 31
------------------------------------------------------
1994 1993 1992 1991
----------- ----------- ----------- -----------
Net sales......................... $70,908,065 $56,230,967 $42,609,330 $50,264,851
Earnings.......................... $ 1,691,075(1) $ 806,272 $ 483,720 $ 866,259
Current assets.................... $21,014,281 $16,542,769 $15,537,203 $16,826,544
Current liabilities............... $ 5,534,143 $ 3,549,495 $ 2,849,637 $ 2,501,178
Net working capital............... $15,480,138 $12,993,274 $12,687,566 $14,325,366
Total assets...................... $27,184,421 $20,491,441 $19,619,875 $20,936,487
Stockholders' equity.............. $17,430,337 $16,528,543 $16,277,792 $16,274,914
Earnings as a percent of
Net sales..................... 2.4 1.4 1.1 1.7
Stockholders' equity.......... 9.7 4.9 3.0 5.3
Average number of common shares
outstanding: Basic(2)........... 7,440,888 7,440,328 7,440,328 7,440,328
Per share
Net earnings per share:
Basic(2)...................... $ 0.23(1) $ 0.11 $ 0.07 $ 0.12
Stockholders' equity(2)......... $ 2.34 $ 2.22 $ 2.19 $ 2.19
Cash dividends per common
share(2)........................ $ 0.11 $ 0.07 $ 0.07 $ 0.10
Stock dividend declared........... 5% 5% 5% 5%
- ------------
(1) Includes the cumulative effect of accounting changes which increased net
earnings $77,000 ($.01 per share).
(2) Adjusted for stock dividends.
17
[FRIEDMAN INDUSTRIES, INCORPORATED LOGO]