EXHIBIT 13.1
THE COMPANY'S ANNUAL
REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED MARCH 31, 2002
FRIEDMAN
INDUSTRIES
INCORPORATED
2002
ANNUAL REPORT
FRIEDMAN INDUSTRIES, INCORPORATED
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
2002 2001
------------ ------------
Net sales................................ $97,817,956 $120,395,583
Net earnings............................. $940,039 $2,927,582
Net earnings per share (Basic)........... $0.12 $0.39
Cash dividends per share................. $0.11 $0.16
Stockholders' equity..................... $30,491,351 $30,378,150
Stockholders' equity per share (Basic)... $4.03 $4.01
Working capital.......................... $25,009,882 $27,959,527
</Table>
TO OUR SHAREHOLDERS:
The Company, and the steel industry in general, experienced a very
difficult year due primarily to soft market conditions for steel products and
services. During the year, many steel companies ceased operations and/or
declared bankruptcy and, as can be seen above in the financial highlights, the
Company's performance was adversely affected by these conditions.
The Houston coil processing facility was closed in November 2001.
Management believed that the capital required to run this facility could be more
efficiently deployed in other Company business.
In December 2001, the Company formed the XSCP Division, which is located
adjacent to the Company's coil processing facility in Hickman, Arkansas. XSCP
Division purchases and markets excess prime and secondary hot-rolled steel coils
received from Nucor Steel Company.
Finally, I regret to report the death of Henry Spira, a director of the
Company since 1965. Mr. Spira died on June 14, 2002 at the age of 97. Mr. Spira
had been associated with the Company since 1941. Those who knew him appreciated
his honesty, integrity and good judgment. He will be greatly missed.
You are cordially invited to attend the Annual Meeting of Shareholders to
be held on September 4, 2002. The meeting will be held at 11:00 a.m. in the
office of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas.
Sincerely,
/s/ JACK FRIEDMAN
Jack Friedman
Chairman of the Board
and Chief Executive Officer
1
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
Howard Henderson
Vice President of Operations -- Texas Tubular Division
Robert Sparkman
Vice President of Sales -- Coil Divisions
Dan Vivian
Vice President of Operations -- Hickman Coil Facility
William Walker
Vice President of Sales -- Texas Tubular Division
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
www.friedmanindustries.com
COUNSEL
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
AUDITORS
Ernst & Young LLP
1221 McKinney, Suite 2400
Houston, Texas 77010
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10007
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
Counsel, 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
Kirk K. Weaver
Chairman of the Board and
Chief Executive Officer,
LTI Technologies, Inc.
(technical services)
Houston, Texas
Joe L. Williams
Chairman and Chief Executive Officer,
Wisenberg Insurance + Risk Management
(insurance and risk management)
Houston, Texas
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, 2002 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.
2
FRIEDMAN INDUSTRIES, INCORPORATED
DESCRIPTION OF BUSINESS
Friedman Industries, Incorporated is in the pipe manufacturing and
processing, steel processing and steel and pipe distribution business.
At its facilities in Lone Star, 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. Since
December 2001, through its newly-formed XSCP Division located in Hickman,
Arkansas, the Company also purchases and markets excess prime and secondary
hot-rolled coils received from Nucor Steel Company ("NSC"). 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 NSC. Loss of LSS or NSC as a source of coil supply could have a
material adverse effect on the Company's business.
The Company sells its coil products and processing services directly
through the Company's own sales force to approximately 360 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 Division located in Lone
Star, Texas, manufactures, purchases, processes and markets tubular products
("pipe"). The Company sells pipe nationally to approximately 340 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 such 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 two product and
service groups, coil and tubular products, is contained in Note 7 of Notes to
the Company's Consolidated Financial Statements appearing herein.
------------------
RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK
<Table>
<Caption>
FISCAL 2002 FISCAL 2001
---------------- -------------------
HIGH LOW HIGH LOW
---- ---- ----- ------
First Quarter............................................... 3.49 2.66 4.00 3.0625
Second Quarter.............................................. 3.32 2.21 4.25 3.0625
Third Quarter............................................... 2.75 2.30 3.875 2.75
Fourth Quarter.............................................. 2.75 2.35 2.89 2.75
</Table>
------------------
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
<Table>
<Caption>
FISCAL 2002 FISCAL 2001
----------- -----------
First Quarter............................................... $.04 $.04
Second Quarter.............................................. $.03 $.04
Third Quarter............................................... $.03 $.04
Fourth Quarter.............................................. $.01 $.04
</Table>
------------------
The Company's Common Stock is traded principally on the American Stock
Exchange (trading symbol FRD).
The approximate number of shareholders of record of the Company as of April
26, 2002 was 530.
3
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<Table>
<Caption>
MARCH 31
----------------------------
2002 2001
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 4,683,894 $ 669,076
Accounts receivable.................................... 7,485,217 10,584,735
Inventories............................................ 23,502,201 28,817,375
Other.................................................. 135,676 160,143
------------ ------------
TOTAL CURRENT ASSETS.............................. 35,806,988 40,231,329
PROPERTY, PLANT AND EQUIPMENT:
Land................................................... 221,543 221,543
Buildings and yard improvements........................ 3,981,154 3,346,912
Machinery and equipment................................ 16,910,763 16,458,899
Less accumulated depreciation.......................... (13,963,024) (13,201,590)
------------ ------------
7,150,436 6,825,764
OTHER ASSET:
Cash value of officers' life insurance................. 1,029,031 953,419
------------ ------------
TOTAL ASSETS...................................... $ 43,986,455 $ 48,010,512
============ ============
</Table>
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
MARCH 31
----------------------------
2002 2001
------------ ------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 9,353,386 $ 10,443,848
Current portion of long-term debt...................... 833,750 800,000
Dividends payable...................................... 75,710 302,746
Income taxes payable................................... 87,472 127,209
Contribution to profit sharing plan.................... 260,000 288,000
Employee compensation and related expenses............. 186,788 309,999
------------ ------------
TOTAL CURRENT LIABILITIES......................... 10,797,106 12,271,802
LONG-TERM DEBT, less current portion........................ 2,053,438 4,800,000
DEFERRED INCOME TAXES....................................... 481,560 447,560
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 163,000 113,000
STOCKHOLDERS' EQUITY:
Common stock, par value $1:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 7,571,239 in 2002
and 7,568,839 in 2001............................. 7,571,239 7,568,839
Additional paid-in capital............................. 27,707,309 27,703,829
Retained deficit....................................... (4,787,197) (4,894,518)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................ 30,491,351 30,378,150
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 43,986,455 $ 48,010,512
============ ============
</Table>
See accompanying notes.
4
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
<Table>
<Caption>
YEAR ENDED MARCH 31
-----------------------------------------
2002 2001 2000
----------- ------------ ------------
Sales........................................... $97,817,956 $120,395,583 $120,267,809
Costs and expenses:
Cost of products sold...................... 91,890,596 110,855,198 111,602,851
Selling, general and administrative........ 4,317,313 4,686,085 4,479,215
Interest expense........................... 278,719 624,431 546,160
----------- ------------ ------------
96,486,628 116,165,714 116,628,226
----------- ------------ ------------
1,331,328 4,229,869 3,639,583
Interest and other income....................... 92,974 205,862 158,602
----------- ------------ ------------
EARNINGS BEFORE FEDERAL INCOME
TAXES............................... 1,424,302 4,435,731 3,798,185
Federal income taxes:
Current.................................... 450,263 1,454,149 1,227,384
Deferred................................... 34,000 54,000 64,000
----------- ------------ ------------
484,263 1,508,149 1,291,384
----------- ------------ ------------
NET EARNINGS.......................... $ 940,039 $ 2,927,582 $ 2,506,801
=========== ============ ============
Average number of common shares outstanding:
Basic......................................... 7,571,239 7,568,839 7,547,624
Diluted....................................... 7,571,239 7,568,839 7,547,624
Net earnings per share:
Basic......................................... $ .12 $ .39 $ .33
Diluted....................................... $ .12 $ .39 $ .33
</Table>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<Table>
<Caption>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
---------- ----------- -----------
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)
Net earnings...................................... -- -- 2,927,582
Exercise of stock options......................... 19,547 11,924 --
Issuance of Directors' shares..................... 2,000 5,500 --
Stock dividend (5%)............................... 359,079 807,928 (1,167,007)
Cash dividends ($0.16 per share).................. -- -- (1,211,354)
---------- ----------- -----------
BALANCE AT MARCH 31, 2001............... 7,568,839 27,703,829 (4,894,518)
Net earnings...................................... -- -- 940,039
Issuance of Directors' shares..................... 2,400 3,480 --
Cash dividends ($0.11 per share).................. -- -- (832,718)
---------- ----------- -----------
BALANCE AT MARCH 31, 2002............... $7,571,239 $27,707,309 $(4,787,197)
========== =========== ===========
</Table>
See accompanying notes.
5
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED MARCH 31
---------------------------------------
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings....................... $ 940,039 $ 2,927,582 $ 2,506,801
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation.................. 903,050 1,047,579 1,043,103
Directors' shares issued...... 5,830 7,500 7,750
Benefit from deferred taxes... 34,000 54,000 64,000
Gains on disposal of property,
plant and equipment......... (24,660) -- --
Changes in operating assets and
liabilities:
Accounts receivable........... 3,099,518 2,948,815 (4,823,822)
Inventories................... 5,315,174 (5,906,866) (3,004,339)
Other assets.................. 24,467 (102,642) 61,706
Accounts payable and accrued
expenses.................... (1,090,462) 3,996,310 1,607,978
Contribution to profit sharing
plan........................ (28,000) 14,000 22,000
Employee compensation and
related expenses............ (73,211) (1,314) (76,080)
Federal income taxes
payable..................... (39,737) (129,697) 188,384
----------- ----------- -----------
Net cash provided by (used in)
operating activities........ 9,066,008 4,855,267 (2,402,519)
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment........................ (1,245,180) (399,263) (225,838)
Proceeds from sale of asset........ 42,118 -- --
Increase in cash value of officers'
life insurance................... (75,612) (98,500) (62,710)
----------- ----------- -----------
Net cash used in investing
activities.................. (1,278,674) (497,763) (288,548)
FINANCING ACTIVITIES
Cash dividends paid................ (1,059,704) (1,195,051) (1,488,670)
Proceeds from borrowings of
long-term debt................... 101,250 -- 5,000,000
Principal payments on long-term
debt............................. (2,814,062) (2,800,000) (3,800,000)
Payments on loans against life
insurance........................ -- (167,587) (426,630)
Cash paid on fractional shares from
stock dividend................... -- (1,079) (1,437)
Cash received from exercised stock
options.......................... -- 31,471 52,687
----------- ----------- -----------
Net cash used in financing
activities.................. (3,772,516) (4,132,246) (664,050)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents........ 4,014,818 225,258 (3,355,117)
Cash and cash equivalents at
beginning of year................ 669,076 443,818 3,798,935
----------- ----------- -----------
Cash and cash equivalents at
end of year................. $ 4,683,894 $ 669,076 $ 443,818
=========== =========== ===========
</Table>
See accompanying notes.
6
FRIEDMAN INDUSTRIES, INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2002
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 when title transfers which is
generally upon shipment of products. Costs associated with shipping and handling
of products are included in cost of products sold.
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:
<Table>
<Caption>
YEAR ENDED MARCH 31
-------------------------
2002 2001
----------- -----------
Coil.................................................... $ 7,883,776 $12,106,418
Tubular................................................. 15,618,425 16,710,957
----------- -----------
$23,502,201 $28,817,375
=========== ===========
</Table>
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. The carrying
value of LIFO inventories, net of lower of cost or market reserves of $600,000
at March 31, 2002, approximated the FIFO value. There were no lower of cost or
market reserves at March 31, 2001.
During the year ended March 31, 2002, coil inventory quantities were
reduced. This reduction resulted in liquidation of LIFO inventory quantities
being carried at higher costs prevailing in prior years as compared with the
costs of fiscal 2002 purchases, the effect of which was not material to the
financial statements.
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.
SUPPLEMENTAL CASH FLOW INFORMATION: The Company paid interest of
approximately $278,700 in 2002, $637,300 in 2001, and $560,000 in 2000. The
Company paid income taxes, net of refunds, of $408,900 in 2002, $1,583,800 in
2001, and $1,039,000 in 2000.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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: Financial instruments include accounts receivable,
accounts payable, revolving loans payable, long-term debt and an interest rate
swap agreement. Management believes the fair value of accounts receivable and
accounts payable approximates their carrying value due to their short-term
nature. The fair value of revolving loans payable and long-term debt is
estimated to approximate the carrying amount at March 31, 2002. The Company has
certain off
7
FRIEDMAN INDUSTRIES, INCORPORATED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
balance sheet obligations, including operating leases, which are not material to
the financial statements.
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 $12.5 million, $17.0 million, and $11.0 million in 2002, 2001 and
2000, respectively. Loss of LSS as a customer could have a material adverse
effect on the Company's business.
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 condition of its customers
and generally does not require collateral. Generally, receivables are due within
30 days.
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, 273,714 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):
<Table>
<Caption>
2002 2001 2000
-------------------- ------------------- -------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
-------- -------- ------- -------- ------- --------
Outstanding at beginning of year......... 400,048 $4.14 419,593 $4.02 437,174 $3.98
Granted.................................. 27,959 $2.45 -- -- -- --
Exercised................................ -- -- (19,547) $1.62 (17,581) $2.99
Canceled................................. (273,714) $4.59 -- $ -- -- $ --
-------- ----- ------- ----- ------- -----
Outstanding at end of year............... 154,293 $3.01* 400,046 $4.14 419,593 $4.02
======== ======= =======
Exercisable at end of year............... 154,293 $3.01 400,046 $4.14 419,593 $4.02
Weighted average fair value of options
granted during the year................ $ .61 N/A N/A
</Table>
* Range of $2.45 to $4.73 per share and a weighted average remaining life of 5.0
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 Statements of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, net earnings and
earnings per share would have been reduced by 1.14%, 0.0%, and 0.7% in 2002,
2001, and 2000, 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 3.4%, a dividend yield of 3.3%,
volatility factor of the expected market price of the Company's common stock of
0.37, 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
8
FRIEDMAN INDUSTRIES, INCORPORATED
2. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
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, 2004, the Company may borrow up to $10 million at an interest
rate no greater than the bank's prime rate. At March 31, 2002, the Company had
borrowings outstanding under the revolving facility of $2 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. As of March 31, 2002, the principal
amount of indebtedness outstanding under the term credit facility was $800,000.
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. The effect of the swap is not
significant. The annual principal payments required on long-term debt during the
next five years are as follows:
<Table>
2003........................................................ $ 833,750
2004........................................................ 2,034,950
2005........................................................ 18,488
2006........................................................ --
2007........................................................ --
----------
Total.................................................. $2,887,188
==========
</Table>
In July 1995, the Company borrowed against the cash surrender value of
officers' life insurance policies (the "borrowings"). The Company repaid
$167,587 of the loans against the cash surrender value of officers' life
insurance policies during the year ended March 31, 2001. At March 31, 2002, the
Company owed $111,043 at an interest rate of 5% relative to the borrowings. 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. EARNINGS PER SHARE
Basic and dilutive net income per share is computed based on the following
information:
<Table>
<Caption>
YEAR ENDED MARCH 31
------------------------------------
2002 2001 2000
---------- ---------- ----------
BASIC
Net income................................... $ 940,039 $2,927,582 $2,506,801
========== ========== ==========
Average common shares........................ 7,571,239 7,568,839 7,547,624
========== ========== ==========
DILUTIVE
Net income................................... $ 940,039 $2,927,582 $2,506,801
========== ========== ==========
Average common shares........................ 7,571,239 7,568,839 7,547,624
Common share equivalents:
Warrants................................... -- -- --
Options.................................... -- -- --
---------- ---------- ----------
Total common share equivalents............... -- -- --
---------- ---------- ----------
Average common shares and common
equivalents................................ 7,571,239 7,568,839 7,547,624
========== ========== ==========
</Table>
9
FRIEDMAN INDUSTRIES, INCORPORATED
5. 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 (liabilities) are as follows:
<Table>
<Caption>
MARCH 31
---------------------
2002 2001
--------- ---------
DEFERRED TAX LIABILITIES:
Depreciation...................................... $(633,650) $(607,560)
--------- ---------
Total deferred tax liabilities...................... (633,650) (607,560)
DEFERRED TAX ASSETS:
Inventory capitalization.......................... 90,264 95,621
Postretirement benefits other than pensions....... 21,420 38,420
Other............................................. 40,406 25,959
--------- ---------
Total deferred tax assets........................... 152,090 160,000
--------- ---------
Net deferred tax liabilities........................ $(481,560) $(447,560)
========= =========
</Table>
6. PROFIT SHARING PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company has a defined contribution 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 $260,000 for
the year ended March 31, 2002, $288,000 for the year ended March 31, 2001, and
$274,000 for the year ended March 31, 2000. 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.
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 $30,500,
$39,000 and $40,000 for the years ended March 31, 2002, 2001, and 2000,
respectively.
7. INDUSTRY SEGMENT DATA
The Company is engaged in pipe manufacturing and processing, steel
processing and steel and pipe distribution. Within the Company, there are two
product and service groups: coil and tubular products. Coil products involves
converting steel coils into flat sheet and plate steel cut to customer
specifications and reselling steel coils. Through its Texas Tubular Division,
the Company manufactures, purchases, processes and markets tubular products.
10
FRIEDMAN INDUSTRIES, INCORPORATED
7. INDUSTRY SEGMENT DATA (CONTINUED)
The following is a summary of significant financial information relating to
the product and service groups:
<Table>
<Caption>
YEAR ENDED MARCH 31
-----------------------------------------
2002 2001 2000
----------- ------------ ------------
NET SALES:
Coil.......................................... $51,880,290 $ 68,517,334 $ 77,842,307
Tubular....................................... 45,937,666 51,878,249 42,425,502
----------- ------------ ------------
TOTAL NET SALES....................... $97,817,956 $120,395,583 $120,267,809
=========== ============ ============
OPERATING PROFIT:
Coil.......................................... $ 416,998 $ 1,028,425 $ 1,950,771
Tubular....................................... 2,285,873 5,034,620 3,414,479
----------- ------------ ------------
TOTAL OPERATING PROFIT................ 2,702,871 6,063,045 5,365,250
Corporate expenses............................ (1,092,824) (1,208,745) (1,179,506)
Interest expense.............................. (278,719) (624,431) (546,160)
Interest and other income..................... 92,974 205,862 158,601
----------- ------------ ------------
TOTAL EARNINGS BEFORE TAXES........... $ 1,424,302 $ 4,435,731 $ 3,798,185
=========== ============ ============
IDENTIFIABLE ASSETS:
Coil.......................................... $18,489,064 $ 23,914,639 $ 25,728,057
Tubular....................................... 19,703,080 22,374,098 18,183,058
----------- ------------ ------------
38,192,144 46,288,737 43,911,115
General corporate assets...................... 5,794,311 1,721,775 1,195,675
----------- ------------ ------------
TOTAL ASSETS.......................... $43,986,455 $ 48,010,512 $ 45,106,790
=========== ============ ============
DEPRECIATION:
Coil.......................................... $ 723,812 $ 685,126 $ 701,526
Tubular....................................... 154,504 338,933 327,206
Corporate and other........................... 24,733 23,520 14,371
----------- ------------ ------------
$ 903,049 $ 1,047,579 $ 1,043,103
=========== ============ ============
CAPITAL EXPENDITURES:
Coil.......................................... $ 1,106,403 $ 117,205 $ 116,172
Tubular....................................... 138,777 258,745 49,248
Corporate and other........................... -- 23,313 60,418
----------- ------------ ------------
$ 1,245,180 $ 399,263 $ 225,838
=========== ============ ============
</Table>
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 and
service groups.
11
FRIEDMAN INDUSTRIES, INCORPORATED
8. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended March 31, 2002 and 2001:
<Table>
<Caption>
Quarter Ended
-------------------------------------------------------
June 30 September 30 December 31 March 31
2001 2001 2001 2002
----------- ------------ ----------- -----------
Net sales....................... $27,885,663 $24,975,561 $20,483,410 $24,473,322
Gross profit.................... 1,871,493 1,698,707 781,671 1,575,489
Net earnings.................... 440,097 397,319 (194,189) 296,812
Net earnings per share:
Basic......................... 0.06 0.05 (0.03) 0.04
Diluted....................... 0.06 0.05 (0.03) 0.04
</Table>
<Table>
<Caption>
Quarter Ended
-------------------------------------------------------
June 30 September 30 December 31 March 31
2000 2000 2000 2001
----------- ------------ ----------- -----------
Net sales....................... $32,274,930 $31,064,827 $27,834,551 $29,221,275
Gross profit.................... 2,593,299 2,478,949 2,176,288 2,291,849
Net earnings.................... 805,518 804,679 645,590 671,795
Net earnings per share:
Basic(1)...................... 0.11 0.11 0.09 0.09
Diluted(1).................... 0.11 0.11 0.09 0.09
</Table>
(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.
12
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, 2002 and 2001, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2002. 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, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2002, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
May 17, 2002
Houston, Texas
------------------------------------------
SELECTED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED MARCH 31
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------- ------------- ------------- -------------
Net sales.......................... $ 97,817,956 $ 120,395,583 $ 120,267,809 $ 124,719,640 $ 148,840,724
Net earnings....................... 940,039 2,927,582 2,506,801 3,540,811 4,809,992
Total assets....................... 43,986,455 48,010,512 45,106,790 41,023,377 46,039,361
Long-term debt..................... 2,053,438 4,800,000 7,600,000 6,400,000 6,366,666
Stockholders' equity............... 30,491,351 30,378,150 28,622,951 27,422,779 25,732,957
Net earnings per share:
Basic............................ 0.12 0.39 0.33 0.47 0.64
Diluted.......................... 0.12 0.39 0.33 0.47 0.63
Cash dividends declared per share
adjusted for stock dividends..... 0.11 0.16 0.18 0.25 0.25
</Table>
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.
13
FRIEDMAN INDUSTRIES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 2002 compared to year ended March 31, 2001
During the year ended March 31, 2002, sales, cost of products sold and
gross profit decreased $22,577,627, $18,964,602 and $3,613,025, respectively,
from the comparable amounts recorded during the year ended March 31, 2001. Both
coil and tubular operations experienced decreased sales during fiscal 2002.
Sales of coil products and services declined approximately $16,637,000 due to a
decrease in tons sold of approximately 8% and a decrease in the average selling
price per ton of approximately 17%. Sales of tubular products declined
approximately $5,941,000 due primarily to a decrease in the average selling
price per ton of approximately 10%. During fiscal 2002, soft market conditions
and related lack of demand continued to have the effect of generating intense
competition for available sales which adversely affected coil and tubular
operations. Gross profit earned on sales of coil products and services and
tubular goods decreased approximately 28% and 43%, respectively. Management
believes the soft market conditions for the Company's products and services were
related to the overall weakness in the United States economy.
Selling, general and administrative costs declined $368,772 from the amount
recorded during fiscal 2001. This decline was associated primarily with variable
expenses related to volume and/or earnings.
Interest expense decreased $345,712 from the comparable amount recorded
during fiscal 2001. This decrease was related principally to reductions in
interest rates and debt associated with working capital requirements.
Interest and other income decreased $112,888 primarily as the result of
substantial decreases in interest rates paid on invested cash positions during
fiscal 2002.
Federal income taxes during fiscal 2002 decreased $1,023,886 from the
comparable amount recorded during fiscal 2001. This decrease was related to the
decline in earnings before taxes as the effective tax rates were the same for
both years.
Year ended March 31, 2001 compared to year ended March 31, 2000
During the year ended March 31, 2001, sales increased $127,774 and cost of
products sold decreased $747,653 from the comparable amounts recorded during the
year ended March 31, 2000, which resulted in an increase in gross profit of
$875,427. Gross profit earned on tubular sales increased $1,792,702 but was
partially offset by a decline of $917,275 in gross profit earned on coil sales.
Tubular operations benefited from improved market conditions during fiscal 2001
and recorded an increase in tons shipped of approximately 16%. Conversely, soft
market conditions for coil products had the effect of generating intense
competition for available sales and decreasing gross profit. Tons of coil
products sold during fiscal 2001 declined approximately 13%. Gross profit as a
percent of sales was 7.2% and 7.9% during fiscal 2000 and 2001, respectively.
This improvement was associated primarily with improved tubular operations as
noted above.
Interest expense increased $78,271 from the amount recorded during fiscal
2000. This increase was related primarily to an increase in debt associated with
working capital requirements.
Interest and other income increased $47,260 from the amount recorded during
fiscal 2000. This increase resulted primarily from other income associated with
the increase in the cash surrender value of life insurance policies.
Federal income taxes increased $216,765 as the result of the increase in
earnings before taxes. The effective tax rates were the same for both fiscal
2001 and 2000.
14
FRIEDMAN INDUSTRIES, INCORPORATED
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
The Company remained in a strong, liquid position at March 31, 2002.
Current ratios were 3.32 and 3.28 at March 31, 2002 and March 31, 2001,
respectively. Working capital was $25,009,882 at March 31, 2002 and $27,959,527
at March 31, 2001. During fiscal 2002, the Company maintained assets and
liabilities at levels it believed were commensurate with operations.
Accordingly, several components comprising working capital at March 31, 2002 and
March 31, 2001 changed substantially. Cash increased $4,014,818 and accounts
receivable, inventories and accounts payable declined $3,099,518, $5,315,174 and
$1,090,462, respectively. Also, the Company reduced its long term debt by
$2,746,562. The Company expects to continue to monitor and evaluate these
balance sheet components depending on changes in market conditions and the
Company's operations.
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, 2004, the Company may borrow up to $10 million at an interest rate no
greater than the bank's prime rate. At March 31, 2002, the Company had
borrowings outstanding under the revolving facility of $2 million. 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,
2002, the principal amount of indebtedness outstanding under the term facility
was $.8 million.
In November 2001, the Company ceased operations at its coil facility in
Houston, Texas. Management believed that the capital required to run the
facility could be more efficiently deployed in other Company business. No loss
was incurred as a result of this closure and the Company intends to sell or
relocate the assets of the Houston facility.
During fiscal 2002, the Company invested approximately $1,100,000 in
capital asset additions related to its newly-formed XSCP Division.
Notwithstanding the current market conditions, the Company believes that
its cash flow from operations and borrowing capability under its revolving line
of credit facility are adequate to fund its expected cash requirements for the
next 24 months.
INFLATION
During fiscal 2002, the Company believes that inflation had little effect
on its operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not material
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Our only accounting policy which requires significant
estimates and judgments is the valuation of LIFO inventories in our quarterly
reporting. Our quarterly valuation of inventory requires estimates of the year
end quantities which is inherently difficult. Historically, these estimates have
been materially correct. On an on-going basis, we evaluate estimates and
judgments. We based our estimates on historical experience and on various other
assumptions that we believed to be reasonable under the circumstances.
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 changes in the
demand and prices for the Company's products, changes in the demand for steel
and steel products in general, and the Company's success in executing its
internal operating plans.
15
FRIEDMAN INDUSTRIES, INCORPORATED
TEN YEAR FINANCIAL SUMMARY
<Table>
<Caption>
YEAR ENDED MARCH 31
--------------------------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
----------- ------------ ------------ ------------ ------------ ------------
Net sales....................... $97,817,956 $120,395,583 $120,267,809 $124,719,640 $148,840,724 $119,920,966
Earnings........................ $ 940,039 $ 2,927,582 $ 2,506,801 $ 3,540,811 $ 4,809,992 $ 3,630,071
Current assets.................. $35,806,988 $ 40,231,329 $ 36,945,378 $ 32,534,040 $ 39,347,548 $ 33,357,160
Current liabilities............. $10,797,106 $ 12,271,802 $ 8,377,279 $ 6,758,038 $ 13,437,178 $ 10,172,672
Net working capital............. $25,009,882 $ 27,959,527 $ 28,568,099 $ 25,776,002 $ 25,910,370 $ 23,184,488
Total assets.................... $43,986,455 $ 48,010,512 $ 45,106,790 $ 41,023,377 $ 46,039,361 $ 38,117,191
Stockholders' equity............ $30,491,351 $ 30,378,150 $ 28,622,951 $ 27,422,779 $ 25,732,957 $ 22,781,959
Earnings as a percent of
Net sales................... 1.0 2.4 2.1 2.8 3.2 3.0
Stockholders' equity........ 3.1 9.6 8.8 12.9 18.7 15.9
Average number of common shares
outstanding: Basic(2)......... 7,571,239 7,568,839 7,547,624 7,528,702 7,512,901 7,489,943
Per share
Net earnings per share:
Basic(2).................... $ .12 $ 0.39 $ 0.33 $ 0.47 $ 0.64 $ 0.48
Stockholders' equity(2)....... $4.03 $ 4.01 $ 3.79 $ 3.64 $ 3.43 $ 3.04
Cash dividends per common
share(2)...................... $0.11 $ 0.16 $ 0.18 $ 0.25 $ 0.25 $ 0.18
Stock dividend declared......... -- -- 5% 5% 5% 5%
<Caption>
YEAR ENDED MARCH 31
-------------------------------------------------------
1996 1995 1994 1993
------------ ----------- ----------- -----------
Net sales....................... $106,849,181 $97,968,805 $70,908,065 $56,230,967
Earnings........................ $ 2,836,768 $ 2,458,132 $ 1,691,075(1) $ 806,272
Current assets.................. $ 27,524,670 $25,956,555 $21,014,281 $16,542,769
Current liabilities............. $ 6,410,527 $ 5,816,334 $ 5,534,143 $ 3,549,495
Net working capital............. $ 21,114,143 $20,140,221 $15,480,138 $12,993,274
Total assets.................... $ 32,812,986 $32,074,862 $27,184,421 $20,491,441
Stockholders' equity............ $ 20,428,936 $18,722,781 $17,430,337 $16,528,543
Earnings as a percent of
Net sales................... 2.7 2.5 2.4 1.4
Stockholders' equity........ 13.9 13.1 9.7 4.9
Average number of common shares
outstanding: Basic(2)......... 7,446,076 7,444,041 7,440,888 7,440,328
Per share
Net earnings per share:
Basic(2).................... $ 0.38 $ 0.33 $ 0.23(1) $ 0.11
Stockholders' equity(2)....... $ 2.74 $ 2.52 $ 2.34 $ 2.22
Cash dividends per common
share(2)...................... $ 0.15 $ 0.16 $ 0.11 $ 0.07
Stock dividend declared......... 5% 5% 5% 5%
</Table>
- ------------
(1) Includes the cumulative effect of accounting changes which increased net
earnings $77,000 ($.01 per share).
(2) Adjusted for stock dividends.
Friedman
Industries
Incorporated
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