EXHIBIT 13.1
THE COMPANY'S ANNUAL
REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED MARCH 31, 2003
FRIEDMAN
INDUSTRIES
INCORPORATED
2003
ANNUAL REPORT
FRIEDMAN INDUSTRIES, INCORPORATED
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
2003 2002
------------ -----------
Net sales................................. $106,082,738 $97,817,956
Net earnings.............................. $1,432,017 $940,039
Net earnings per share (Basic)............ $0.19 $0.12
Cash dividends per share.................. $0.09 $0.11
Stockholders' equity...................... $31,246,751 $30,491,351
Stockholders' equity per share (Basic).... $4.13 $4.03
Working capital........................... $23,734,112 $25,009,882
</Table>
TO OUR SHAREHOLDERS:
During fiscal 2003, the steel industry suffered from soft market conditions
and related lack of demand. Soft market conditions have characterized the
industry for more than two years. Through this period, your Company has remained
profitable, which has allowed continued payment of cash dividends. The Company
has been public for 31 years and has declared 124 consecutive quarterly cash
dividends.
The steel industry continues to struggle. The consolidation of the industry
is a "work in progress" as we enter fiscal 2004.
You are cordially invited to attend the Annual Meeting of Shareholders to
be held on September 10, 2003. The meeting will be held at 11:00 a.m. in the
offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, 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
Charles W. Hall
Assistant Secretary
COMPANY OFFICES AND WEB SITE
CORPORATE 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
1401 McKinney, Suite 1200
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
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
Business advisor
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, 2003 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 engaged in pipe manufacturing and
processing, steel processing and steel and pipe distribution.
At its facilities in Lone Star, Texas, and Hickman, Arkansas, the Company
processes 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. In addition, through its XSCP Division
located in Hickman, Arkansas, the Company purchases and markets non-standard
hot-rolled coils received from Nucor Steel Company ("NSC"). 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 310 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 320 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 2003 FISCAL 2002
---------------- ----------------
HIGH LOW HIGH LOW
---- ---- ---- ----
First Quarter............................................... 3.09 2.55 3.49 2.66
Second Quarter.............................................. 2.88 2.37 3.32 2.21
Third Quarter............................................... 2.53 2.30 2.75 2.30
Fourth Quarter.............................................. 2.55 2.34 2.75 2.35
</Table>
------------------
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
<Table>
<Caption>
FISCAL 2003 FISCAL 2002
----------- -----------
First Quarter............................................... $.02 $.04
Second Quarter.............................................. $.02 $.03
Third Quarter............................................... $.03 $.03
Fourth Quarter.............................................. $.02 $.01
</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
25, 2003 was 530.
3
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<Table>
<Caption>
MARCH 31
----------------------------
2003 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 673,127 $ 4,683,894
Accounts receivable, net of allowance of $7,276 in both
years................................................ 9,966,061 7,485,217
Inventories............................................ 24,032,268 23,502,201
Other.................................................. 98,044 135,676
------------ ------------
TOTAL CURRENT ASSETS.............................. 34,769,500 35,806,988
PROPERTY, PLANT, AND EQUIPMENT:
Land................................................... 437,793 221,543
Buildings and yard improvements........................ 4,063,579 3,981,154
Machinery and equipment................................ 17,216,823 16,910,763
Less accumulated depreciation.......................... (14,930,027) (13,963,024)
------------ ------------
6,788,168 7,150,436
OTHER ASSET:
Cash value of officers' life insurance................. 1,221,258 1,029,031
------------ ------------
TOTAL ASSETS...................................... $ 42,778,926 $ 43,986,455
============ ============
</Table>
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
MARCH 31
----------------------------
2003 2002
------------ ------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 9,870,888 $ 9,353,386
Current portion of long-term debt...................... 68,496 833,750
Dividends payable...................................... 151,460 75,710
Income taxes payable................................... 406,620 87,472
Contribution to profit sharing plan.................... 260,000 260,000
Employee compensation and related expenses............. 277,924 186,788
------------ ------------
TOTAL CURRENT LIABILITIES......................... 11,035,388 10,797,106
LONG-TERM DEBT, less current portion........................ 57,329 2,053,438
DEFERRED INCOME TAXES....................................... 283,458 481,560
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 156,000 163,000
STOCKHOLDERS' EQUITY:
Common stock, par value $1:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 7,573,239 in 2003
and 7,571,239 in 2002............................. 7,573,239 7,571,239
Additional paid-in capital............................. 27,710,369 27,707,309
Retained deficit....................................... (4,036,857) (4,787,197)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................ 31,246,751 30,491,351
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 42,778,926 $ 43,986,455
============ ============
</Table>
See accompanying notes.
4
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
<Table>
<Caption>
YEAR ENDED MARCH 31
-----------------------------------------
2003 2002 2001
------------ ----------- ------------
Sales........................................... $106,082,738 $97,817,956 $120,395,583
Costs and expenses:
Cost of products sold...................... 99,667,017 91,890,596 110,855,198
Selling, general, and administrative....... 4,283,973 4,317,313 4,686,085
Interest expense........................... 71,700 278,719 624,431
------------ ----------- ------------
104,022,690 96,486,628 116,165,714
------------ ----------- ------------
2,060,048 1,331,328 4,229,869
Interest and other income....................... 109,674 92,974 205,862
------------ ----------- ------------
EARNINGS BEFORE FEDERAL INCOME
TAXES............................... 2,169,722 1,424,302 4,435,731
Federal income taxes:
Current.................................... 935,807 450,263 1,454,149
Deferred................................... (198,102) 34,000 54,000
------------ ----------- ------------
737,705 484,263 1,508,149
------------ ----------- ------------
NET EARNINGS.......................... $ 1,432,017 $ 940,039 $ 2,927,582
============ =========== ============
Average number of common shares outstanding:
Basic......................................... 7,572,239 7,571,239 7,568,839
Diluted....................................... 7,589,900 7,571,239 7,568,839
Net earnings per share:
Basic......................................... $ .19 $ .12 $ .39
Diluted....................................... $ .19 $ .12 $ .39
</Table>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<Table>
<Caption>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
---------- ----------- -----------
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)
Net earnings...................................... -- -- 1,432,017
Issuance of Directors' shares..................... 2,000 3,060 --
Cash dividends ($0.09 per share).................. -- -- (681,677)
---------- ----------- -----------
BALANCE AT MARCH 31, 2003............... $7,573,239 $27,710,369 $(4,036,857)
========== =========== ===========
</Table>
See accompanying notes.
5
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED MARCH 31
---------------------------------------
2003 2002 2001
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings....................... $ 1,432,017 $ 940,039 $ 2,927,582
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation.................. 967,003 903,050 1,047,579
Directors' shares issued...... 5,060 5,830 7,500
Deferred taxes................ (198,102) 34,000 54,000
Change post retirement
benefits.................... (7,000) -- --
Gain on disposal of property,
plant, and equipment........ -- (24,660) --
Changes in operating assets and
liabilities:
Accounts receivable........... (2,480,844) 3,099,518 2,948,815
Inventories................... (530,067) 5,315,174 (5,906,866)
Other assets.................. 37,632 24,467 (102,642)
Accounts payable and accrued
expenses.................... 517,502 (1,090,462) 3,996,310
Contribution to profit sharing
plan........................ -- (28,000) 14,000
Employee compensation and
related expenses............ 91,136 (73,211) (1,314)
Federal income taxes
payable..................... 319,148 (39,737) (129,697)
----------- ----------- -----------
Net cash provided by operating
activities.................. 153,485 9,066,008 4,855,267
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment........................ (604,735) (1,245,180) (399,263)
Proceeds from sale of asset........ -- 42,118 --
Increase in cash value of officers'
life insurance................... (81,184) (75,612) (98,500)
----------- ----------- -----------
Net cash used in investing
activities.................. (685,919) (1,278,674) (497,763)
FINANCING ACTIVITIES
Cash dividends paid................ (605,782) (1,059,704) (1,195,051)
Proceeds from borrowings of
long-term debt................... 104,239 101,250 --
Principal payments on debt......... (2,865,747) (2,814,062) (2,800,000)
Payments on loans against life
insurance........................ (111,043) -- (167,587)
Cash paid on fractional shares from
stock dividend................... -- -- (1,079)
Cash received from exercised stock
options.......................... -- -- 31,471
----------- ----------- -----------
Net cash used in financing
activities.................. (3,478,333) (3,772,516) (4,132,246)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents........ (4,010,767) 4,014,818 225,258
Cash and cash equivalents at
beginning of year................ 4,683,894 669,076 443,818
----------- ----------- -----------
Cash and cash equivalents at
end of year................. $ 673,127 $ 4,683,894 $ 669,076
=========== =========== ===========
</Table>
See accompanying notes.
6
FRIEDMAN INDUSTRIES, INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2003
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.
The terms of all shipments made by the Company is free on board shipping point.
Costs associated with shipping and handling of products are included in cost of
products sold.
TRADE RECEIVABLES: The Company's receivables are recorded when billed,
advanced or accrued and represent claims against third parties that will be
settled in cash. The carrying value of the Company's receivables, net of the
allowance for doubtful accounts, represents their estimated net realizable
value. The Company estimates its allowance for doubtful accounts based on
historical collection trends, the age of outstanding receivables and existing
economic conditions. Past-due receivable balances are written-off when the
Company's internal collection efforts have been unsuccessful in collecting the
amount due.
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
-------------------------
2003 2002
----------- -----------
Coil.................................................... $ 8,468,582 $ 7,883,776
Tubular................................................. 15,563,686 15,618,425
----------- -----------
$24,032,268 $23,502,201
=========== ===========
</Table>
Inventories consist of prime coil, non-standard coil and tubular materials.
Prime coil inventory ("prime inventory") consists primarily of raw materials,
non-standard coil inventory consists primarily of finished goods and tubular
inventory consists of both raw materials and finished goods. Inventories are
valued at the lower of cost or replacement market. Cost for prime inventory is
determined under the last-in, first-out ("LIFO") method. Cost for tubular
inventory is determined using the weighted average method. Cost for non-standard
inventory is determined using the specific identification method. At March 31,
2003, LIFO replacement cost exceeded LIFO cost by approximately $990,000. At
March 31, 2002, replacement and LIFO costs were approximately the same.
Beginning April 1, 2002, the Company combined two prime inventory LIFO pools
into one LIFO pool to consolidate inventories of similar characteristics. There
was no cumulative effect and no material impact on income during each of the
last five fiscal years resulting from this combination.
During the year ended March 31, 2003, prime inventory quantities were
reduced. This reduction resulted in liquidation of LIFO inventory quantities
being carried at lower costs prevailing in prior years as compared with the
costs of fiscal 2003 purchases, the effect of which increased net earnings by
approximately $70,000.
PROPERTY, PLANT, AND EQUIPMENT: On April 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). That statement
requires that assets held-for-sale be recorded at the lower of their carrying
amount or their fair value less cost to sell. Held-for-sale assets are not
depreciated. Assets are classified as held-for-sale only if (i) management
commits to a plan to sell the asset, (ii) the asset is available for immediate
sale, (iii) the asset is actively being marketed for
7
FRIEDMAN INDUSTRIES, INCORPORATED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
sale at a price that is reasonable in relation to its current fair value and
(iv) management believes the sale of the asset is probable and expects transfer
within one year. No assets met the definition of held-for-sale at March 31,
2003. Property, plant, and equipment are stated at cost. Depreciation is
calculated primarily by the straight-line method over 10 to 20 years for
buildings and yard improvements and 5 to 10 years for machinery and equipment.
Interest costs incurred during construction projects are capitalized as part of
the cost of such assets. The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. No impairments were necessary at March
31, 2003 or 2002.
SUPPLEMENTAL CASH FLOW INFORMATION: The Company paid interest of
approximately $87,307 in 2003, $278,700 in 2002, and $637,300 in 2001. The
Company paid income taxes, net of refunds, of $445,000 in 2003, $408,900 in
2002, and $1,583,800 in 2001.
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: The carrying value of the Company's financial
instruments approximates fair value.
STOCK BASED COMPENSATION: 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. 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 3.0%, a
dividend yield of 3.4%, volatility factor of the expected market price of the
Company's common stock of 0.42, and a weighted average expected life of the
option of four years.
The following schedule reflects the impact on net income and earnings per
common share if the Company had applied the fair value recognition provisions of
Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation to stock based employee compensation for the years ended March 31:
<Table>
<Caption>
2003 2002 2001
---------- -------- ----------
Reported net income.................................... $1,432,017 $940,039 $2,927,582
Less: compensation expenses per SFAS No. 123, net of
tax.................................................. 113,685 10,716 0
---------- -------- ----------
Pro forma net income................................... $1,318,332 $929,323 $2,927,582
---------- -------- ----------
BASIC EARNINGS PER COMMON SHARE:
Reported net income.................................... .19 .12 .39
Less: compensation expense per SFAS No. 123, net of
tax.................................................. .02 .00 .00
---------- -------- ----------
Pro forma net income................................... .17 .12 .39
---------- -------- ----------
DILUTED EARNINGS PER COMMON SHARE:
Reported net income.................................... .19 .12 .39
Less: compensation expense per SFAS No. 123, net of
tax.................................................. .02 .00 .00
---------- -------- ----------
Pro forma net income................................... .17 .12 .39
---------- -------- ----------
</Table>
ECONOMIC RELATIONSHIP: Lone Star Steel Company ("LSS") and Nucor Steel
Company ("NSC") supply a significant amount of steel products to the Company.
Loss of either of these mills
8
FRIEDMAN INDUSTRIES, INCORPORATED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $12.4 million,
$12.5 million, and $17.0 million in 2003, 2002, and 2001, respectively. Loss of
the LSS mill 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 conditions of its
customers and generally does not require collateral. Generally, receivables are
due within 30 days.
NEW ACCOUNTING PRONOUNCEMENT: In January 2003, the FASB issued FASB
Interpretation No. 46 ("FIN 46"). FIN 46 requires that unconsolidated variable
interest entities must be consolidated by their primary beneficiaries. A primary
beneficiary is the party that absorbs a majority of the entity's expected losses
or residual benefits. FIN 46 applies immediately to variable interest entities
created after January 31, 2003 and to existing variable interest entities in the
periods beginning after June 15, 2003. No variable interest entities have been
created after January 31, 2003. Management is currently evaluating the effect of
variable interest entities, if any, created prior to January 31, 2003.
2. STOCK OPTIONS AND CAPITAL STOCK
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, 16,314 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>
2003 2002 2001
------------------- -------------------- -------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- ------- --------
Outstanding at beginning of year......... 154,293 $3.01 400,048 $4.14 419,593 $4.02
Granted.................................. 265,000 $2.33 27,959 $2.45 -- $ --
Exercised................................ -- -- -- -- (19,547) $1.62
Canceled................................. (7,599) $2.78 (273,714) $4.59 -- $ --
------- ----- -------- ----- ------- -----
Outstanding at end of year............... 411,694 $2.58* 154,293 $3.01 400,046 $4.14
======= ======== =======
Exercisable at end of year............... 146,694 $3.03 154,293 $3.01 400,046 $4.14
Weighted average fair value of options
granted during the year................ $2.33 $2.45 N/A
</Table>
* Range of $2.33 to $4.73 per share and a weighted average remaining life of 7.0
years.
Outstanding and exercisable stock options and warrants at March 31, 2003,
were as follows:
<Table>
<Caption>
OUTSTANDING EXERCISABLE
------------------------ ------------------------
RANGE OF WEIGHTED AVERAGE WEIGHT AVERAGE WEIGHT AVERAGE
EXERCISE PRICE REMAINING YEARS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- ---------------- ------- -------------- ------- --------------
$2.33 - $2.94 8.6 299,222 $2.36 34,222 $2.63
$3.13 3.0 111,368 $3.13 111,368 $3.13
$4.73 6.0 1,104 $4.73 1,104 $4.73
</Table>
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
9
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 AND COMMITMENTS AND CONTINGENCIES
The Company has a credit arrangement with a bank which provides for a
revolving line of credit facility (the "revolving 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,
2003, the Company did not have borrowings outstanding under the revolving
facility. The debt outstanding at March 31, 2003 related to equipment purchased
by the Company. The annual principal payments required on long-term debt are as
follows:
<Table>
2004........................................................ $ 68,496
2005........................................................ 54,433
2006........................................................ 2,896
2007........................................................ --
2008........................................................ --
Thereafter.................................................. --
--------
Total.................................................. $125,825
========
</Table>
In July 1995, the Company borrowed against the cash surrender value of
officers' life insurance policies (the "borrowings"). In fiscal 2003, the
Company paid the remaining $111,043 balance due on the borrowings and
accordingly, the borrowings were paid in full at March 31, 2003.
The Company is obligated under an operating lease for its Longview, Texas
office building that expires on April 30, 2008. The following is a schedule of
future minimum annual rental payments required under this operating lease as of
March 31, 2003:
<Table>
2004........................................................ $ 27,264
2005........................................................ 27,264
2006........................................................ 27,264
2007........................................................ 27,264
2008........................................................ 2,272
Thereafter.................................................. --
--------
Total.................................................. $111,328
</Table>
Rental expense for leased properties was $131,629, $27,264 and $26,728
during fiscal 2003, 2002 and 2001, respectively.
Effective September 2001, the Company entered into an arrangement to
purchase non-standard coils from NSC. Either the Company or NSC can terminate
this arrangement upon 90 days' written notice.
10
FRIEDMAN INDUSTRIES, INCORPORATED
4. EARNINGS PER SHARE
Basic and dilutive net income per share is computed based on the following
information:
<Table>
<Caption>
YEAR ENDED MARCH 31
------------------------------------
2003 2002 2001
---------- ---------- ----------
BASIC
Net income................................... $1,432,017 $ 940,039 $2,927,582
========== ========== ==========
Average common shares........................ 7,572,239 7,571,239 7,568,839
========== ========== ==========
DILUTIVE
Net income................................... $1,432,017 $ 940,039 $2,927,582
========== ========== ==========
Average common shares........................ 7,572,239 7,571,239 7,568,839
Common share equivalents:
Options.................................... 17,661 -- --
---------- ---------- ----------
Total common share equivalents............... 17,661 -- --
---------- ---------- ----------
Average common shares and common
equivalents................................ 7,589,900 7,571,239 7,568,839
========== ========== ==========
</Table>
11
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
---------------------
2003 2002
--------- ---------
DEFERRED TAX LIABILITIES:
Depreciation...................................... $(699,092) $(633,650)
--------- ---------
Total deferred tax liabilities...................... (699,092) (633,650)
DEFERRED TAX ASSETS:
Inventory capitalization.......................... 90,047 90,264
Inventory reserve................................. 204,000 --
Postretirement benefits other than pensions....... 53,040 21,420
Other............................................. 68,547 40,406
--------- ---------
Total deferred tax assets........................... 415,634 152,090
--------- ---------
Net deferred tax liabilities........................ $(283,458) $(481,560)
========= =========
</Table>
6. 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 $260,000 for the year ended March 31, 2003, $260,000 for the year ended
March 31, 2002, and $288,000 for the year ended March 31, 2001. 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. Effective April 1, 2003, the Company
discontinued this policy. The Company has not funded the cost of the
postretirement health care plan of the grandfathered retirees.
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 $26,500,
$30,500 and $39,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.
7. INDUSTRY SEGMENT DATA
The Company is engaged in pipe manufacturing, steel processing and steel
and pipe distribution. Within the Company, there are two product and service
groups: coil and tubular products. Coil product involves converting steel coils
into flat sheet and plate steel cut to customer specifications and reselling
steel coils. Through its Texas Tubular operation, the Company purchases,
processes, manufactures and markets tubular products.
12
FRIEDMAN INDUSTRIES, INCORPORATED
7. INDUSTRY SEGMENT DATA (CONTINUED)
The following is a summary of significant financial information relating to
the product groups:
<Table>
<Caption>
YEAR ENDED MARCH 31
-----------------------------------------
2003 2002 2001
------------ ----------- ------------
NET SALES:
Coil.......................................... $ 60,416,662 $51,880,290 $ 68,517,334
Tubular....................................... 45,666,076 45,937,666 51,878,249
------------ ----------- ------------
TOTAL NET SALES....................... $106,082,738 $97,817,956 $120,395,583
============ =========== ============
OPERATING PROFIT:
Coil.......................................... $ 1,180,292 $ 416,998 $ 1,028,425
Tubular....................................... 2,130,523 2,285,873 5,034,620
------------ ----------- ------------
TOTAL OPERATING PROFIT................ 3,310,815 2,702,871 6,063,045
Corporate expenses............................ (1,179,067) (1,092,824) (1,208,745)
Interest expense.............................. (71,700) (278,719) (624,431)
Interest and other income..................... 109,674 92,974 205,862
------------ ----------- ------------
TOTAL EARNINGS BEFORE TAXES........... $ 2,169,722 $ 1,424,302 $ 4,435,731
============ =========== ============
IDENTIFIABLE ASSETS:
Coil.......................................... $ 18,967,495 $18,489,064 $ 23,914,639
Tubular....................................... 21,848,558 19,703,080 22,374,098
------------ ----------- ------------
40,816,053 38,192,144 46,288,737
General corporate assets...................... 1,962,873 5,794,311 1,721,775
------------ ----------- ------------
TOTAL ASSETS.......................... $ 42,778,926 $43,986,455 $ 48,010,512
============ =========== ============
DEPRECIATION:
Coil.......................................... $ 804,463 $ 723,812 $ 685,126
Tubular....................................... 141,384 154,504 338,933
Corporate and other........................... 21,156 24,733 23,520
------------ ----------- ------------
$ 967,003 $ 903,049 $ 1,047,579
------------ ----------- ------------
CAPITAL EXPENDITURES:
Coil.......................................... $ 56,494 $ 1,106,403 $ 117,205
Tubular....................................... 514,623 138,777 258,745
Corporate and other........................... 33,618 -- 23,313
------------ ----------- ------------
$ 604,735 $ 1,245,180 $ 399,263
============ =========== ============
</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 groups.
13
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, 2003 and 2002:
<Table>
<Caption>
Quarter Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
2002 2002 2002 2003
----------- ------------ ----------- -----------
Net sales........................ $25,561,298 $27,776,049 $25,418,779 $27,326,612
Gross profit..................... 1,468,518 1,806,128 1,245,502 1,895,573
Net earnings..................... 277,155 469,042 200,197 485,623
Net earnings per share:
Basic.......................... 0.04 0.06 0.03 0.06
Diluted........................ 0.04 0.06 0.03 0.06
</Table>
<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>
14
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, 2003 and 2002, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2003. 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, 2003 and 2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2003, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
May 16, 2003
------------------------------------------
SELECTED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED MARCH 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------ ------------- ------------- -------------
Net sales.......................... $ 106,082,738 $ 97,817,956 $ 120,395,583 $ 120,267,809 $ 124,719,640
Net earnings....................... 1,432,017 940,039 2,927,582 2,506,801 3,540,811
Total assets....................... 42,778,926 43,986,455 48,010,512 45,106,790 41,023,377
Long-term debt..................... 57,329 2,053,438 4,800,000 7,600,000 6,400,000
Stockholders' equity............... 31,246,751 30,491,351 30,378,150 28,622,951 27,422,779
Net earnings per share:
Basic............................ 0.19 0.12 0.39 0.33 0.47
Diluted.......................... 0.19 0.12 0.39 0.33 0.47
Cash dividends declared per share
adjusted for stock dividends..... 0.09 0.11 0.16 0.18 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.
15
FRIEDMAN INDUSTRIES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 2003 compared to year ended March 31, 2002
During the year ended March 31, 2003, sales, costs of goods sold and gross
profit increased $8,264,782, $7,776,421 and $488,361, respectively, from the
comparable amounts recorded during the year ended March 31, 2002. These
increases were related primarily to the Company's coil operations. During fiscal
2003, coil tons sold increased approximately 4% and the average selling price
per ton increased approximately 14% from levels recorded in fiscal 2002. Gross
profit as a percentage of sales was approximately the same for both years.
Interest expense decreased $207,019 from the amount recorded in fiscal
2002. This decrease was related primarily to reductions in short and long term
debt.
Interest and other income increased $16,700 from the amount recorded in
fiscal 2002 primarily as the result of an increase in average invested cash
positions during fiscal 2003.
Federal income taxes during fiscal 2003 increased $253,442 from the
comparable amount recorded during fiscal 2002 as a result of the increase in
earnings before taxes. The effective tax rates were the same for both years.
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.
16
FRIEDMAN INDUSTRIES, INCORPORATED
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
The Company remained in a strong, liquid position at March 31, 2003.
Current ratios were 3.15 and 3.32 at March 31, 2003 and March 31, 2002,
respectively. Working capital was $23,734,112 at March 31, 2003 and $25,009,882
at March 31, 2002.
Several balance sheet amounts reflected substantial changes from March 31,
2002 to March 31, 2003. A decrease in cash of $4,010,767 was related primarily
to net cash used in financing activities which included payments totaling
$2,976,790 to pay down both short and long term debt. Accounts receivable
increased $2,480,844 and was primarily associated with the average days of sales
in accounts receivable ("average days"). Average days increased from
approximately 28 days at March 31, 2002 to 34 days at March 31, 2003. Average
days of 34 days reflected a return to a more common collection pattern for the
Company. The Company expects to continue to monitor and evaluate 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"). 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, 2003, the Company had no borrowings outstanding under the revolving
facility. During the year ended March 31, 2003, the Company paid off the
remaining $800,000 balance due on its term note.
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 sold or relocated
certain assets of the Houston facility. The remaining assets are expected to be
sold or relocated to other operations as needed.
During fiscal 2002, the Company invested approximately $1,100,000 in
capital asset additions related to its XSCP Division.
During the quarter ended December 31, 2002, the Company exercised its right
under a lease agreement to purchase approximately 68 acres of land on which its
tubular operations are located for $214,338. This land was previously leased
from Lone Star Steel Company.
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 2003, the Company believes that inflation had little effect
on its operations.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. One such accounting policy which requires
significant estimates and judgments is the valuation of LIFO inventories in the
Company's quarterly reporting. The Company's quarterly valuation of inventory
requires estimates of the year end quantities which is inherently difficult.
Historically, these estimates have been materially correct. In addition, the
Company maintains an allowance for doubtful accounts receivable by providing for
specifically identified accounts where collectibility is doubtful and a general
allowance based on the aging of the receivables compared to past experience and
current trends. On an on-going basis, the Company evaluates estimates and
judgments. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances.
17
FRIEDMAN INDUSTRIES, INCORPORATED
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not material
18
FRIEDMAN INDUSTRIES, INCORPORATED
TEN YEAR FINANCIAL SUMMARY
<Table>
<Caption>
YEAR ENDED MARCH 31
--------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------ ----------- ------------ ------------ ------------ ------------
Net sales....................... $106,082,738 $97,817,956 $120,395,583 $120,267,809 $124,719,640 $148,840,724
Earnings........................ $ 1,432,017 $ 940,039 $ 2,927,582 $ 2,506,801 $ 3,540,811 $ 4,809,992
Current assets.................. $ 34,769,500 $35,806,988 $ 40,231,329 $ 36,945,378 $ 32,534,040 $ 39,347,548
Current liabilities............. $ 11,035,388 $10,797,106 $ 12,271,802 $ 8,377,279 $ 6,758,038 $ 13,437,178
Net working capital............. $ 23,734,112 $25,009,882 $ 27,959,527 $ 28,568,099 $ 25,776,002 $ 25,910,370
Total assets.................... $ 42,778,926 $43,986,455 $ 48,010,512 $ 45,106,790 $ 41,023,377 $ 46,039,361
Stockholders' equity............ $ 31,246,751 $30,491,351 $ 30,378,150 $ 28,622,951 $ 27,422,779 $ 25,732,957
Earnings as a percent of
Net sales................... 1.3 1.0 2.4 2.1 2.8 3.2
Stockholders' equity........ 4.6 3.1 9.6 8.8 12.9 18.7
Average number of common shares
outstanding: Basic(2)......... 7,572,239 7,571,239 7,568,839 7,547,624 7,528,702 7,512,901
Per share
Net earnings per share:
Basic(2).................... $ 0.19 $ 0.12 $ 0.39 $ 0.33 $ 0.47 $ 0.64
Stockholders' equity(2)....... $ 4.13 $ 4.03 $ 4.01 $ 3.79 $ 3.64 $ 3.43
Cash dividends per common
share(2)...................... $ 0.09 $ 0.11 $ 0.16 $ 0.18 $ 0.25 $ 0.25
Stock dividend declared......... -- -- -- 5% 5% 5%
<Caption>
YEAR ENDED MARCH 31
--------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ----------- -----------
Net sales....................... $119,920,966 $106,849,181 $97,968,805 $70,908,065
Earnings........................ $ 3,630,071 $ 2,836,768 $ 2,458,132 $ 1,691,075(1)
Current assets.................. $ 33,357,160 $ 27,524,670 $25,956,555 $21,014,281
Current liabilities............. $ 10,172,672 $ 6,410,527 $ 5,816,334 $ 5,534,143
Net working capital............. $ 23,184,488 $ 21,114,143 $20,140,221 $15,480,138
Total assets.................... $ 38,117,191 $ 32,812,986 $32,074,862 $27,184,421
Stockholders' equity............ $ 22,781,959 $ 20,428,936 $18,722,781 $17,430,337
Earnings as a percent of
Net sales................... 3.0 2.7 2.5 2.4
Stockholders' equity........ 15.9 13.9 13.1 9.7
Average number of common shares
outstanding: Basic(2)......... 7,489,943 7,446,076 7,444,041 7,440,888
Per share
Net earnings per share:
Basic(2).................... $ 0.48 $ 0.38 $ 0.33 $ 0.23(1)
Stockholders' equity(2)....... $ 3.04 $ 2.74 $ 2.52 $ 2.34
Cash dividends per common
share(2)...................... $ 0.18 $ 0.15 $ 0.16 $ 0.11
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 LOGO]