10-K/A 1 d09793a1e10vkza.txt AMENDMENT NO. 1 TO FORM 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K/A (AMENDMENT NO. 1) (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------- -------- COMMISSION FILE NO. 1-4304 COMMERCIAL METALS COMPANY (Exact name of registrant as specified in its Charter) DELAWARE 75-0725338 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6565 MACARTHUR BLVD., IRVING, TEXAS 75039 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (214) 689-4300 Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $5 par value New York Stock Exchange Rights to Purchase Series A Preferred Stock New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ X ] THE AGGREGATE MARKET VALUE OF THE COMMON STOCK ON NOVEMBER 15, 2002, HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $16.05 PER SHARE ON NOVEMBER 15, 2002, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY $426,312,958. (FOR PURPOSES OF DETERMINATION OF THIS AMOUNT, ONLY DIRECTORS, EXECUTIVE OFFICERS AND 10% OR GREATER STOCKHOLDERS HAVE BEEN DEEMED AFFILIATES.) THE NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF NOVEMBER 15, 2002 WAS 28,420,735. DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE FOLLOWING DOCUMENT ARE INCORPORATED BY REFERENCE INTO THE LISTED PART OF FORM 10-K: REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 23, 2003 -- PART III. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- This Amendment No. 1 to Commercial Metals Company's annual report on Form 10-K for the year ended August 31, 2002 is being filed to include certain reclassifications for improved disclosures on the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows. We have also revised the language in Note 2, Sales of Accounts Receivable, expanded disclosures related to accounting policies and made various other modifications, corrections and clarifications, including the reconciliation of non-GAAP financial measures that is now required by Regulation G. ITEM 6. SELECTED FINANCIAL DATA The table below sets forth a summary of our selected consolidated financial information for the periods indicated. The per share amounts have been adjusted to reflect a two-for-one stock split in the form of a stock dividend on our common stock effective June 28, 2002. Net earnings, diluted earnings per share, total assets and stockholders' equity have been restated as described in Note 14 to the consolidated financial statements.

FOR THE YEARS ENDED AUGUST 31, 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net Sales $2,446,777 $2,441,216 $2,661,420 $2,251,442 $2,367,569 Net Earnings 40,525 23,772 44,590 46,974 42,714 Diluted Earnings 1.43 0.90 1.56 1.61 1.41 Per Share Total Assets 1,230,076 1,081,946 1,170,092 1,079,074 1,002,617 Stockholders' Equity 501,306 433,094 418,805 418,312 381,389 Long-term Debt 255,969 251,638 261,884 265,590 173,789 Cash Dividends Per Share 0.275 0.26 0.26 0.26 0.26

1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION We manufacture, recycle, market and distribute steel and metal products through a network of over 130 locations in the United States and internationally. Manufacturing Operations We conduct our manufacturing operations through the following: o 4 steel mills, commonly referred to as "minimills," that produce reinforcing bar, angles, flats, small beams, rounds, fence-post sections and other shapes o 29 steel plants that bend, cut and fabricate steel, primarily reinforcing bar and angles o 1 plant that produces copper tubing o 27 warehouses that sell or rent supplies for the installation of concrete o 6 plants that produce special sections for floors and ceiling support o 4 plants that produce steel fence posts o 1 plant that treats steel with heat to strengthen and provide flexibility o 1 plant that rebuilds railcars o 1 railroad salvage company Recycling Operations We conduct our recycling operations through 44 metal processing plants located in the states of Texas, South Carolina, Florida, North Carolina, Oklahoma, Kansas, Missouri, Tennessee, Louisiana and Georgia. Marketing and Distribution Operations We market and distribute steel, copper and aluminum coil, sheet and tubing, ores, metal concentrates, industrial minerals, ferro alloys and chemicals through our network of 16 marketing and distribution offices, 4 processing facilities and joint ventures around the world. Our customers use these products in a variety of industries. You should read this management's discussion and analysis in connection with your review of our consolidated audited financial statements and the accompanying footnotes. Critical Accounting Policies and Estimates The following are important accounting policies, estimates and assumptions that you should understand as you review our financial statements. We apply these accounting policies and make these estimates and assumptions to prepare financial statements under generally accepted accounting principles. Our use of these accounting policies, estimates and assumptions affects our results of operations and our reported amounts of assets and liabilities. Where we have used estimates or assumptions, actual results could differ significantly from our estimates. REVENUE RECOGNITION Generally, we recognize sales when title passes. For a few of our steel fabrication operations, we recognize net sales and profits from certain long-term fixed price contracts by the percentage-of-completion method. In determining the amount of net sales to recognize, we estimate the total costs and profits expected to be recorded for the contract term, and the recoverability of costs related to change orders. These estimates could change, resulting in changes in our earnings. CONTINGENCIES We make accruals as needed for litigation, administrative proceedings, government investigations, including environmental matters, and contract disputes. We base our environmental liabilities on estimates regarding the number of sites for which we will be responsible, the scope and cost of work to be performed at each site, the portion 2 of costs that we expect we will share with other parties and the timing of the remediation. Where timing of expenditures can be reliably estimated, we discount amounts to reflect our cost of capital over time. We record these and other contingent liabilities when they are probable and when we can reasonably estimate the amount of loss. Where timing and amounts cannot be precisely estimated, we estimate a range, and we recognize the low end of the range without undiscounting. Also, see footnote 10, Commitments and Contingencies, in the consolidated financial statements for the year ended August 31, 2002. INVENTORY COST We determine inventory cost for most domestic inventories by the last-in, first-out method, or LIFO. At the end of each quarter, we estimate both inventory quantities and costs that we expect at the end of the fiscal year for these LIFO calculations, and we record an amount on a pro-rata basis. These estimates could vary substantially from the actual year-end results, causing an adjustment to cost of goods sold. See footnote 15, Quarterly Financial Data, to the consolidated financial statements. We record all inventories at the lower of their cost or market value. PROPERTY, PLANT AND EQUIPMENT Our manufacturing and recycling businesses are capital intensive. We evaluate the value of these assets and other long-lived assets whenever a change in circumstances indicates that their carrying value may not be recoverable. Some of the estimated values for assets that we currently use in our operations utilize judgments and assumptions of future undiscounted cash flows that the assets will produce. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer's different viewpoint of future cash flows. Also, we depreciate property, plant and equipment on a straight-line basis over the estimated useful lives of the assets. Depreciable lives are based on our estimate of the assets' economically useful lives. To the extent that an asset's actual life differs from our estimate, there could be an impact on depreciation expense or a gain/loss on the disposal of the asset in a later period. We expense major maintenance costs as incurred. OTHER ACCOUNTING POLICIES For additional information on our accounting policies, see footnote 1, Summary of Significant Accounting Policies, to the consolidated financial statements. NEW ACCOUNTING PRONOUNCEMENTS See footnote 1, Summary of Significant Accounting Policies, to the consolidated financial statements. Consolidated Results of Operations As discussed in Note 14, Restatement, we have restated the financial statements and the financial information included in our management's discussion and analysis.

Year ended August 31, --------------------------------------- (in millions except share data) 2002 2001 2000 ---------- ---------- ---------- Net sales $ 2,447 $ 2,441 $ 2,661 Net earnings 40.5 23.8 44.6 International sales 776 755 879 As % of total 32% 31% 33% LIFO effect on net earnings expense (income) 1.0 (1.1) 3.4 Per diluted share* 0.04 (0.04) 0.12 LIFO reserve 8.1 6.5 8.2 % of inventory on LIFO 72% 70% 71%

* Adjusted for stock split Our management uses a non-GAAP measure, adjusted operating profit, to compare and evaluate the financial performance of our segments. See Note 13, Business Segments, to the consolidated financial statements. We define adjusted operating profit, as referred to in our Management's Discussion and Analysis, as the sum of our earnings before income taxes and financing costs. Adjusted operating profit provides a core operational earnings measurement that compares segments without the need to adjust for federal, but more specifically state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. Also, we exclude interest cost in our calculation of adjusted operating profit. The results are therefore without consideration of financing alternatives of capital employed. In the following tables, we are providing a reconciliation of adjusted operating profit (loss) to net earnings (loss), the nearest comparable GAAP measure (in millions).

MARKETING AND CORPORATE AND SEGMENT MANUFACTURING RECYCLING DISTRIBUTION ELIMINATIONS TOTAL ------------------------------- ------------- --------- ------------- ------------- ----- YEAR ENDED AUGUST 31, 2002: Net earnings (loss) $ 45.0 $ 3.7 $ 8.1 $ (16.3) $ 40.5 Income taxes 25.7 1.2 3.8 (8.1) 22.6 Interest expense .3 -- 2.0 16.4 18.7 Discounts on sales of accounts receivable .4 .2 .3 (.1) .8 ------- ------- ------- -------- ------- Adjusted operating profit (loss) $ 71.4 $ 5.1 $ 14.2 $ (8.1) $ 82.6 ======= ======= ======= ======== ======= YEAR ENDED AUGUST 31, 2001: Net earnings (loss) $ 34.8 $( 1.5) $ 3.6 $ (13.1) $ 23.8 Income taxes 21.1 (.9) 2.1 (7.7) 14.6 Interest expense .4 -- 1.8 25.4 27.6 Discounts on sales of accounts receivable .4 .1 .3 .2 1.0 ------- ------- ------- -------- ------- Adjusted operating profit (loss) $ 56.7 $ (2.3) $ 7.8 $ 4.8 $ 67.0 ======= ======= ======= ======== ======= YEAR ENDED AUGUST 31, 2000: Net earnings (loss) $ 44.8 $ 3.8 $ 11.5 $ (15.5) $ 44.6 Income taxes 27.1 2.0 5.5 (8.5) 26.1 Interest expense .2 -- 2.2 24.9 27.3 ------- ------- ------- -------- ------- Adjusted operating profit (loss) $ 72.1 $ 5.8 $ 19.2 $ .9 $ 98.0 ======= ======= ======= ======== =======

Our results in fiscal 2002 reflect the impact of significant external factors. Our fiscal year began on September 1, 2001, only 10 days before the September 11 terrorist attacks, which dramatically affected United States commercial activity. Capital markets also suffered during our fiscal 2002 period due to the collapse of the technology market bubble and corporate financial and accounting scandals. Following signs of an economic recovery during the first 3 calendar quarter of 2002, the growth of the U.S. economy instead slowed during the second and third calendar quarters. Economic activity also lost momentum in most global markets, perhaps except for non-Japan Asia. Our 2002 results reflect notable weakness in business investment. We saw big declines in key markets such as nonresidential construction spending for factories, offices and other commercial buildings. Public works outlays for institutional buildings, highways and bridges remained strong, but did not offset reduced expenditures in the private sector. Residential construction activity fell, although it remains at a historically high level. Hotel/motel building also fell. Consequently, we experienced lower margins in our manufacturing segment, especially during our fiscal fourth quarter. The weakening of the U.S. dollar during the latter part of our fiscal year helped our results, although the impact was not as strong as we expected. We believe that one reason is that world production and supply of many steel products and nonferrous metals remained excessive. During fiscal 2002, the U.S. government implemented tariffs on imported steel products that compete with most of the products manufactured by our minimills. However, because production by our U.S. competitors remained constant, we have not seen a significant increase in prices. Conditions in our important end use markets generally showed little improvement and in some instances deteriorated. The following financial events were significant this year: 1. 2002 earnings were much higher than 2001, even excluding the $5.4 million after-tax litigation accrual recorded last year in the manufacturing segment. 2. At year end 2002, we had no short-term financing needs and had, in fact, significant cash and cash equivalents. 3. Steel minimill earnings were higher in 2002 due to increased production and shipments in spite of lower selling prices and higher scrap costs. 4. During the current year, our steel group received a nonrecurring graphite electrode litigation settlement of $1.6 million after-tax. 5. Our steel group realized a $3.4 million after-tax gain from the sale of the assets of SMI-Owen Steel Company in 2002. 6. We discovered a theft and accounting fraud and accounting errors at two rebar fabrication operations totalling $3.0 million after-tax. See Note 14, Restatement, to the consolidated financial statements. 7. Copper tube adjusted operating profits decreased in spite of record production and shipments because of lower selling prices and margins. 8. Our recycling segment returned to profitability during 2002 mostly due to the recently improved ferrous scrap market. 9. Our marketing and distribution group's adjusted operating profit was higher than last year, but some markets remained weak. Our acquisition of the Coil Steels Group in September 2001 significantly contributed to adjusted operating profits. 10. Financing costs decreased due to lower requirements, reduced interest rates and the beneficial effect of an interest rate swap. 11. A lower effective income tax rate, due primarily to the favorable completion of IRS audits, added $1.0 million to net earnings in 2002. 4 Segments Unless otherwise indicated, all dollars below are pre-tax. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for making operating decisions. We have three reportable segments: manufacturing, recycling, and marketing and distribution. The following table shows net sales and adjusted operating profit (loss) by business segment (in millions).

Year ended August 31, ------------------------------- 2002 2001 2000 -------- -------- -------- Net sales: Manufacturing $ 1,333 $ 1,321 $ 1,357 Recycling 378 394 463 Marketing and distribution 777 771 903 Adjusted operating profit (loss): Manufacturing 71.4 56.7 72.1 Recycling 5.1 (2.3) 5.8 Marketing and distribution 14.2 7.8 19.2

2002 COMPARED TO 2001 MANUFACTURING We include our steel group and our copper tube division in our manufacturing segment. Adjusted operating profit is equal to earnings before income taxes for our four steel minimills, our copper tube mill and the steel group's fabrication operations. Our manufacturing adjusted operating profit in 2002 increased $14.7 million (26%) as compared to 2001 on marginally more ($12 million) net sales. We achieved this increase in adjusted operating profit for two primary reasons in 2002:(i) the nonrecurrence of the prior year litigation accrual in the amount of $8.3 million, and (ii) the current year gain on the sale of the steel group's heavy structural fabrication operation, SMI-Owen, in the amount of $5.2 million. Excluding those items, our manufacturing segment's adjusted operating profit was slightly higher than last year. Increased production and shipments at our steel group's minimills more than offset lower selling prices, increased scrap purchase costs and lower copper tube earnings. Also, we spent less in 2002 on utilities, and we recorded lower depreciation and amortization expense. However, fiscal 2002 was not a good year in the steel group's downstream steel fabrication and related businesses due to lower adjusted operating profits in rebar fabrication and structural steel fabrication, excluding SMI-Owen. The table below reflects steel and scrap prices per ton:

August 31, --------------- (dollars per ton) 2002 2001 ------ ------ Average mill selling price-total sales $ 269 $ 284 Average mill selling price-finished goods only 275 290 Average fabrication selling price 608 646 Average ferrous scrap purchase price 80 74

MINIMILLS During 2002, adjusted operating profit for our four steel minimills rose 27% compared with 2001, despite lower selling prices. SMI South Carolina had a $2.8 million adjusted operating profit in 2002 compared to a $1.6 million loss in 2001. SMI Alabama turned around as well with a $2.5 million adjusted operating profit in 2002 compared to a $2.2 million adjusted operating loss in 2001. Adjusted operating profits at SMI Arkansas were up 4% in the current year period. These improvements more than offset a 7% decline in adjusted operating profits at SMI Texas as compared to 2001. A major reason for the minimills' improved profitability was a 14% increase in shipments because of continued public projects infrastructure construction. Shipments were 2,171,000 tons in 2002 compared to 1,903,000 in 2001. Mill production also increased over last year. Tons rolled were up 19% to 2,026,000 in 2002. Tons melted were up 17% to 2,100,000 in 2002. Even though demand was strong, the average total mill selling 5 price at $269 per ton was $15 (5%) below last year. Also, in 2002, we sold more semi-finished billets, a product with a lower selling price than our average. Average scrap purchase costs were $6 per ton (8%) higher than in 2001, resulting in smaller margins. Utility expenses declined by $2.4 million as compared to 2001. Decreases in natural gas costs more than offset higher electricity costs. Also, depreciation and amortization expenses decreased by $5.2 million in 2002, primarily because SMI-South Carolina fully depreciated its mill rolls and guides as well as certain melt shop equipment. The mills also received $2.5 million from a nonrecurring graphite electrode litigation settlement in 2002. The U.S. government's new tariffs cover most of the steel minimills' products and range from 15-30% the first year, declining over the next two years. An import licensing and monitoring system and an anti-surge mechanism will further strengthen these remedies. Also, the U.S. administration plans to continue discussions with other steel producing nations to remove excess global capacity and eliminate subsidies. FABRICATION AND OTHER BUSINESSES Adjusted operating profit in the steel group's fabrication and other businesses increased by $12.1 million (57%) in 2002 as compared to 2001. Excluding the 2002 gain on the sale of SMI-Owen ($5.2 million) and the 2001 litigation accrual ($8.3 million), adjusted operating profits in 2002 decreased by $1.3 million (4%) as compared to 2001. Near the end of fiscal 2002, we discovered two significant, but unrelated events, requiring retroactive writedowns at two rebar fabrication operations. The total amount of the adjustments required to correct the August 31, 2002 balance sheets of these two facilities was $4.6 million. These adjustments affect four fiscal years from 1999 to 2002. In August 2002, we uncovered a theft and an accounting fraud which occurred over four years at a rebar fabrication plant in South Carolina. The total adjustment required to revert the accounting records to their proper balances was $2.7 million. In September 2002, we discovered accounting errors related to losses on rebar fabrication and placement jobs at one facility in California, some of which date back to its acquisition in fiscal 2000. The resulting charge was $1.9 million. The South Carolina incident resulted in a $900 thousand expense in fiscal 2002. The remaining $3.7 million for both instances was attributed $885 thousand to fiscal 2001, $2.6 million to fiscal 2000, and $227 thousand to 1999, resulting in prior period adjustments to these previously reported financial statements. We took immediate action to strengthen compliance with our internal control policies in the areas of segregation of duties, personnel, and management review and oversight. Controllers at both locations were replaced as well as the general manager of the rebar fabrication plant in South Carolina. The steel group has increased the level of detail, the frequency of submission, and the amount of review of its operating locations' reporting. The Company has renewed emphasis on periodic and timely internal balance sheet audits at all operating locations and completed audits of all its operating locations in fiscal 2003. No major areas of noncompliance were noted. Senior management and area managers of all the Company's locations attended internal meetings led by the CEO and CFO regarding management's responsibility for internal control, dealing with noncompliance issues and the Company's commitment to only the highest ethical standards of conduct. Fabrication plant shipments totaled 984,000 tons, down fractionally from 986,000 tons shipped in 2001. The average fabrication selling price in 2002 decreased $38 per ton (6%) as compared to 2001. Rebar fabrication markets were softer in 2002 as a result of intense competition, and several plants reported losses. During the fourth quarter 2002, we acquired the real estate, equipment, inventory and work in process of Varmicon, Inc. in Harlingen, Texas. We now operate this rebar fabrication facility under the name of SMI-Valley Steel. The steel joist operations, which includes cellular and castellated beams, were breakeven in 2002, an improvement over the adjusted operating loss in 2001. Both prices and shipments decreased, but lower operating costs and shop efficiencies helped significantly. Also, in 2001 these operations incurred $8.9 million in start-up costs. Structural steel fabrication adjusted operating profits, excluding SMI-Owen and the prior year litigation accrual, were down in 2002 compared to 2001. However, our concrete-related products operations were more profitable in 2002. We continued to expand this business through the acquisition in the fourth quarter of Dowel Assembly Manufacturing Company, or DAMCO, in Jackson, Mississippi. DAMCO manufactures dowel baskets and has an epoxy coating business. In 2002, the steel group started Spray Forming International, a stainless steel cladding operation located in South Carolina. Spray Forming International will use a patented process to produce stainless clad billets. COPPER TUBE Our copper tube division's adjusted operating profit decreased 59% with 7% less net sales as compared to 2001. Copper tube shipments increased 3% from 2001 to a record 59.3 million pounds, and production increased 5% from 2001 to a record 56.2 million pounds. However, average sales prices dropped 10% in 2002 to $1.24 per pound as compared to $1.38 per pound in 2001. The biggest factor was lower apartment and hotel/motel construction. Consequently, demand for plumbing and refrigeration tube was not as strong. The 2002 product mix included increased quantities of HVAC products and line sets. In the marketplace, we continued to adapt to the consolidation among our buyers. The difference between sales price and copper scrap purchase cost (commonly referred to as "the metal spread"), declined 8% in 2002 compared to 2001. Lower raw material purchase costs did not fully compensate for the decline in selling prices. 6 RECYCLING Our recycling segment reported an adjusted operating profit of $5.1 million in 2002 compared with an adjusted operating loss of $2.3 million in 2001. Net sales in 2002 were 4% lower at $378 million as compared to 2001. However, gross margins were 11% above last year, primarily because we shipped 8% more total tons. Demand for ferrous scrap improved both in the U.S. and internationally. The segment processed and shipped 1,494,000 tons of ferrous scrap in 2002, 10% more than in 2001. Ferrous sales prices were on average $81 per ton, an increase of $6 from 2001. Nonferrous shipments were flat at 238,000 tons. The average 2002 nonferrous scrap sales price of $947 per ton was 9% lower than in 2001. Increased productivity, higher asset turnover and reduced costs contributed to the improved 2002 results. The total volume of scrap processed, including the steel group's processing plants, was 2,568,000 tons, an increase of 11% from the 2,308,000 tons processed in 2001. In June 2002, we acquired most of the transportation assets of Sampson Steel Corporation in Beaumont, Texas. These assets will be combined with our existing scrap processing facility in Beaumont. Earlier in the year we closed our Midland, Texas facility, resulting in a writedown of $455,000 on certain equipment. MARKETING AND DISTRIBUTION Net sales in 2002 for our marketing and distribution segment increased 1% to $777 million as compared to 2001. Adjusted operating profit in 2002 increased 82% to $14.2 million as compared to 2001, mostly due to better results from our Australian operations. International steel prices and volumes for steel and nonferrous semifinished products improved during the second half of 2002, primarily in the distribution and processing businesses. However, depressed economies, oversupply in most markets and intense competition from domestic suppliers in the respective markets caused compressed margins for numerous steel products, nonferrous metal products and industrial raw materials and products. The U.S. dollar weakened against major currencies, a beneficial development. In September 2001, we completed our acquisition of Coil Steels Group, an Australian service center in which we already owned a 22% share. This acquisition provided $2.2 million of additional adjusted operating profits and $69.0 million in net sales during 2002. Sales and profits for the Company's pre-existing business in Australia also improved significantly. However, this increase in net sales was more than offset by decreased sales in our U.S. operations due to fewer imports into the United States. Adjusted operating profits for the U.S. divisions improved significantly due to Cometals which returned to more historical levels, and Dallas Trading which benefited from the U.S. tariff legislation. Lower margins at Commonwealth on semi-finished products almost offset these improvements. Our European operations' net sales decreased slightly in 2002 as compared to 2001, but adjusted operating profits improved significantly. The segment's recent strategy of growing its downstream marketing and distribution business offset the continuing very difficult trading conditions. OTHER Selling, general and administration as well as employee's retirement plans expenses were higher in 2002 as compared to 2001, mostly due to the acquisition of Coil Steels Group and discretionary items, such as bonuses and profit sharing. This increase was consistent with the improvement in our operating profitability. Interest expense decreased by $8.9 million (32%) from 2001 largely due to lower interest rates and much lower average short-term borrowings. Also, during 2002 we entered into two interest rate swaps (see footnote 4, Credit Arrangements, to the consolidated financial statements) which resulted in interest expense savings. During 2002, we favorably resolved all issues for our federal income tax returns through 1999. Due to the lack of any material adjustments, we have reevaluated the tax accruals and, consequently, reduced the net tax expense by $1.0 million during 2002. Near-Term Outlook We expect that fiscal 2003 will be weaker than 2002. The global economy slowed in 2002 amid considerable uncertainty, and economic growth in the United States remains slow and uneven. Our specific markets reflect the soft demand and remain very competitive. The outlook for our markets generally is weaker, in some cases significantly so. The manufacturing sector continues to grow slowly. We do not expect private, nonresidential construction to improve before mid-calendar year 2003, but we expect public construction to hold steady. Residential building slowed in 2002, but housing sales and starts remain at a historically high level because of the lowest mortgage rates in three decades. Economic growth outside the United States also slowed, especially in Europe. On the other hand, most analysts don't expect the global economy to fall into a double-dip recession. 7 The fiscal 2003 quarterly results are likely to be erratic and the first half of fiscal 2003 could be relatively weak. In addition to market conditions, we face a number of other challenges including increased insurance costs and higher energy costs. By segment, we anticipate a decrease in operating profit for manufacturing, little change in recycling and an increase in marketing and distribution. We expect fiscal 2003 diluted earnings per share to decrease because diluted average shares will rise further. Our balance sheet should remain strong. During 2002, we had capital spending of $47 million plus $7 million for the acquisition of the remaining shares of Coil Steels Group, compared to capital spending of $53 million in fiscal 2001. We have focused on reducing short-term financing needs during the past two fiscal years. We plan to increase capital expenditures to $88 million for fiscal 2003. Fiscal 2003 capital expenditures will include expansion in downstream rebar fabrication and concrete-related products operations in the steel group and the acquisition of the flat-rolled assets of Horans, a small service center in Australia. We have no major projects planned at the steel mills for fiscal 2003, only smaller enhancements and maintenance expenditures. All segments will continue to focus on improving or disposing of under performing operations, especially if they no longer fit our strategic direction. Long-Term Outlook We are well-positioned to exploit long-term opportunities. Our challenge is to continue growing in a manner which increases our earnings per share and return on capital and generates free cash flows over time. Further consolidation is a virtual certainty in the industries in which we participate, and we plan to participate in a prudent way. The reasons for further consolidation include an inadequate return on capital for most companies, numerous bankruptcies, a high degree of fragmentation, the need to eliminate non-competitive capacity and more effective marketing. The outlook section contains forward-looking statements regarding the outlook for our financial results including net earnings, product pricing and demand, production rates, energy expense, insurance expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "plans to," "ought," "could," "should," "likely," "appears," "projects," "forecasts," or other similar words or phrases. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from our current opinion. Developments that could impact our expectations include the following: o interest rate changes o construction activity o litigation claims and settlements o difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes o metals pricing over which we exert little influence o increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing o court decisions o industry consolidation or changes in production capacity or utilization o global factors including credit availability o currency fluctuations o energy and insurance prices o decisions by governments impacting the level of steel imports and the pace of overall economic activity. 8 2001 COMPARED TO 2000 Segments MANUFACTURING Our manufacturing net sales for 2001 for the manufacturing segment decreased by 3% compared to 2000. Despite an increase in both mill and fabrication shipments, net sales decreased due to lower selling prices. Adjusted operating profit as restated decreased $15.4 million (21%) in 2001 as compared to 2000. The adverse charge for litigation of $8.3 million caused more than half of the decrease. Also, 2001 copper tube adjusted operating profits dropped from their record levels in 2000. Steel group adjusted operating profits, excluding the litigation accrual, decreased slightly as well. We recorded pre-tax LIFO income of $1.7 million in 2001 compared to LIFO expense of $5.2 million in 2000, primarily in the manufacturing segment.

August 31, --------------- (dollars per ton) 2001 2000 ------ ------ Average mill selling price-total sales $ 284 $ 306 Average mill selling price-finished goods only 290 314 Average fab selling price 646 647 Average ferrous scrap purchase price 74 91

MINIMILLS Our steel minimills recovered in the second half of 2001 despite very weak markets throughout the year. The four steel mills' adjusted operating profit decreased 27% as compared to 2000. An adjusted operating loss at the Alabama mill and lower adjusted operating profits in Texas and Arkansas contributed significantly to the decrease. The lower adjusted operating profits were partially offset by significantly lower losses at South Carolina. Tons melted and rolled decreased 3% to 1.8 and 1.7 million tons, respectively. Shipments rose by 3% to 1.9 million tons. The average mill selling price decreased $22 (7%) in 2001 as compared to 2000. The average selling price for finished goods decreased $24 per ton (8%) in 2001 as compared to 2000. The average scrap purchase cost for the mills decreased $17 per ton (19%) in 2001, which offset the decreases in selling prices. However, utility costs rose $9.8 million (13%) as compared to 2000. Import levels and more aggressive competition caused sales prices to drop. Excluding prior year graphite electrode settlements, adjusted operating profit in 2001 at SMI-Texas decreased 16% and at SMI-Arkansas decreased 24% as compared to 2000. SMI-Alabama reported an adjusted operating loss in 2001 as compared to an adjusted operating profit in 2000. The price drops especially hurt SMI-Alabama. Record shipments at the SMI-South Carolina mill caused adjusted operating losses to decrease by $8.1 million in 2001 to $1.6 million. This mill was profitable in the second half of 2001. Selling prices continued to be significantly lower, and utility and scrap purchase costs were down as well. FABRICATION AND OTHER BUSINESSES In 2001, our downstream steel fabrication businesses had another solid year. We have restated 2001 adjusted operating results by $885 thousand for the accounting fraud at the South Carolina rebar facility. Also, we reduced fiscal 2000 adjusted operating profits by $677 thousand and $1.9 million, respectively, for the accounting fraud at the South Carolina rebar facility and the accounting errors at the California rebar manufacturing and placement operation. We discovered both events near the end of fiscal 2002. Excluding a net pre-tax gain of $5.5 million from the sale of land and improvements in fiscal 2000, net sales remained the same in 2001 as compared to 2000. Adjusted operating profits increased 30% as compared to 2000, excluding the 2001 litigation accrual of $8.3 million for an adverse court ruling and the 2000 $5.5 million gain on the sale. Fabricated steel shipments of 986,000 tons increased 3% as compared to 2000; however, this included new capacity. Although prices were mixed, the annual average fab selling price remained unchanged. Steel joist and cellular beam manufacturing operations incurred $8.9 million in startup costs for four projects. A major turnaround in large structural steel jobs fabricated by SMI-Owen more than offset these costs. COPPER TUBE Our copper tube division's adjusted operating profit decreased 29% in 2001 as compared to 2000. Shipments decreased less than 1% in 2001 to 57.3 million pounds, and metal spreads declined 13% in 2001 as compared to 2000. Our copper tube selling prices decreased 8 cents (6%) per pound to $1.38 in 2001 as compared to $1.46 in 2000. Production at the plant decreased consistently with shipments. Although the housing sector of the U.S. economy remained relatively strong, demand for plumbing and refrigeration tube was softer than in the prior year. In the second half of 2001, we added line sets to our product mix, although shipments of this new product were not yet significant. 9 CAPITAL IMPROVEMENTS Our capital improvements decreased significantly to $53 million as compared to $70 million in 2000, primarily in the manufacturing segment. The $70 million included the expansion at the copper tube mill and the installation of a ladle metallurgical station at SMI-South Carolina. In fiscal 2001, we substantially completed the copper tube mill expansion. RECYCLING Our recycling segment incurred an adjusted operating loss of $2.3 million in 2001 as compared to a $5.8 million adjusted operating profit in 2000. Tons processed and shipped decreased 4% as compared to 2000; however, net sales decreased 15% as compared to 2000. Due to high scrap imports, weak domestic steel mills and the strong U.S. dollar, ferrous prices fell $21 per ton (22%) as compared to $75 per ton in 2000, and shipments fell 5%. A sharp drop in terminal market values resulted in lower nonferrous margins. The average nonferrous scrap price was 5% lower on volumes which were 2% higher as compared to 2000. Increased productivity, high asset turnover and reduced expenses mitigated the effects of weak markets. The total volume of scrap processed and shipped in 2001, including our steel group operations, decreased slightly to 2.3 million tons from 2.4 million tons in fiscal 2000. MARKETING AND DISTRIBUTION Our marketing and distribution segment's net sales decreased in 2001 by 15% to $771 million, and adjusted operating profits were 59% lower as compared to 2000. Depressed global economies, oversupply in most markets and intense competition from domestic suppliers in the respective markets contributed significantly to the decline. Also, the strong U.S. dollar continued to hamper the segment's results in various parts of the world. Margins were compressed for most steel products, nonferrous metal products and industrial raw materials and products. Our strategy in recent years to enhance regional businesses helped in the difficult market and currency conditions. Most importantly, we achieved profitability even as we continued a major commitment to develop quality people in sales and administration to provide for long-term growth. We continued to diversify and build business by adding product and geographic areas. We expanded regional trade as well, and continued to increase our operations in the processing of the materials and products we buy and sell. 2002 Liquidity and Capital Resources We discuss liquidity and capital resources on a consolidated basis. Our discussion includes the sources and uses of our three operating segments and centralized corporate functions. We have a centralized treasury function and use inter-company loans to efficiently manage the short-term cash needs of our operating divisions. We invest any excess funds centrally. We rely upon cash flows from operating activities, and to the extent necessary, external short-term financing sources. Our short-term financing sources include the issuance of commercial paper, sales of accounts receivable and borrowing under our bank credit facilities. From time to time, we have issued long-term public debt. Our investment grade credit ratings and general business conditions affect our access to external financing on a cost-effective basis. Depending on the price of our common stock, we may realize significant cash flows from the exercise of stock options. Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch (F-2) rate our $174.5 million commercial paper program, which is up from $135 million in 2001, in the second highest category. To support our commercial paper program, we have unsecured revolving credit agreements with a group of eight banks. Our $129.5 million facility expires in August 2003 and our $45 million facility expires in August 2004. We plan to continue our commercial paper program and the revolving credit agreements in comparable amounts to support the commercial paper program. For added flexibility, we may secure financing from the sale of certain accounts receivable in an amount not to exceed $130 million. We may continually sell accounts receivable on an ongoing basis to replace those receivables that we have collected from our customers. Our long-term public debt, which was $255 million at August 31, 2002, is investment 10 grade rated by Standard & Poor's Corporation (BBB), Fitch (BBB) and by Moody's Investors Services (Baa1). We have access to the public markets for potential refinancing or the issuance of additional long term debt. Also, we have numerous informal, uncommitted credit facilities available from domestic and international banks. These credit facilities are priced at bankers' acceptance rates or on a cost of funds basis. Credit ratings affect our ability to obtain short- and long-term financing and the cost of such financing. If the rating agencies were to reduce our credit ratings, we would pay higher financing costs and possibly would have less availability of the informal, uncommitted facilities. In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. Such factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy, industry condition and contingencies. We are committed to maintaining our investment grade credit ratings. Certain of our financing agreements include various covenants. The most restrictive of these covenants requires us to maintain an interest coverage ratio of greater than three times and a debt to capitalization ratio of 55% as defined in the financing agreement. A few of the agreements provide that if we default on the terms of another financing agreement, it is considered a default under these agreements. We have complied with the requirements, including the covenants of our financing agreement as of and for the year ended, August 31, 2002. Our unsecured revolving credit agreements and accounts receivable securitization agreement include ratings triggers. The trigger in the revolving credit agreements is solely a means to reset pricing for facility fees and, if a borrowing occurs, on loans. Within the accounts receivable securitization agreement, the ratings trigger is contained in a "termination event," but the trigger is set at catastrophic levels. The trigger requires a combination of ratings actions on behalf of two independent rating agencies and is set at levels seven ratings categories below our current rating. Our manufacturing and recycling businesses are capital intensive. Our capital requirements include construction, purchases of equipment and maintenance capital at existing facilities. We plan to invest in new operations. We also plan to invest in working capital to support the growth of our businesses, maintain our ability to repay maturing long-term debt when due at its earliest maturity in 2005 and pay dividends to our stockholders. Our management continues to assess alternative means of raising capital, including potential dispositions of under-performing or non-strategic assets. Any potential future major acquisitions could require additional financing from external sources such as the sale of common stock. CASH FLOWS Our cash flows from operating activities primarily result from sales of steel and related products and, to a lesser extent, from sales of nonferrous metal products. We have a diverse and generally stable customer base. We use futures or forward contracts as needed to mitigate the risks from fluctuations in foreign currency exchange rates and metals commodity prices (see footnote 5, Financial Instruments, Market and Credit Risk, in the consolidated financial statements). The volume and price of the orders from our U.S. customers in the manufacturing and construction sectors affect our cash flows from operating activities. Our international marketing and distribution operations also significantly affect our cash flows from operating activity. The weather can influence the volume of products we ship in any given period. Also, the general economy, the strength of the U.S. dollar, governmental action, and various other factors beyond our control influence our volumes and prices. These periodic fluctuations in our prices and volumes can result in variations in cash flows from operations. Despite these fluctuations, we have historically relied on operating activities as a steady source of cash. 11 Net cash flows from operating activities decreased to $96.6 million in 2002 as compared to $192.7 million in 2001, primarily as a result of decreased funding from sales of accounts receivable. Net working capital in 2002 increased to $379 million from $274 million in 2001, primarily due to increased cash and cash equivalents and higher receivables. Increases in accounts payable more than offset the increase in inventories. The ratio of current assets to current liabilities was 1.9 at August 31, 2002, increased from 1.8 at August 31, 2001. Excluding Coil Steels Group, CSG, and SMI-Owen, which were facilities acquired and sold in 2002, accounts receivable at August 31, 2002 were $48.7 million more than at August 31, 2001. The increase resulted because we did not request as much funding from the accounts receivable that we sold to financial institutions. Excluding CSG and SMI-Owen, inventories and accounts payable, accrued expenses, other payables and income taxes at August 31, 2002 increased by $37.2 million and $66.9 million, respectively, as compared to 2001. Inventories in the steel group, excluding SMI-Owen, increased $22.3 million. The majority of the increase occurred at the minimills because of higher scrap purchase costs and higher inventory quantities. Steel fabrication and post inventories increased as well. Inventories in marketing and distribution, excluding CSG, increased $15.1 million in 2002 mostly due to shipments in transit and customer delays. Accounts payable in marketing and distribution, excluding CSG, increased by $65.5 million in 2002 due to higher inventory purchases and extended terms with vendors. Accounts payable in the steel group at the minimills increased $9.9 million in 2002. Also, during 2002, we received $15.0 million from a litigation settlement (see footnote 10, Commitments and Contingencies, to the consolidated financial statements). Increased profits resulted in an increase of $5.7 million in income taxes payable. During 2002, we received $5.2 million for the contract balance and settlement of disputed change orders on an old large structural steel fabrication contract at SMI-Owen. Higher net earnings in 2002 as compared to 2001 partially offset the increased working capital. Depreciation and amortization expense decreased $5.7 million in 2002 primarily because SMI South Carolina fully depreciated its mill rolls and guides as well as certain melt shop equipment. We realized a $4.1 million increase in the tax benefits from stock issued under option and purchase plans during 2002. Our cash flows increased by $2.4 million in 2002 as a result of deferred income taxes, due largely to additional depreciation which was granted under new tax legislation. We invested $47.2 million in property, plant and equipment in 2002, which was $5.8 million less than in 2001. In addition, in 2002, we acquired the remaining shares of CSG for $6.8 million, net of cash. We received $19.7 million during 2002 for the sale of the assets of SMI-Owen. We expect capital spending for fiscal 2003 to be $88 million, including both new construction and acquisitions to expand our downstream businesses. We needed much less short-term financing during 2002 than during 2001, primarily due to better management of working capital, higher earnings, the litigation settlement, the sale of SMI-Owen and cash from stock issued under incentive and purchase plans. These events enabled us to repay all of our short-term borrowings. In 2002, we also made our final payment on the 8.49% long-term notes. In May 2002, our Board of Directors declared a two-for-one stock split in the form of a stock dividend on our common stock payable June 28, 2002 to our shareholders of record on June 7, 2002 (see footnote 7, Capital Stock, to the consolidated financial statements). On June 28, 2002, we issued 16,132,583 additional shares of common stock. At August 31, 2002, 28,518,453 shares of common stock were issued and outstanding, and 3,746,713 were held in our treasury. Also, we issued 2,361,265 additional shares of common stock during 2002 because more employees exercised stock options, and we issued more shares than last year under our employee stock purchase plan because of the significant increase in our average market price per share. We issued all shares from treasury shares. As a result of this activity, our cash flows increased by $30.2 million in 2002 as compared to $4.4 million from such activity in 2001. We paid dividends of $7.5 million during 2002, slightly more than the $6.8 million we paid during 2001. On May 20, 2002, our directors declared a quarterly cash dividend of eight cents per share on common stock. We paid this quarterly cash dividend on July 19 to stockholders of record at July 5, 2002. This new cash dividend rate on the after-split shares represents a 23% increase in our cash dividend. This was the 151st consecutive quarterly cash dividend we have paid. We believe that we have sufficient liquidity for fiscal year 2003 and the foreseeable future. 12 Contractual Obligations The following table represents our contractual obligations as of August 31, 2002 (dollars in thousands):

Payments Due Within* -------------------------------------------------------- 2-3 4-5 After Total 1 Year Years Years 5 Years --------- -------- --------- --------- --------- Contractual Obligations: Long-term debt(1) $ 256,600 $ 631 $ 105,859 $ 50,033 $ 100,077 Operating leases(2) 23,986 9,347 8,996 3,953 1,690 Unconditional purchase obligations(3) 53,698 17,388 12,345 7,102 16,863 ========= ======== ========= ========= ========= Total contractual cash obligations $ 334,284 $ 27,366 $ 127,200 $ 61,088 $ 118,630

*We have not discounted the cash obligations in this table. (1) Total amounts are included in the August 31, 2002 consolidated balance sheet. See footnote 4, Credit Arrangements, to the consolidated financial statements. (2) Includes minimum lease payment obligations for noncancelable equipment and real-estate leases in effect as of August 31, 2002. See footnote 10, Commitments and Contingencies, to the consolidated financial statements. (3) About 35% of these purchase obligations are for inventory items to be sold in the ordinary course of business; most of the remainder are for freight and supplies associated with normal revenue-producing activities. At August 31, 2002, we received $2,141,000 of net funding from the sales of accounts receivable. If we terminated the accounts receivable program on August 31, 2002, we would have to pay the first $2.1 million of collections from these accounts to third party financial institutions. We complied with the terms of this program as of, and for the year ended August 31, 2002. Other Commercial Commitments We maintain stand-by letters of credit to provide support for certain transactions that our customers or suppliers request. At August 31, 2002, we had committed $20.9 million under these arrangements. A cash deposit included in current other assets on the consolidated balance sheet collateralized $6 million of these commitments. All commitments expire within one year. At the request of a customer and its surety bond issuer, we have agreed to indemnify the surety against all costs the surety may incur should our customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. We are the customer' primary supplier of steel, and steel is a substantial portion of our customer' cost to perform the contracts. We believe we have adequate controls to monitor the customer' performance under the contracts including payment for the steel we supply. As of August 31, 2002, the surety had issued bonds in the total amount (without reduction for work performed to that date) of $2,193,000 which are subject to our guaranty obligation under the indemnity agreement. Contingencies In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings, government investigations including environmental matters, and contract disputes. We may incur settlement, fines, penalties or judgments because of some of these matters. While we are unable to estimate precisely the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals we deem necessary. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, and the uncertainties involved in litigation. Accordingly, we cannot always estimate a meaningful range of possible exposure. We believe that we have adequately provided in our financial statements for the estimable potential impact of these contingencies. We also believe that the outcomes will not significantly affect the long-term results of operations or our financial position. However, they may have a material impact on earnings for a particular period. 13 CONSTRUCTION CONTRACT DISPUTES See footnote 10, Commitments and Contingencies, to the consolidated financial statements. ENVIRONMENTAL AND OTHER MATTERS We are subject to federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. Our original business and one of our core businesses for over eight decades is metals recycling. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, are contrary to the goal of greater recycling. Such regulations expose us and the industry to potentially significant risks. We believe that recycled materials are commodities that are diverted by recyclers, such as us, from the solid waste streams because of their inherent value. Commodities are materials that are purchased and sold in public and private markets and commodities exchanges every day around the world. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications. Environmental agencies at various federal and state levels classify certain recycled materials as hazardous substances and subject recyclers to material remediation costs, fines and penalties. Taken to extremes, such actions could cripple the recycling industry and undermine any national goal of material conservation. Enforcement, interpretation, and litigation involving these regulations are not well developed. The U.S. Environmental Protection Agency, or EPA, or an equivalent state agency notified us that we are considered a potentially responsible party, or PRP, at fourteen sites, none owned by us. We may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, or a similar state statute to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time we may contest, our liability at the sites. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. In fiscal 2002, we incurred environmental expense of $12.1 million. This expense included the cost of environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. Approximately $507 thousand of our capital expenditures for 2002 related to costs directly associated with environmental compliance. At August 31, 2002, $5.0 million was accrued for environmental liabilities of which $1.5 million is classified as other long-term liabilities. Dividends We have paid quarterly cash dividends in each of the past 39 consecutive years. We paid dividends in 2002 at the rate of 0.065 cents per share each quarter for the first three quarters, and 0.08 cents per share for the fourth quarter. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS

Year ended August 31, ---------------------------------------------- (in thousands, except share data) 2002 2001* 2000* ---------- --------------- --------------- Net sales $2,446,777 $ 2,441,216 $ 2,661,420 Costs and expenses: Cost of goods sold 2,129,378 2,143,900 2,333,930 Selling, general and administrative expenses 220,868 212,424 211,403 Employees' retirement plans 14,685 10,611 18,108 Interest expense 18,708 27,608 27,319 Litigation accrual -- 8,258 -- ---------- --------------- --------------- 2,383,639 2,402,801 2,590,760 ---------- --------------- --------------- Earnings before income taxes 63,138 38,415 70,660 Income taxes 22,613 14,643 26,070 ---------- --------------- --------------- Net earnings $ 40,525 $ 23,772 $ 44,590 ========== =============== =============== Basic earnings per share $ 1.48 $ 0.91 $ 1.59 ========== =============== =============== Diluted earnings per share $ 1.43 $ 0.90 $ 1.56 ========== =============== ===============

* As restated, see Note 14. See notes to consolidated financial statements. 15 Commercial Metals Company and Subsidiaries CONSOLIDATED BALANCE SHEETS

August 31, ------------------------------- (in thousands, except share data) 2002* 2001* ------------ --------------- ASSETS Current assets: Cash and cash equivalents $ 124,397 $ 56,021 Accounts receivable (less allowance for collection losses of $8,877 and $7,958) 350,885 297,611 Inventories 268,040 223,859 Other 50,930 45,522 ------------ --------------- Total current assets 794,252 623,013 Property, plant and equipment: Land 29,099 29,315 Buildings 119,592 109,549 Equipment 727,650 704,469 Leasehold improvements 34,637 33,213 Construction in process 10,801 20,350 ------------ --------------- 921,779 896,896 Less accumulated depreciation and amortization (543,624) (501,045) ------------ --------------- 378,155 395,851 Other assets 57,669 63,082 ------------ --------------- $ 1,230,076 $ 1,081,946 ============ ===============

* As restated, see Note 14. See notes to consolidated financial statements. 16

August 31, ------------------------------- (in thousands, except share data) 2002* 2001* ------------ --------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ -- $ 3,793 Accounts payable 275,232 201,271 Accrued expenses and other payables 133,608 133,847 Income taxes payable 5,676 -- Current maturities of long-term debt 631 10,288 ------------ --------------- Total current liabilities 415,147 349,199 Deferred income taxes 32,813 30,405 Other long-term liabilities 24,841 17,610 Long-term debt 255,969 251,638 Commitments and contingencies Stockholders' equity: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share: authorized 40,000,000 shares; issued 32,265,166 and 16,132,583 shares; outstanding 28,518,453 and 13,078,594 shares 161,326 80,663 Additional paid-in capital 170 13,930 Accumulated other comprehensive loss (1,458) (1,961) Retained earnings 392,004 422,309 ------------ --------------- 552,042 514,941 Less treasury stock 3,746,713 and 3,053,989 shares at cost (50,736) (81,847) ------------ --------------- 501,306 433,094 ------------ --------------- $ 1,230,076 $ 1,081,946 ============ ===============

* As restated, see Note 14. See notes to consolidated financial statements. 17 Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS

August 31, ---------------------------------------------------- (in thousands) 2002* 2001* 2000* --------------- --------------- --------------- Cash Flows From (Used By) Operating Activities: Net Earnings $ 40,525 $ 23,772 $ 44,590 Adjustments to earnings not requiring cash: Depreciation and amortization 61,579 67,272 66,583 Provision for losses on receivables 3,985 4,371 948 Deferred income taxes 2,408 (726) 7,868 Tax benefits from stock plans 4,467 404 274 Gain on sale of SMI-Owen (5,234) -- -- Other (307) (148) (5,570) Changes in Operating Assets and Liabilities, net of effect of Coil Steels Group Acquisition and Sale of SMI-Owen: Decrease (increase) in accounts receivable (48,690) (8,276) (55,488) Funding from accounts receivable sold -- 58,498 -- Decrease (increase) in inventories (37,206) 46,508 (23,213) Decrease (increase) in other assets 912 5,837 (36,433) Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes 66,927 (2,389) 3,269 Increase (decrease) in other long-term liabilities 7,231 (2,431) 5,780 ------------ --------------- --------------- Net Cash Flows From Operating Activities 96,597 192,692 8,608 Cash Flows From (Used By) Investing Activities: Purchases of property, plant and equipment (47,223) (53,022) (69,627) Acquisition of Coil Steels Group, net of cash received (6,834) -- -- Sale of Assets of SMI-Owen 19,705 -- -- Sales of property, plant and equipment 3,496 2,866 9,323 Other investments -- -- (2,966) ------------ --------------- --------------- Net Cash Used By Investing Activities (30,856) (50,156) (63,270) Cash Flows From (Used by) Financing Activities: Short-term borrowings-net change (9,981) (88,673) 78,084 Payments on long-term debt (10,101) (8,786) (4,750) Stock issued under incentive and purchase plans 30,238 4,383 5,958 Treasury stock acquired -- (6,716) (41,934) Dividends paid (7,521) (6,780) (7,304) ------------ --------------- --------------- Net Cash From (Used by) Financing Activities 2,635 (106,572) 30,054 ------------ --------------- --------------- Increase (Decrease) in Cash and Cash Equivalents 68,376 35,964 (24,608) Cash and Cash Equivalents at Beginning of Year 56,021 20,057 44,665 ------------ --------------- --------------- Cash and Cash Equivalents at End of Year $ 124,397 $ 56,021 $ 20,057 ============ =============== ===============

* As restated, see Note 14. See notes to consolidated financial statements. 18 Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock Accumulated -------------------------------- Additional Other Number of Paid-In Comprehensive (in thousands, except share data) Shares Amount Capital Loss ---------- ------------ ---------- -------------- Balance, September 1, 1999, as previously reported 16,132,583 $ 80,663 $ 14,131 $ (774) Prior period adjustments (see footnote 14) ---------- ---------- ---------- ------------ Balance, September 1, 1999, as restated 16,132,583 80,663 14,131 (774) Comprehensive income: Net earnings* Other comprehensive loss- Foreign currency translation adjustment, net of taxes of $440 (817) Comprehensive income Cash dividends Treasury stock acquired Stock issued under incentive and purchase plans 100 ---------- ---------- ---------- ------------ Balance, August 31, 2000 16,132,583 80,663 14,231 (1,591) ---------- ---------- ---------- ------------ Comprehensive income: Net earnings* Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment, net of taxes of $192 (356) Comprehensive income Cash dividends Treasury stock acquired Stock issued under incentive and purchase plans (301) ---------- ---------- ---------- ------------ Balance, August 31, 2001 16,132,583 80,663 13,930 (1,961) ---------- ---------- ---------- ------------ Comprehensive income: Net earnings Other comprehensive income (loss)- Foreign currency translation adjustment, net of taxes of $276 513 Unrealized loss on derivatives, net of taxes of $(5) (10) Comprehensive income Cash dividends 2-for-1 stock split 16,132,583 80,663 (17,354) Stock issued under incentive and purchase plans (873) Tax benefits from stock plans 4,467 ---------- ---------- ---------- ------------ Balance, August 31, 2002 32,265,166 $ 161,326 $ 170 $ (1,458) ========== ========== ========== ============

Treasury Stock --------------------------------- Retained Number of (in thousands, except share data) Earnings Shares Amount Total ------------ ---------- ------------ ------------ Balance, September 1, 1999, as previously reported $ 368,177 (1,726,323) $ (43,739) $ 418,458 Prior period adjustments (see footnote 14) (146) (146) ------------ ---------- ------------ ------------ Balance, September 1, 1999, as restated 368,031 (1,726,323) (43,739) 418,312 Comprehensive income: Net earnings* 44,590 44,590 Other comprehensive loss- Foreign currency translation adjustment, net of taxes of $440 (817) ------------ Comprehensive income 43,773 Cash dividends (7,304) (7,304) Treasury stock acquired (1,465,100) (41,934) (41,934) Stock issued under incentive and purchase plans 231,515 5,858 5,958 ------------ ---------- ------------ ------------ Balance, August 31, 2000 405,317 (2,959,908) (79,815) 418,805 ------------ ---------- ------------ ------------ Comprehensive income: Net earnings* 23,772 23,772 Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment, net of taxes of $192 (356) ------------ Comprehensive income 23,402 Cash dividends (6,780) (6,780) Treasury stock acquired (271,500) (6,716) (6,716) Stock issued under incentive and purchase plans 177,419 4,684 4,383 ------------ ---------- ------------ ------------ Balance, August 31, 2001 422,309 (3,053,989) (81,847) 433,094 ------------ ---------- ------------ ------------ Comprehensive income: Net earnings 40,525 40,525 Other comprehensive income (loss)- Foreign currency translation adjustment, net of taxes of $276 513 Unrealized loss on derivatives, net of taxes of $(5) (10) ------------ Comprehensive income 41,028 Cash dividends (7,521) (7,521) 2-for-1 stock split (63,309) (3,053,989) Stock issued under incentive and purchase plans 2,361,265 31,111 30,238 Tax benefits from stock plans 4,467 ------------ ---------- ------------ ------------ Balance, August 31, 2002 $ 392,004 (3,746,713) $ (50,736) $ 501,306 ============ ========== ============ ============

* As restated-see footnote 14. See notes to consolidated financial statements. 19 Commercial Metals Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 Summary of Significant Accounting Policies NATURE OF OPERATIONS The Company manufactures, recycles and markets steel and metal products and related materials. Its manufacturing and recycling facilities and primary markets are located in the Sunbelt from the mid-Atlantic area through the West. Through its global marketing offices, the Company markets and distributes steel and nonferrous metal products and other industrial products worldwide. As more fully discussed in note 13, the manufacturing segment is the most dominant in terms of capital assets and operating profit. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. Investments in 20% to 50% owned affiliates are accounted for on the equity method. All investments under 20% are accounted for under the cost method, unless the Company has the ability to exercise significant influence over the investee. REVENUE RECOGNITION Generally, sales are recognized when title passes to the customer. Some of the revenues related to the steel fabrication operations are recognized on the percentage of completion method. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that completion costs for certain projects will be further revised in the near-term. CASH AND CASH EQUIVALENTS The Company considers temporary investments that are short-term (generally with original maturities of three months or less) and highly liquid to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Inventory cost for most domestic inventories is determined by the last-in, first-out (LIFO) method; cost of international and remaining inventories is determined by the first-in, first-out (FIFO) method. Elements of cost in finished goods inventory in addition to the cost of material include depreciation and amortization, utilities, consumable production supplies, maintenance and production wages. Also, the costs of departments that support production including materials management and quality control are allocated to inventory. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. Provision for amortization of leasehold improvements is made at annual rates based upon the estimated useful lives of the assets or terms of the leases, whichever is shorter. At August 31, 2002, the useful lives used for depreciation and amortization were as follows: Buildings 7 to 40 years Equipment 3 to 15 years Leasehold improvements 3 to 10 years We evaluate the carrying value of property, plant and equipment whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. If we determine that impairment exists, we reduce the net book values as warranted. Major maintenance is expensed as incurred. START-UP COSTS Start-up costs associated with the acquisition and expansion of manufacturing and recycling facilities are expensed as incurred. ENVIRONMENTAL COSTS The Company accrues liabilities for environmental investigation and remediation costs based upon estimates regarding the number of sites for which the Company will be responsible, the scope and cost of work to be performed at each site, the portion of costs that will be shared with other parties and the timing of remediation. Where amounts and timing can be reliably estimated, amounts are discounted. Where timing and amounts cannot be reasonably determined, a range is estimated and the lower end of the range is recognized on an undiscounted basis. INCOME TAXES The Company and its U.S. subsidiaries file a consolidated federal income tax return, and federal income taxes are allocated to subsidiaries based upon their respective taxable income or loss. Deferred income taxes are provided for temporary differences between financial and tax reporting. The principal differences are described in footnote 6, Income Taxes. Benefits from tax credits are reflected currently in earnings. The Company provides for taxes on unremitted earnings of foreign subsidiaries. FOREIGN CURRENCY The functional currency of the Company's international subsidiaries in Australia, the United Kingdom, and Germany is the local currency. The remaining international subsidiaries' functional currency is the United States dollar. Translation adjustments are reported as a component of accumulated other comprehensive loss. 20 Effective September 1, 2002, most of the Company's subsidiaries in Europe changed their functional currency to the Euro. The Company does not anticipate that this change will have a material impact on its financial condition or results of operation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates regarding assets and liabilities and associated revenues and expenses. Management believes these estimates to be reasonable; however, actual results may vary. DERIVATIVES The Company records derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses from the changes in the values of the derivatives are recorded in the statement of earnings, or are deferred if they are highly effective in achieving offsetting changes in fair values or cash flows of the hedged items during the term of the hedge. RECLASSIFICATIONS Certain reclassifications have been made in the 2001 and 2000 financial statements to conform to the classifications used in the current year. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No.142, Goodwill and Other Intangible Assets, must be adopted by the Company in the first quarter of its fiscal year 2003, and will be applied to all goodwill and other intangible assets recognized on the balance sheet, regardless of when those assets were initially recognized. Goodwill will no longer be amortized, but must be tested for impairment as of the beginning of the fiscal year of adoption and annually thereafter. Goodwill was $6.8 million at August 31, 2002. Management does not believe that the implementation of SFAS 142 will result in an impairment charge. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for the Company in fiscal 2003. This standard requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful lives of the assets. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that refines criteria for assets classified as held for sale, further refines rules regarding impairment of long-lived assets and changes the reporting of discontinued operations. SFAS No. 144 is effective for the Company's fiscal 2003. SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in June 2002. It is effective for all such activities initiated after December 31, 2002. SFASNo. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value only when incurred. Management believes that the adoption of SFAS Nos.143, 144 and 146 will have no significant impact on the results of operations or financial position of the Company. NOTE 2 Sales of Accounts Receivable The Company has an accounts receivable securitization program (Securitization Program) which it utilizes as a cost-effective, short-term financing alternative. Under the Securitization Program, the Company and several of its subsidiaries (the Originators) periodically sell accounts receivable to the Company's wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is structured to be a bankruptcy-remote entity. CMCR, in turn, sells an undivided percentage ownership interest (Participation Interest) in the pool of receivables to an affiliate of a third party financial institution (Buyer). CMCR may sell undivided interests of up to $130 million, depending on the Company's level of financing needs. This Program is designed to enable receivables sold by the Company to CMCR to constitute true sales under US Bankruptcy Laws, and the Company has received an opinion from counsel relating to the "true sale" nature of the program. As a result, these receivables are available to satisfy CMCR's own obligations to its third party creditors. The Company accounts for the Securitization Program in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The transfers meet all of the criteria for a sale under SFAS No. 140. At the time a Participation Interest in the pool of receivables is sold, the amount sold is removed from the consolidated balance sheet and the proceeds from the sale are reflected as cash provided by operating activities. At August 31, 2002 and 2001, uncollected accounts receivable of $146 million and $138 million, respectively, had been sold to CMCR, and the Company's undivided interest in these receivables was subordinate to any interest owned by the Buyer. At August 31, 2002 and 2001, $0 and $40 million, respectively of participation interests in CMCR's accounts receivable pool were owned by the Buyer and therefore reflected as a reduction in accounts receivable on the Company's consolidated balance sheets. Discounts (losses) on the sales of accounts receivable to the Buyer under this Securitization Program were $793 thousand and $976 thousand for the years ended August 31, 2003 and 2002, respectively. These losses, representing primarily the costs of funds, were included in selling, general and administrative expenses. At August 31, 2002, the carrying amount of the Company's retained interest (representing the Company's interest in the receivable pool) was $146 million (100%) in the revolving pool of receivables of $146 million. The carrying amount of the Company's retained interest was $98 million in the revolving pool of receivables of $138 million at August 31, 2001. The carrying amount of the Company's retained interest in the receivables approximated fair value due to the short-term nature of the collection period. The retained interest is determined reflecting 100% of any allowance for collection losses on the entire receivables pool. No other material assumptions are made in determining the fair value of the retained interest. The Company is responsible for servicing the entire pool of receivables. In addition to the Securitization Program described above, the Company's international subsidiaries periodically sell accounts receivable. These arrangements also constitute true sales and, once the accounts are sold, they are no longer available to satisfy the Company's creditors in the event of bankruptcy. Uncollected accounts receivable that had been sold under these arrangements and removed from the consolidated balance sheets were $2.1 million and $18.5 million at August 31, 2002 and 2001, respectively. 21 NOTE 3 Inventories Before deduction of LIFO reserves of $8,074,000 and $6,476,000 at August 31, 2002 and 2001, respectively, inventories valued under the first-in, first-out method approximated replacement cost. At August 31, 2002 and 2001, 72% and 70%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to the marketing and distribution business. The majority of the Company's inventories are in the form of finished goods, with minimal work in process. Approximately $15.3 million and $10.8 million were in raw materials at August 31, 2002 and 2001, respectively. NOTE 4 Credit Arrangements In August 2002, the Company increased its commercial paper program to permit maximum borrowings of up to $174.5 million, an increase from the prior year $135 million level. It is the Company's policy to maintain contractual bank credit lines equal to 100% of the amount of all commercial paper outstanding. On August 8, 2002, the Company arranged an unsecured revolving credit agreement with a group of eight banks consisting of a 364-day, $129.5 million facility. This facility is in addition to the previously existing $45 million facility that matures August 14, 2004. These agreements provide for borrowing in United States dollars indexed to LIBOR. Facility and other fees of 0.150% and 0.125% per annum are payable on the 364-day and multi-year credit lines, respectively. No compensating balances are required. The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at bankers' acceptance rates or on a cost of funds basis. No compensating balances or commitment fees are required under these credit facilities. Long-term debt and amounts due within one year as of August 31, are as follows:

(in thousands) 2002 2001 -------------- -------- -------- 7.20% notes due July 2005 $104,775 $100,000 6.75% notes due February 2009 100,000 100,000 6.80% notes due August 2007 50,000 50,000 8.49% notes due December 2001 -- 7,142 Other 1,825 4,784 -------- -------- 256,600 261,926 Less current maturities 631 10,288 -------- -------- $255,969 $251,638 ======== ========

Interest on these notes is payable semiannually. On April 9, 2002, the Company entered into two interest rate swaps to convert a portion of its fixed interest rate long-term debt commitment to a floating interest commitment. These arrangements adjust the Company's fixed to floating interest rate exposure as well as reduce overall financing costs. The swaps effectively convert interest on the $100 million debt due July 2005 from a fixed rate of 7.20% to a six month LIBOR (determined in arrears) plus 2.02%. The floating rate was 3.88% at July 15, 2002, the most recent reset date. The total fair value of both swaps was $4,775,000 at August 31, 2002 and is recorded in other long-term assets, with a corresponding increase in the 7.20% long-term notes, representing the change in fair value of the hedged debt. Certain of the note agreements include various covenants. The most restrictive of these requires maintenance of an interest coverage ratio of greater than three times and a debt/capitalization ratio of 55% (as defined). The aggregate amounts of all long-term debt maturities for the five years following August 31, 2002 are (in thousands): 2003-$631; 2004-$563; 2005-$105,296; 2006-$17; 2007-$50,016 and thereafter-$100,077. 22 Interest expense is comprised of the following:

Year ended August 31, ----------------------------------------------- (in thousands) 2002 2001 2000 -------------- --------- --------- --------- Long-term debt $ 16,499 $ 17,532 $ 18,419 Commercial paper 145 7,076 4,816 Notes payable 2,064 3,000 4,084 --------- --------- --------- $ 18,708 $ 27,608 $ 27,319 ========= ========= =========

Interest of $447,000, $1,111,000, and $808,000 was capitalized in the cost of property, plant and equipment constructed in 2002, 2001, and 2000, respectively. Interest of $18,879,000, $28,704,000, and $27,536,000 was paid in 2002, 2001, and 2000, respectively. NOTE 5 Financial Instruments, Market and Credit Risk Generally accepted accounting principles require disclosure of an estimate of the fair value of the Company's financial instruments as of year end. These estimated fair values disregard management intentions concerning these instruments and do not represent liquidation proceeds or settlement amounts currently available to the Company. Differences between historical presentation and estimated fair values can occur for many reasons including taxes, commissions, prepayment penalties, make-whole provisions and other restrictions as well as the inherent limitations in any estimation technique. Due to near-term maturities, allowances for collection losses, investment grade ratings and security provided, the following financial instruments' carrying amounts are considered equivalent to fair value: o Cash and cash equivalents o Accounts receivable/payable o Short-term borrowings The Company's long-term debt is predominantly publicly held. Fair value was determined by indicated market values.

(in thousands) 2002 2001 -------------- ---------- ---------- Long-Term Debt: Carrying amount $ 256,600 $ 261,926 Estimated fair value 259,656 252,531 ========== ==========

The Company maintains both corporate and divisional credit departments. Limits are set for customers and countries. Credit insurance is used for some of the Company's divisions. Letters of credit issued or confirmed by sound financial institutions are obtained to further ensure prompt payment in accordance with terms of sale; generally, collateral is not required. In the normal course of its marketing activities, the Company transacts business with substantially all sectors of the metals industry. Customers are internationally dispersed, cover the spectrum of manufacturing and distribution, deal with various types and grades of metal and have a variety of end markets in which they sell. The Company's historical experience in collection of accounts receivable falls within the recorded allowances. Due to these factors, no additional credit risk, beyond amounts provided for collection losses, is believed inherent in the Company's accounts receivable. The Company's worldwide operations and product lines expose it to risks from fluctuations in foreign currency exchange rates and metals commodity prices. The objective of the Company's risk management program is to mitigate these risks using futures or forward contracts (derivative instruments). The Company enters into metal commodity forward contracts to mitigate the risk of unanticipated declines in gross margin due to the volatility of the commodities' prices, and enters into foreign currency forward contracts which match the expected settlements for purchases and sales denominated in foreign currencies. The Company designates as hedges for accounting purposes only those contracts which closely match the terms of the underlying transaction. These hedges resulted in substantially no ineffectiveness in the statements of earnings for the years ended August 31, 2002 and 2001. Certain of the foreign currency and all of the commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges. The changes in fair value of these instruments resulted in a 23 $208 thousand decrease and a $452 thousand increase in cost of goods sold for the years ended August 31, 2002 and 2001, respectively. All of the instruments are highly liquid and none are entered into for trading purposes or speculation. See footnote 4, Credit Arrangements, regarding the Company's interest rate hedges. NOTE 6 Income Taxes The provisions for income taxes include the following:

Year ended August 31, --------------------------------------------- (in thousands) 2002 2001 2000 -------------- -------- -------- -------- Current: United States $ 15,173 $ 13,498 $ 14,731 Foreign 1,670 80 573 State and local 644 1,863 2,637 -------- -------- -------- 17,487 15,441 17,941 Deferred 5,126 (798) 8,129 -------- -------- -------- $ 22,613 $ 14,643 $ 26,070 ======== ======== ========

During 2002, the Company favorably resolved all issues for its federal income tax returns through 1999. Management has reevaluated the tax accruals resulting in a net decrease of approximately $1,000,000. Taxes of $11,016,000, $8,691,000 and $26,363,000 were paid in 2002, 2001 and 2000, respectively. Deferred taxes arise from temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. The sources and deferred long-term tax liabilities (assets) associated with these differences are:

August 31, --------------------------- (in thousands) 2002 2001 ------------- -------- -------- Tax on difference between tax and book depreciation $ 38,457 $ 33,873 U.S. taxes provided on foreign income and foreign taxes 11,857 11,586 Net operating losses (less allowances of $780 and $2,035) (561) (1,090) Alternative minimum tax credit (1,713) (1,713) Other accruals (9,183) (6,330) Other (6,044) (5,921) -------- -------- Total $ 32,813 $ 30,405 ======== ========

Current deferred tax assets of $12.3 and $11.0 million at August 31, 2002 and 2001, respectively, were included in other assets on the consolidated balance sheets. These deferred taxes were largely due to different book and tax treatments of various allowances and accruals. No valuation allowances were required at August 31, 2002 or 2001 for the current deferred tax assets. The Company uses substantially the same depreciable lives for tax and book purposes. Changes in deferred taxes relating to depreciation are mainly attributable to differences in the basis of underlying assets recorded under the purchase method of accounting. As noted above, the Company provides United States taxes on unremitted foreign earnings. Net operating losses consist of $120 million of state net operating losses that expire during the tax years ending from 2006 to 2022. These assets will be reduced as tax expense is recognized in future periods. The $1.7 million alternative minimum tax credit is available indefinitely. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 replaced the Foreign Sales Corporation (FSC) tax benefits with the "extraterritorial income" exemption (ETI) for fiscal year 2002 and the years thereafter. The ETI exclusion maintains the same level of tax benefit for current FSC users. 24 The Company's effective tax rates were 35.8% for 2002, 38.1% for 2001 and 36.9% for 2000. Reconciliations of the United States statutory rates to the effective rates are as follows:

Year ended August 31, ---------------------------------------- 2002 2001 2000 ---- ---- ---- Statutory rate 35.0% 35.0% 35.0% State and local taxes 1.0 3.1 2.3 ETI (1.2) (1.1) (0.6) Other 1.0 1.1 0.2 ---- ---- ---- Effective tax rate 35.8% 38.1% 36.9% ==== ==== ====

NOTE 7 Capital Stock On May 20, 2002, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend on its common stock. This stock split was effective June 28, 2002 to shareholders of record on June 7, 2002. On June 28, 2002, the Company issued 16,132,583 additional shares of common stock and transferred $17,354,000 from paid-in capital and $63,309,000 from retained earnings to common stock. All applicable share and per share amounts in the accompanying consolidated financial statements have been restated to reflect this stock split. Following the stock split, the Company also instituted a quarterly cash dividend of eight cents per share on the increased number of shares. STOCK PURCHASE PLAN Almost all employees may participate in the Company's employee stock purchase plan. The Directors have authorized the annual purchase of up to 200 shares per employee at a discount of 25% from the stock's market price. Yearly activity of the stock purchase plan was as follows: 2002 2001 2000 -------------- -------------- -------------- Shares subscribed 282,780 347,640 330,000 Price per share $ 12.48 $ 9.48 $ 11.74 Shares purchased 257,860 74,480 273,980 Price per share $ 9.48 $ 11.74 $ 9.75 Shares available 366,446 The Company recorded compensation expense for this plan of $815,000, $291,000 and $890,000 in 2002, 2001 and 2000, respectively. STOCK OPTION PLANS The 1986 Stock Incentive Plan (1986 Plan) ended November 23, 1996, except for awards outstanding. Under the 1986 Plan, stock options were awarded to full-time salaried employees. The option price was the fair market value of the Company's stock at the date of grant, and the options are exercisable two years from date of grant. The outstanding awards under this Plan are 100% vested and expire through 2006. The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December 1996. Under the 1996 Plan, stock options, stock appreciation rights, and restricted stock may be awarded to employees. The option price for both the stock options and the stock rights will not be less than the fair market value of the Company's stock at the date of grant. The outstanding awards under the 1996 Plan vest 50% after one year and 50% after two years from date of grant and will expire seven years after grant. The terms of the 1996 Plan resulted in additional authorized shares of 52,126 in 2000, 67,270 in 2001, and 1,073,782 in 2002. In addition, the Company's shareholders authorized an additional 1,000,000 shares during 2002. In January 2000, the Company's stockholders approved the 1999 Non-Employee Director Stock Option Plan and authorized 400,000 shares to be made available for grant. Under this Plan, each outside director of the Company will receive annually an option to purchase 3,000 shares of the Company's stock. In addition, any outside director may elect to receive all or part of fees otherwise payable in the form of a stock option. The price of these options is the fair market value of the Company's stock at the date of the grant. The options granted automatically vest 50% after one year and 50% after two years from the grant date. Options granted in lieu of fees are immediately vested. All options expire seven years from the date of grant. 25 Combined share information for the three plans is as follows:

Weighted Average Price Exercise Range Number Price Per Share ---------- ------------- ------------ September 1, 1999 Outstanding 3,821,522 $ 12.98 $ 6.31-14.91 Exercisable 3,424,636 12.78 6.31-14.91 Granted 773,800 15.45 15.44-15.97 Exercised (201,732) 11.49 6.31-14.91 Forfeited (42,730) 14.85 12.25-15.44 Increase authorized 452,126 ---------- ------------- ------------ August 31, 2000 Outstanding 4,350,860 $ 13.47 $ 6.31-15.97 Exercisable 3,559,810 13.06 6.31-15.44 Granted 803,672 11.71 10.95-13.23 Exercised (320,422) 10.70 6.31-15.44 Forfeited (99,932) 13.82 10.99-15.97 Increase authorized 67,270 ---------- ------------- ------------ August 31, 2001 Outstanding 4,734,178 $ 13.36 $ 9.21-15.97 Exercisable 3,608,052 13.47 9.21-15.97 Granted 805,380 17.28 17.17-21.42 Exercised (2,212,903) 13.13 9.21-15.97 Forfeited (80,920) 14.00 11.76-17.17 Increase authorized 2,073,782 ---------- ------------- ------------ August 31, 2002 Outstanding 3,245,735 $ 14.46 $10.10-21.42 Exercisable 2,111,744 13.94 10.10-18.05 Authorized Shares remaining 1,938,738 ---------- ------------- ------------

Share information for options at August 31, 2002:

Outstanding Exercisable ---------------------------------------------------------------------------------- --------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Yrs) Price Exercisable Price ------------- ----------- ----------- ------------- ----------- ------------- $ 10.10-12.25 828,579 4.4 $ 11.72 476,224 $ 11.70 13.13-14.91 1,197,768 2.6 14.13 1,166,462 14.14 15.44-21.42 1,219,388 5.6 16.65 469,058 15.70 ------------- ----------- ----------- ------------- ---------- ------------- $ 10.10-21.42 3,245,735 4.2 $ 14.46 2,111,744 $ 13.94

The Company has maintained its historical method for accounting for stock options, which recognizes no compensation expense for fixed options granted at current market values. Generally accepted accounting principles require disclosure of an estimate of the weighted-average grant date fair value of options granted during the year and pro forma disclosures of the effect on earnings if compensation expense had been recorded. The Black-Scholes option pricing model used requires the following assumptions as of August 31:

2002 2001 2000 ---------- ---------- ---------- Risk-free interest rate 4.42% 4.84% 6.34% Expected life 5.44 years 4.60 years 4.06 years Expected volatility .250 .232 .248 Expected dividend yield 1.7% 1.7% 1.9%

26 Management believes that the results have limited relevance as characteristics of the Company's options such as nontransferability, forfeiture provisions and long lives are inconsistent with the option model's basic purpose of valuing traded options. For purposes of pro forma earnings disclosures, the assumed compensation expense is amortized over the option's vesting period. The pro forma information includes options granted in preceding years.

2002 2001 2000 ---------- ---------- ---------- Net earnings (in thousands) As reported $ 40,525 $ 23,772 $ 44,590 Pro forma 38,888 22,577 43,097 Diluted earnings per share As reported $ 1.43 $ 0.90 $ 1.56 Pro forma 1.37 0.86 1.51

The weighted-average fair value of options granted in 2002, 2001 and 2000 was $4.52, $2.77 and $3.89, respectively. PREFERRED STOCK Preferred stock has a par value of $1.00 a share, with 2,000,000 shares authorized. It may be issued in series, and the shares of each series shall have such rights and preferences as fixed by the Board of Directors when authorizing the issuance of that particular series. There are no shares of preferred stock outstanding. STOCKHOLDER RIGHTS PLAN On July 28, 1999, the Company's Board of Directors adopted a stockholder rights plan pursuant to which stockholders were granted preferred stock rights (Rights) to purchase one one-thousandth of a share of the Company's Series A Preferred Stock for each share of common stock held. In connection with the adoption of such plan, the Company designated and reserved 100,000 shares of preferred stock as Series A Preferred Stock and declared a dividend of one Right on each outstanding share of the Company's common stock. Rights were distributed to stockholders of record as of August 9, 1999. The Rights are represented by and traded with the Company's common stock. The Rights do not become exercisable or trade separately from the common stock unless at least one of the following conditions are met: a public announcement that a person has acquired 15% or more of the common stock of the Company or a tender or exchange offer is made for 15% or more of the common stock of the Company. Should either of these conditions be met and the Rights become exercisable, each Right will entitle the holder (other than the acquiring person or group) to buy one one-thousandth of a share of the Series A Preferred Stock at an exercise price of $150.00. Each fractional share of the Series A Preferred Stock will essentially be the economic equivalent of one share of common stock. Under certain circumstances, each Right would entitle its holder to purchase the Company's stock or shares of the acquirer's stock at a 50% discount. The Company's Board of Directors may choose to redeem the Rights (before they become exercisable) at $0.001 per Right. The Rights expire July 28, 2009. NOTE 8 Employees' Retirement Plans Substantially all employees of the Company and its subsidiaries are covered by defined contribution profit sharing and savings plans. Company contributions, which are discretionary, to all plans were $14,685,000, $10,611,000, and $18,108,000, for 2002, 2001 and 2000, respectively. NOTE 9 Postretirement Benefits Other Than Pensions/Postemployment Benefits The Company has no significant postretirement obligations. The Company's historical costs for postemployment benefits have not been significant and are not expected to be in the future. 27 NOTE 10 Commitments and Contingencies Minimum lease commitments payable by the Company and its consolidated subsidiaries for noncancelable operating leases in effect at August 31, 2002, are as follows for the fiscal periods specified:

Real (in thousands) Equipment Estate -------------- --------- --------- 2003 $ 6,169 $ 3,178 2004 3,499 1,723 2005 2,529 1,245 2006 1,749 823 2007 and thereafter 2,088 983 -------- --------- $ 16,034 $ 7,952 ======== =========

Total rental expense was $11,774,000, $11,483,000 and $10,664,000 in 2002, 2001 and 2000, respectively. CONSTRUCTION CONTRACT DISPUTES During 2001, the Company increased its litigation accrual (included in accrued expenses and other payables) by $8.3 million due to an adverse judgment from a trial. At August 31, 2002 and 2001, $9.8 million and $9.4 million, respectively, were accrued (including interest). The Company has appealed the judgment. In another matter, a subsidiary of the Company entered into a fixed price contract with the design/builder general contractor (D/B) to furnish, erect and install structural steel, hollow core pre-cast concrete planks, fireproofing, and certain concrete slabs along with related design and engineering work for the construction of a large hotel and casino complex. In connection with the contract, the D/B secured insurance under a subcontractor/vendor default protection policy which named the Company as an insured in lieu of performance and payment bonds. A large subcontractor to the Company defaulted, and the Company incurred unanticipated costs to complete the work. The Company made a claim against the insurance company for all losses, costs, and expenses incurred or arising from the default. A portion of the claim, $6.6 million, was recorded as a claim receivable in other assets at August 31, 2001. During May 2002, the Company and the insurance company settled litigation filed by the Company following the insurer' refusal to pay the claim. The Company recovered $15 million from the insurance company, which included recovery of the $6.6 million claim receivable, receipt of an additional amount ($7.4 million), the release of the balance of $1 million of previously escrowed funds for payment of certain claims by subcontractors to the Company and, subject to certain contingencies, reimbursement of an additional amount (up to $3 million). The $7.4 million in excess of the claim receivable and escrow amount released was recorded as deferred insurance proceeds (in other long-term liabilities at August 31, 2002) pending final resolution of the Company's disputes with the D/B. The Company has also filed a lawsuit against the insurance broker for insurance benefits not received due to the broker's acts, errors and omissions. Disputes between the Company and the D/B have been submitted to binding arbitration. Depending upon future rulings in the arbitration, a portion of the Company's recovery from the insurance company may be credited toward the Company's claim against the D/B. The Company has filed a claim for approximately $27 million against the D/B. The claims seeks recovery of unpaid contract receivables, amounts for delay claims and change orders all of which have not been paid by the D/B. At August 31, 2002 and 2001, the Company maintained contract receivables of $7.2 million from the D/B. Such amounts are included within other assets on the accompanying balance sheets. The D/B has not disputed certain amounts owed under the contract, but contends that other deductive items, disputed by the Company, reduce the contract balance by approximately $6.3 million which together with other D/B claims (discussed below) exceed the unpaid contract balance. The Company disputes the deductive items in the D/B's claim and intends to vigorously pursue recovery of the contract balance in addition to all amounts not recovered under insurance program coverage as a result of misrepresentations or omissions of the D/B. The owner of the Project and the D/B have filed joint claims in the arbitration proceeding against the Company, primarily for alleged delay damages, totaling approximately $144 million which includes alleged delay damages in construction of a retail area adjacent to the Project. Management believes the claims are generally unsubstantiated, and the Company has valid legal defenses against such claims and intends to vigorously defend these claims. Man- 28 agement is unable to determine a range of potential loss related to such claims, and therefore no losses have been accrued; however, it believes the ultimate resolution will not have a material effect on the Company's consolidated financial statements. Due to the uncertainties inherent in the estimating process, it is at least reasonably possible that a change in the Company's estimate of its collection of amounts receivable and possible liability could occur in the near term. The Company is involved in various other claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse effect on the results of operations or the financial position of the Company. ENVIRONMENTAL AND OTHER MATTERS In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. Management believes that adequate provision has been made in the financial statements for the potential impact of these issues, and that the outcomes will not significantly impact the results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular quarter. The Company has received notices from the U.S. Environmental Protection Agency (EPA) or equivalent state agency that it is considered a potentially responsible party (PRP) at fourteen sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with the above-referenced matters, it makes accruals as warranted. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. It is the opinion of the Company's management that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the results of operations or the financial position of the Company. NOTE 11 Earnings Per Share In calculating earnings per share, there were no adjustments to net earnings to arrive at income for any years presented. The stock options granted June 7, 2002, with total outstanding share commitments of 10,000 at year end, are antidilutive.

August 31, -------------------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Shares outstanding for basic earnings per share 27,377,083 26,059,122 28,036,052 Effect of dilutive securities: Stock options/ purchase plans 898,208 261,866 464,118 ---------- ---------- ---------- Shares outstanding for diluted earnings per share 28,275,291 26,320,988 28,500,170 ========== ========== ==========

29 NOTE 12 Accrued Expenses and Other Payables

August 31, --------------------- (in thousands) 2002 2001 -------------- -------- -------- Salaries, wages and commissions $ 31,544 $ 30,844 Litigation accruals 16,416 16,048 Employees' retirement plans 15,086 11,749 Insurance 12,987 10,401 Taxes other than income taxes 9,470 10,359 Advance billings on contracts 7,855 15,621 Freight 5,980 4,467 Environmental 3,437 2,675 Accrual for contract losses 2,506 3,278 Interest 1,901 2,491 Contributions 1,788 935 Other 24,638 24,979 -------- -------- $133,608 $133,847 ======== ========

NOTE 13 Business Segments The Company's reportable segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise. The Company has three reportable segments consisting of manufacturing, recycling, and marketing and distribution. Manufacturing consists of the CMC steel group's minimills, steel and joist fabrication operations, fence post manufacturing plants, heat treating, railcar rebuilding and concrete-related products, as well as Howell Metal Company's copper tube manufacturing facility. The manufacturing segment's business operates primarily in the southern and western United States. Recycling consists of the Secondary Metals Processing Division's scrap processing and sales operations primarily in Texas, Florida and the southern United States. Marketing and distribution includes both domestic and international operations for the sales and distribution of both ferrous and nonferrous metals and other industrial products. The segment's activities consist only of physical transactions and not speculation. The Company uses adjusted operating profit to measure segment performance. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. 30 The following presents information regarding the Company's domestic operations and operations outside of the United States:

External Net Sales for the Year ended August 31, -------------------------------------------------- (in thousands) 2002 2001 2000 -------------- ---------- ---------- ---------- United States $1,670,497 $1,685,981 $1,782,189 Non United States 776,280 755,235 879,231 ---------- ---------- ---------- Total $2,446,777 $2,441,216 $2,661,420 ========== ========== ==========

Long-Lived Assets as of August 31, -------------------------------------------- (in thousands) 2002 2001 2000 -------------- -------- -------- -------- United States $421,332 $449,121 $457,204 Non United States 14,492 9,812 10,483 -------- -------- -------- Total $435,824 $458,933 $467,687 ======== ======== ========

Summarized data for the Company's international operations located outside of the United States (principally in Europe, Australia and the Far East) are as follows:

Year ended August 31, -------------------------------------------- (in thousands) 2002 2001 2000 -------------- -------- -------- -------- Net sales-unaffiliated customers $378,745 $266,609 $343,805 ======== ======== ======== Total assets 124,870 83,743 68,556 ======== ======== ========

The following is a summary of certain financial information by reportable segment: 31 NOTE 13 Business Segments (Continued):

Adjustments Marketing and 2002 (dollars in thousands) Manufacturing Recycling and Distribution Corporate Eliminations Consolidated --------------------------- ------------- ---------- ---------------- ---------- ------------ ------------ Net sales-unaffiliated customers $1,329,159 $ 354,387 $ 762,584 $ 647 $ -- $2,446,777 Intersegment sales 3,587 23,667 14,428 -- (41,682) -- ---------- ---------- ---------- ---------- ---------- ---------- Net sales 1,332,746 378,054 777,012 647 (41,682) 2,446,777 ========== ========== ========== ========== ========== ========== Adjusted operating profit (loss) 71,447 5,098 14,196 (8,102) -- 82,639 ========== ========== ========== ========== ========== ========== Interest expense 3,949 1,011 1,050 13,145 (447) 18,708 ========== ========== ========== ========== ========== ========== Capital expenditures 39,046 4,723 9,323 965 -- 54,057 ========== ========== ========== ========== ========== ========== Depreciation and amortization 49,538 9,650 1,609 782 -- 61,579 ========== ========== ========== ========== ========== ========== Total assets 720,450 98,847 262,111 148,668 -- 1,230,076 ========== ========== ========== ========== ========== ========== 2001 (dollars in thousands) --------------------------- Net sales-unaffiliated customers $1,315,700 $ 371,298 $ 752,723 $ 1,495 $ -- $2,441,216 Intersegment sales 5,375 22,539 18,433 -- (46,347) -- ---------- ---------- ---------- ---------- ---------- ---------- Net sales 1,321,075 393,837 771,156 1,495 (46,347) 2,441,216 ========== ========== ========== ========== ========== ========== Adjusted operating profit (loss) 56,700 (2,324) 7,833 4,790 -- 66,999 ========== ========== ========== ========== ========== ========== Interest expense 10,585 2,165 1,332 14,637 (1,111) 27,608 ========== ========== ========== ========== ========== ========== Capital expenditures 45,979 5,587 1,208 248 -- 53,022 ========== ========== ========== ========== ========== ========== Depreciation and amortization 54,402 11,005 1,124 741 -- 67,272 ========== ========== ========== ========== ========== ========== Total assets 739,625 93,268 188,405 60,648 -- 1,081,946 ========== ========== ========== ========== ========== ========== 2000 (dollars in thousands) --------------------------- Net sales-unaffiliated customers $1,348,994 $ 432,115 $ 881,238 $ (927) $ -- $2,661,420 Intersegment sales 7,732 30,496 22,055 -- (60,283) -- ---------- ---------- ---------- ---------- ---------- ---------- Net sales 1,356,726 462,611 903,293 (927) (60,283) 2,661,420 ========== ========== ========== ========== ========== ========== Adjusted operating profit (loss) 72,135 5,841 19,244 759 -- 97,979 ========== ========== ========== ========== ========== ========== Interest expense 11,007 2,811 1,741 12,568 (808) 27,319 ========== ========== ========== ========== ========== ========== Capital expenditures 61,538 6,220 1,260 609 -- 69,627 ========== ========== ========== ========== ========== ========== Depreciation and amortization 52,688 12,152 1,061 682 -- 66,583 ========== ========== ========== ========== ========== ========== Total assets 769,536 115,532 242,568 42,456 -- 1,170,092 ========== ========== ========== ========== ========== ==========

In the following table we are providing a reconciliation of our non-GAAP measure, adjusted operating profit (loss), to net earnings (loss), the most comparable GAAP measure (in thousands):

MARKETING AND CORPORATE AND SEGMENT MANUFACTURING RECYCLING DISTRIBUTION ELIMINATIONS TOTAL ------------------------------- ------------- --------- ------------- ------------- ----- YEAR ENDED AUGUST 31, 2002: Net earnings (loss) $45,026 $ 3,741 $ 8,085 $(16,327) $40,525 Income taxes 25,739 1,187 3,769 (8,082) 22,613 Interest expense 291 4 2,039 16,374 18,708 Discounts on sales of accounts receivable 391 166 303 (67) 793 ------- ------- ------- -------- ------- Adjusted operating profit (loss) $71,447 $ 5,098 $14,196 $ (8,102) $82,639 ======= ======= ======= ======== ======= YEAR ENDED AUGUST 31, 2001: Net earnings (loss) $34,826 $(1,579) $ 3,612 $(13,087) $23,772 Income taxes 21,150 (903) 2,139 (7,743) 14,643 Interest expense 357 12 1,798 25,441 27,608 Discounts on sales of accounts receivable 367 146 284 179 976 ------- ------- ------- -------- ------- Adjusted operating profit (loss) $56,700 $(2,324) $ 7,833 $ 4,790 $66,999 ======= ======= ======= ======== ======= YEAR ENDED AUGUST 31, 2000: Net earnings (loss) $44,794 $ 3,836 $11,548 $(15,588) $44,590 Income taxes 27,135 1,971 5,469 (8,505) 26,070 Interest expense 206 34 2,227 24,852 27,319 ------- ------- ------- -------- ------- Adjusted operating profit (loss) $72,135 $ 5,841 $19,244 $ 759 $97,979 ======= ======= ======= ======== =======

32 NOTE 14 Restatement In August 2002, the Company uncovered a theft and accounting fraud which had occurred over four years at a rebar fabrication facility in South Carolina. The total adjustment required to restate the accounting records to their proper balances was $2.7 million pre-tax. In a second, unrelated incident, the Company discovered accounting errors related to losses on rebar fabrication and placement jobs at one facility in California, some of which dated from the acquisition of the facility in May 2000. The resulting charge was $1.9 million pre-tax. The South Carolina incident resulted in a $900 thousand pre-tax expense in fiscal 2002. The remaining $3.7 million pre-tax for both instances was attributed $885 thousand in 2001, $2.6 million in 2000 and $227 thousand in 1999. All reported periods have been restated. The effects of the restatement were as follows:

2001 2000 ------------------------------- ------------------------------- As Previously As As Previously As ($ in thousands, except per share) Reported Restated Reported Restated ---------------------------------- ------------- ---------- ------------- ---------- At August 31: Cash $ 33,289 $ 32,921 $ 20,067 $ 20,057 Accounts receivable 204,032 202,095 354,045 352,203 Inventories 236,679 223,859 277,455 270,368 Total assets 1,084,800 1,081,671 1,172,862 1,170,092 Accounts payable 201,292 201,114 194,538 194,205 Other payables and accrued expenses 133,464 133,895 142,680 142,732 Income taxes payable 1,105 -- 678 -- Retained earnings 424,688 422,309 407,128 405,317 Total stockholders' equity 435,473 433,094 420,616 418,805 For the year ended August 31: Selling, general and administrative expenses $ 211,539 $ 212,424 $ 208,808 $ 211,403 Earnings before income taxes 39,300 38,415 73,255 70,660 Net earnings 24,340 23,772 46,255 44,590 Basic EPS 0.93 0.91 1.65 1.59 Diluted EPS 0.92 0.90 1.62 1.56

In addition to the above, beginning retained earnings as of September 1, 1999 was reduced by $146 thousand. In October 2003, the Company determined that the amounts previously reported in 2002 and 2001 as temporary investments should have been classified as "cash equivalents" and combined with the amounts reported as cash on its consolidated balance sheets. Also, the Company has determined that it should have consolidated its interests in CMCR, the primary effect of which is to combine the amounts previously reported as notes receivables from affiliate with accounts receivable on the consolidated balance sheets. As a result, cash and cash equivalents shown in the accompanying consolidated balance sheets as of August 31, 2002 and 2001 have been increased by $91 million and $23 million, respectively, from the amounts previously reported as cash (as shown in the table above), and the previously reported temporary investments line has been removed. As a result of consolidating CMCR, accounts receivable as of August 31, 2002 and 2001 have been increased by $143 million and $95.5 million, respectively, from the amounts previously reported (as shown in the table above), and the previously reported notes receivable from affiliates line has been removed. In conjunction with these balance sheet changes, cash flows used by investing activities in the accompanying statements of cash flows for the years ended August 31, 2002 and 2001 have been changed from ($99) million and ($73) million, respectively, to ($31) million and ($50) million. In addition, the disclosures in Note 2, Sales of Accounts Receivable, have been revised. Other changes were also made to the consolidated balance sheets and statements of cash flows and accompanying notes as a result of the consolidation of CMCR, none of which are material to the financial statements. 33 NOTE 15 Quarterly Financial Data (Unaudited) Summarized quarterly financial data for fiscal 2002, 2001 and 2000 are as follows (in thousands except per share data):

Three Months Ended 2002 ---------------------------------------------------------------------------------- As Previously As Reported Restated Nov. 30 Nov. 30 Feb. 28 May 31 Aug. 31 ------------- -------- -------- -------- -------- Net sales $564,880 $564,880 $566,419 $642,908 $672,570 Gross profit 78,095 78,095 74,872 92,116 72,316 Net earnings 8,832 8,482 6,572 16,433 9,038 Basic EPS 0.34 0.32 0.24 0.59 0.32 Diluted EPS 0.33 0.32 0.24 0.56 0.31

Three Months Ended 2001 ------------------------------------------------------------------------------------------------------------- As Previously As As Previously As As Previously As As Previously As Reported Restated Reported Restated Reported Restated Reported Restated Nov. 30 Nov. 30 Feb. 28 Feb. 28 May 31 May 31 Aug. 31 Aug. 31 ------------- --------- ------------- -------- ------------- -------- ------------- -------- Net sales $ 594,540 $ 594,540 $578,330 $578,330 $622,090 $622,090 $646,256 $646,256 Gross profit 70,844 70,844 58,253 58,253 82,893 82,893 85,326 85,326 Net earnings (loss) (2,233) (2,421) 1,662 1,590 10,721 10,569 14,190 14,034 Basic EPS (loss) (0.09) (0.09) 0.06 0.06 0.41 0.41 0.54 0.54 Diluted EPS (loss) (0.09) (0.09) 0.06 0.06 0.41 0.40 0.53 0.53

Three Months Ended 2000 ------------------------------------------------------------------------------------------------------------- As Previously As As Previously As As Previously As As Previously As Reported Restated Reported Restated Reported Restated Reported Restated Nov. 30 Nov. 30 Feb. 28 Feb. 28 May 31 May 31 Aug. 31 Aug. 31 ------------- --------- ------------- --------- ------------- --------- ------------- -------- Net sales $ 612,427 $ 612,427 $ 637,624 $ 637,624 $ 701,209 $ 701,209 $ 710,160 $710,160 Gross profit 77,434 77,434 79,132 79,132 87,076 87,076 83,848 83,848 Net earnings 10,233 9,972 10,358 10,317 12,961 12,453 12,703 11,848 Basic EPS 0.36 0.35 0.36 0.36 0.46 0.45 0.47 0.44 Diluted EPS 0.35 0.34 0.35 0.35 0.46 0.44 0.47 0.44

The quantities and costs used in calculating cost of goods sold on a quarterly basis include estimates of the annual LIFO effect. The actual effect cannot be known until the year end physical inventory is completed and quantity and price indices are developed. The quarterly cost of goods sold above includes such estimates. The final determination of inventory quantities and prices resulted in $1.1 million after-tax expense in the fourth quarter 2002. Fourth quarter 2001 net earnings were not significantly impacted. Fourth quarter 2000 net earnings decreased $1.2 million after the final determination of quantities and prices was made. In recording accruals for workers' compensation expense, management relies on prior years' experience and information from third party administrators in making estimates. Results at the end of fiscal year 2002, 2001 and 2000 indicated a decline in the number of claims resulting in a $1.0 million, $2.1 million and $2.6 million reduction, respectively, in the accrual during the fourth quarters. Following a revised Court ruling, the Company reduced its litigation accrual by $2.5 million during the fourth quarter 2001 (see note 10). 34 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Commercial Metals Company Dallas, Texas We have audited the consolidated balance sheets of Commercial Metals Company and subsidiaries at August 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 August 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Commercial Metals Company and subsidiaries at August 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 14, the accompanying 2002, 2001 and 2000 financial statements have been restated. /s/ DELOITTE & TOUCHE LLP Dallas, Texas November 22, 2002 (October 29, 2003 as to the effects of the restatement discussed in the last paragraph of Note 14) 35 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. All financial statements are included at Item 8 above. 2. Commercial Metals Company and Subsidiaries Consolidated Financial Statement Schedule Independent Auditors' Report as to Schedule Valuation and qualifying accounts (Schedule VIII) All other schedules have been omitted because they are not applicable, are not required, or the required information is shown in the financial statements or notes thereto. 3. The following is a list of the Exhibits required to be filed by Item 601 of Regulation S-K: (3)(i) - Restated Certificate of Incorporation (Filed herewith). (3)(i)a - Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed herewith). (3)(i)b - Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed herewith). (3)(i)c - Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Filed as Exhibit 2 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference). (3)(ii) - By-Laws (Filed herewith). (4)(i)a - Indenture between Commercial Metals and Chase Manhattan Bank dated as of July 31, 1995 (Filed as Exhibit 4.1 to Commercial Metals' Registration Statement No. 33-60809 on July 18, 1995 and incorporated herein by reference). (4)(i)b - Rights Agreement dated July 28, 1999 by and between Commercial Metals and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed as Exhibit 1 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference). 36 4(i)c - Form of Note for Commercial Metals' 7.20% Senior Notes due 2005 (filed herewith). 4(i)d - Form of Note for Commercial Metals' 6.80% Senior Notes due 2007 (filed herewith). 4(i)e - Officers' Certificate, dated August 4, 1997, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.80% Senior Notes due 2007 (filed herewith). 4(i)f - Form of Note for Commercial Metals' 6.75% Senior Notes due 2009 (filed herewith). 4(i)g - Officers' Certificate, dated February 23, 1999, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.75% Senior Notes due 2009 (filed herewith). (10)(i)a - Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (Filed as Exhibit (10)(a) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). (10)(i)b - Receivables Purchase Agreement dated June 20, 2001, among CMC Receivables, Inc., as Seller, Three Rivers Funding Corporation, as Buyer, and Commercial Metals Company as Servicer (Filed as Exhibit (10)(b) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). (10)(i)c - $45,000,000 3 Year Revolving Credit Agreement dated as of August 15, 2001 (Filed as Exhibit (10)(i)c to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). (10)(i)d - $129,500,000 Amended and Restated 364-Day Revolving Credit Agreement dated as of August 8, 2002 (Filed as Exhibit 10(i)(d) to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). (10)(iii)a* - Employment Agreement of Murray R. McClean as amended through October 2, 2000 (Filed as Exhibit (10)(iii) to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2000, and Incorporated herein by reference). (10)(iii)b* - Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001, (Filed as Exhibit (10)(iii)b to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference). (10)(iii)c* - Key Employee Long-Term Performance Plan description (Filed as Exhibit (10)(iii)c to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). (10)(iii)d* - Key Employee Annual Incentive Plan description (Filed as Exhibit (10)(iii)d to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). (10)(iii)e* - Employment and Consulting Agreement of Marvin Selig dated as of June 7, 2002 (Filed as Exhibit 10(iii)e to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). (10)(iii)f* 1999 Non-Employee Director Stock Option Plan (filed herewith). (12) Statement re computation of earnings to fixed charges (filed herewith). (21) Subsidiaries of Registrant (Filed as Exhibit 21 to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002 and incorporated herein by reference). (23) Independent Auditors' consent to incorporation by reference of report dated November 22, 2002 (October 29, 2003, as to the effects of the restatement discussed in the last paragraph of Note 14), accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2002, into previously filed Registration Statements No. 033-61073, No. 033-61075, No. 333-27967 and No. 333-42648 on Form S-8 and Registration Statements No. 33-60809 and No. 333-61379 on Form S-3 (filed herewith). 37 (31)a - Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (31)b - Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32)a - Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32)b - Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). ---------- * denotes management contract or compensatory plan. A Form 8-K was filed on June 13, 2002, under Item 5, announcing Marvin Selig's retirement effective August 31, 2002 and his resignation from our board of directors. We also announced Clyde Selig's election as a director to fill the vacancy created by Marvin Selig's resignation and Clyde Selig's appointment as President and Chief Executive Officer of the CMC Steel Group. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ WILLIAM B. LARSON -------------------------------------- William B. Larson, Vice President and Chief Financial Officer Date: October 31, 2003 39 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders of Commercial Metals Company Dallas, Texas We have audited the consolidated financial statements of Commercial Metals Company and subsidiaries as of August 31, 2002 and 2001, and for each of the three years in the period ended August 31, 2002, and have issued our report thereon dated November 22, 2002 (October 29, 2003 as to the effects of the restatement discussed in the last paragraph of Note 14). Such financial statements and report are included in Item 8 herein. Our audits also included the consolidated financial statement schedule of Commercial Metals Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 14, the financial statements have been restated. /s/ DELOITTE & TOUCHE LLP Dallas, Texas November 22, 2002 (October 29, 2003 as to the effects of the restatement discussed in the last paragraph of Note 14) SCHEDULE VIII COMMERCIAL METALS COMPANY AND SUBSIDIARIES ---------- VALUATION AND QUALIFYING ACCOUNTS ---------- YEARS ENDED AUGUST 31, 2002, 2001 AND 2000 ---------- (In thousands) Allowance for collection losses deducted from accounts receivable:

Charged to Charged Deductions Balance, profit and to other from Balance beginning loss or accounts reserves end Year of year income (A) (B) of year ---- --------- -------- -------- ---------- -------- 2000 7,714 948 567 1,361 7,868 2001 7,868 4,371 264 4,545 7,958 2002 7,958 3,985 591 3,657 8,877

(A) Recoveries of accounts written off and acquired allowance. (B) Write-off of uncollectible accounts. INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION ------- ----------- (3)(i) - Restated Certificate of Incorporation (Filed herewith). (3)(i)a - Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed herewith). (3)(i)b - Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed herewith). (3)(i)c - Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Filed as Exhibit 2 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference). (3)(ii) - By-Laws (Filed herewith). (4)(i)a - Indenture between Commercial Metals and Chase Manhattan Bank dated as of July 31, 1995 (Filed as Exhibit 4.1 to Commercial Metals' Registration Statement No. 33-60809 on July 18, 1995 and incorporated herein by reference). (4)(i)b - Rights Agreement dated July 28, 1999 by and between Commercial Metals and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed as Exhibit 1 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference).

4(i)c - Form of Note for Commercial Metals' 7.20% Senior Notes due 2005 (filed herewith). 4(i)d - Form of Note for Commercial Metals' 6.80% Senior Notes due 2007 (filed herewith). 4(i)e - Officers' Certificate, dated August 4, 1997, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.80% Senior Notes due 2007 (filed herewith). 4(i)f - Form of Note for Commercial Metals' 6.75% Senior Notes due 2009 (filed herewith). 4(i)g - Officers' Certificate, dated February 23, 1999, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.75% Senior Notes due 2009 (filed herewith). (10)(i)a - Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (Filed as Exhibit (10)(a) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). (10)(i)b - Receivables Purchase Agreement dated June 20, 2001, among CMC Receivables, Inc., as Seller, Three Rivers Funding Corporation, as Buyer, and Commercial Metals Company as Servicer (Filed as Exhibit (10)(b) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). (10)(i)c - $45,000,000 3 Year Revolving Credit Agreement dated as of August 15, 2001 (Filed as Exhibit (10)(i)c to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). (10)(i)d - $129,500,000 Amended and Restated 364-Day Revolving Credit Agreement dated as of August 8, 2002 (Filed as Exhibit 10(i)(d) to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). (10)(iii)a* - Employment Agreement of Murray R. McClean as amended through October 2, 2000 (Filed as Exhibit (10)(iii) to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2000, and Incorporated herein by reference). (10)(iii)b* - Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001, (Filed as Exhibit (10)(iii)b to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference). (10)(iii)c* - Key Employee Long-Term Performance Plan description (Filed as Exhibit (10)(iii)c to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). (10)(iii)d* - Key Employee Annual Incentive Plan description (Filed as Exhibit (10)(iii)d to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). (10)(iii)e* - Employment and Consulting Agreement of Marvin Selig dated as of June 7, 2002 (Filed as Exhibit 10(iii)e to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). (10)(iii)f* 1999 Non-Employee Director Stock Option Plan (filed herewith). (12) Statement re computation of earnings to fixed charges (filed herewith). (21) Subsidiaries of Registrant (Filed as Exhibit 21 to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002 and incorporated herein by reference). (23) Independent Auditors' consent to incorporation by reference of report dated November 22, 2002 (October 29, 2003, as to the effects of the restatement discussed in the last paragraph of Note 14), accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2002, into previously filed Registration Statements No. 033-61073, No. 033-61075, No. 333-27967 and No. 333-42648 on Form S-8 and Registration Statements No. 33-60809 and No. 333-61379 on Form S-3 (filed herewith). (31)a - Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (31)b - Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32)a - Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32)b - Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). ---------- * denotes management contract or compensatory plan.