ITEM 1. BUSINESS
(a) General development of business
Chaparral Steel Company (the "Company") was organized as a Delaware corporation in July 1973 by Texas Industries, Inc. ("TXI") and Co-Steel Inc.("Co-Steel"), a Canadian corporation, which owns steel mills in New Jersey, Canada and the United Kingdom. TXI is a New York Stock Exchange listed company which produces cement and concrete. At the time of the Company's organization, TXI and Co-Steel each owned a 50% interest in the Company. TXI owned 100% of the Company from November 1985 when it acquired the remaining 50% of the outstanding securities of the Company from Co-Steel, until July 1988 when approximately 19.8% of the outstanding securities were sold in an initial public offering of common stock by the Company. The consolidated financial statements include the operations of Chaparral Steel Company, America Steel Transport and Chaparral's inactive wholly-owned subsidiaries.
(b) Financial information about industry segments
The Company operates in the steel industry only; therefore, no industry segment information is presented.
(c) Narrative description of business
The Company's original steel mill facility was completed in 1975 and consisted of an electric arc furnace and a rolling mill, which produced rebar used in concrete construction, and small size angles, channels, rounds and flats. The mill achieved a production rate of approximately 500,000 tons per year, which was substantially above its original design capacity.
In 1982, a major expansion of the steel mill, at a cost of approximately $180 million, added an additional electric arc furnace and rolling mill to produce medium-sized structural products. The expansion enabled the Company to produce beams up to 8" wide. Additional modifications to the medium section mill now enable the Company to produce beams up to 14" wide, in addition to large channels and angles.
During fiscal 1992, commissioning was completed on a large beam mill which has expanded the existing product range up to include 24" wide flange beams. The expansion was financed with long-term senior unsecured notes of $80 million.
PRODUCTS
The Company's products are sold generally to steel service centers and steel fabricators for use in the construction industry, as well as to cold finishers, forgers and original equipment manufacturers for use in the railroad, defense, automotive, mobile home and energy industries.
The Company designed its bar and structural mills to efficiently produce bar mill products (31% of 1994 sales on a tonnage basis), structural mill products (52% of 1994 sales on a tonnage basis) and large beam mill products (17% of 1994 sales on a tonnage basis). The bar and structural mills can be modified, without substantial cost or delay, to change current product mix in order to comply with customer needs or changes in market conditions.
After inspection, bundling and strapping, finished products are delivered by common carrier, customer-owned truck, rail or barge. The Company maintains an inventory of finished products based on anticipated short-term usage to provide prompt shipments to customers when possible.
The following is a general description of the Company's products:
REINFORCING BAR
The Company produces all commercial sizes of rebar from 3/8" diameter to 1-3/8" diameter for use in construction applications ranging from highway and public works projects to residential and high-rise construction.
MERCHANT QUALITY ROUNDS
Merchant quality rounds are cylindrical steel bars used in construction and fabrication operations. Common uses include roof joists, anchor bolts and truss supports.
SPECIAL BAR QUALITY ROUNDS
Special Bar Quality ("SBQ") rounds are produced in a large variety of carbon and alloy grades primarily for use in the forging, machining and cold drawing industries for production of automotive gears and hand tools. SBQ rounds are also used as sucker rod material in the oil industry.
BEAMS
Beams are used for building construction and the non-building fabrication industries. Sales of beams currently constitute approximately 64% of the Company's sales on a tonnage basis. Beams produced by the Company's medium section mill include wide-flange beams (ranging in size from 4" x 4" to 14" x 6-3/4"), certain sizes of standard "I" beams and Bantam(TM) beams. Those beams are used in low-rise construction (up to five stories) and in various fabrication operations for industrial machinery and mobile home frames. The large beam mill has enabled the Company to produce wide-flange beams from 8" to 24" in diameter that are used in multi-story buildings, short-span bridges and other heavy industrial applications.
STRUCTURAL MERCHANT SHAPES AND OTHER PRODUCTS
These products consist of structural channels, flat bars and squares used in the equipment manufacturing and construction industries, particularly in low-rise structures.
The Company's products are predominately marketed in North America exclusively by Company salespersons. Approximately 47% of the Company's products are sold in Texas, Oklahoma, Louisiana and Arkansas. Other regional sales of the Company's products are approximately 17% in the midwest United States and approximately 11% in the southeastern United States. Rebar, merchant shapes and other products are sold principally to customers located in the southwestern United States. The Free Trade Agreements between the United States, Canada and Mexico may continue to favorably affect the Company's position as a supplier of certain steel products in the Canadian and Mexican markets. Export sales accounted for 7% of 1994 shipments.
EXPANDING CAPACITY
Historically, the Company's philosophy was to operate its mill at full production capacity. Recently, the Company refocused on serving customer requirements and specific markets while striving to achieve the lowest possible unit cost of production. The Company's strategy is to continually increase its melting capacity through productivity improvements, the utilization of new technology and capital expenditures. Continuing increases in melting capacity have dictated further capital spending for increases in rolling capacity to allow maximum use of the Company's facilities to take advantage of marketplace opportunities.
RAW MATERIALS AND ENERGY
The Company's primary raw material is scrap steel, which includes shredded steel. The Company produces a major portion of its shredded steel requirements from its own shredder operation at the site of the steel mill. Shredded material, which constitutes approximately 28% of the Company's raw material mix, is produced by the Company at its facility and is primarily composed of crushed auto bodies purchased on the open market. Another grade of scrap steel is #1 Heavy, which constitutes approximately 29% of the Company's scrap steel requirements and is also purchased on the open market. Historically, the Company has had an adequate supply of scrap steel for its operations, and the Company believes that the supply of scrap steel will be adequate to meet future requirements. The purchase price of scrap steel is subject to market forces largely beyond the control of the Company. The Company has historically maintained a scrap inventory commensurate with market conditions.
The Company's steel mill consumes large amounts of electricity and natural gas. Electricity is obtained from a local electric utility under an interruptible supply contract with price adjustments which reflect increases or decreases in the utility's fuel costs. The Company believes that the savings in the cost of electricity resulting from the interruption provisions of the contract offsets any loss which might result from interruptions. Natural gas is purchased in the open market generally under a one year supply contract. The Company believes that adequate supplies of both electricity and natural gas are readily available.
SEASONALITY
While there is generally no seasonality in demand for the Company's products, production at the mill is normally shut down for up to two weeks each summer and up to one week in December, in order to conduct comprehensive maintenance (in addition to normal maintenance performed throughout the year) and to install capital improvements. During these periods, much of the equipment in the plant is dismantled, inspected and overhauled. The resulting lower production during the three month periods ending August and February affect the Company's financial results for those periods.
MARKETING AND BACKLOG
At present, the Company has approximately 1,100 customers, no one of which accounted for more than 10% of the Company's products sold in 1994. The commodity nature of certain of the Company's products is generally not characteristic of a long lead time order cycle. The Company does not believe that backlog is a significant factor in its business. While the Company has a small number of long-term customer contracts, most contracts are for quarterly customer requirements or for immediate shipment. Orders are generally filled within 45 days and are cancelable.
COMPETITION AND OTHER MARKET FACTORS
The Company competes with steel producers, including foreign producers, on the basis of price, quality and service. Intense sales competition exists for substantially all of the Company's products. A substantial portion of the Company's products is sold to the construction industry.
Both the domestic and foreign steel industries are characterized by excess mill capacity. Steel producers in the United States have faced strong competition from producers around the world. The Company believes that its success in increasing productivity, reducing production costs and shifting into higher margin product lines should continue to enable it to compete effectively with both foreign and domestic producers.
ENVIRONMENTAL MATTERS
The operations of the Company and its subsidiaries are subject to various federal and state environmental laws and regulations. Under these laws the U.S. Environmental Protection Agency ("EPA") and agencies of state government have the authority to promulgate regulations which could result in substantial expenditures for pollution control and solid waste treatment. Three major areas regulated by these authorities are air quality, water quality and hazardous waste management. Pursuant to these laws and regulations emission sources at the Company's facilities are regulated by a combination of permit limitations and emission standards of statewide application, and the Company believes that it is in substantial compliance with its permit limitations and applicable laws and regulations.
The Company's steel mill generates, in the same manner as other similar steel mills in the industry, electric arc furnace ("EAF") dust that contains lead, chromium and cadmium. The EPA has listed this EAF dust, which is collected in baghouses, as a hazardous waste. The Company has contracts with reclamation facilities in the United States and Mexico pursuant to which such facilities receive the EAF dust generated by the Company and recover the metals from the dust for reuse, thus rendering the dust non-hazardous. In addition, the Company is continually investigating alternative reclamation technologies and has implemented processes for diminishing the amount of EAF dust generated.
In March 1991, the EPA issued an Administrative Order for Removal Action requiring the Company, along with several other companies, to undertake final removal activities (the "Final Activities") at a site to which it had shipped EAF dust. The Company had participated earlier in preliminary remedial activities at the site under an Administrative Order on Consent entered into in January 1986 among the EPA, Chaparral and the other companies. Chaparral's share of the costs associated with the Final Activities did not have a material adverse effect on its competitive position, operations or financial condition.
The Company intends to comply with all legal requirements regarding the environment but since many of them are not fixed, presently determinable, or are likely to be affected by future legislation or rule making by government agencies, it is not possible to accurately predict the aggregate future costs of compliance and their effect on the Company's operations, future net income or financial condition.
EMPLOYEES
At May 31, 1994, the Company had 943 employees.
ITEM 2.
ITEM 2. PROPERTIES
The Company's original steel mill facility in Midlothian, Texas, was completed in 1975. In 1982, a major expansion of the steel mill, added an additional electric arc furnace and rolling mill. In 1992, a large beam mill was commissioned that results in excess rolling capacity over the production capacity of the melting operation. The Company's real property, plant and equipment are subject to liens securing its long-term debt.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims arising in the ordinary course of business operations. No material litigation is pending against or currently affects the Company.
The Company maintains insurance with financially sound insurance companies against certain risks, which insurance the Company believes to be adequate in relation to the Company's business. The Company also maintains a hazardous waste liability policy against certain third party claims.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common stock market prices, dividends and certain other items as shown in the "Quarterly Stock Prices and Dividends" information located on page 15 of the Registrant's Annual Report to Stockholders for the year ended May 31, 1994, are incorporated herein by reference. The restriction on the payment of dividends described in Note E to the Consolidated Financial Statements entitled "Long-Term Debt" on page 12 of the Registrant's Annual Report to Stockholders for the year ended May 31, 1994, is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Financial Data" on page five of the Registrant's Annual Report to Stockholders for the year ended May 31, 1994, is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages three and four of the Registrant's Annual Report to Stockholders for the year ended May 31, 1994, are incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and Supplementary Data of the Registrant and its subsidiaries, included in the Registrant's Annual Report to Stockholders for the year ended May 31, 1994, are incorporated herein by reference:
Consolidated Balance Sheets - May 31, 1994 and 1993 Consolidated Statements of Income - Years ended May 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows - Years ended May 31, 1994, 1993 and 1992 Consolidated Statements of Stockholders' Equity - Years ended May 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements - May 31, 1994 Quarterly Financial Information
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors" on page two of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held October 19, 1994. Information on the directors and executive officers of the Registrant is presented below:
(1) Member of the Audit Committee.
(2) Member of the Executive Committee.
(3) Member of the Compensation Committee.
Directors who are not employees of the Company currently receive $15,000 per year plus $1,000 for each day that a Board and/or a Committee Meeting is attended. All references to years in the above biographies are references to calendar years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The "Executive Compensation" and "Report of the Compensation Committee on Executive Compensation" on pages five through eight of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held October 19, 1994, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Security Ownership of Certain Beneficial Owners" on page two and the "Security Ownership of Management" on page four of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held October 19, 1994, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No reportable transactions occurred between the Company and any director, nominee for director, officer or any affiliate of, or person related to, any of the foregoing since the beginning of the Company's last fiscal year (June 1, 1993).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report.
(a)(3) Listing of Exhibits
3. Articles of Incorporation. (incorporated by reference from Chaparral Steel Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988)
4. Instruments defining rights of security holders. (incorporated by reference from Chaparral Steel Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988)
10. Material contracts. (incorporated by reference from Chaparral Steel Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988)
11. Statement re: computation of per share earnings.
13. Annual report to security holders--Registrant's annual report to security holders for its last fiscal year, except for those portions thereof which are expressly incorporated by reference in this filing, is furnished for the information of the Commission and is not to be deemed "filed" as part of this filing. Since the financial statements in the report have been incorporated by reference in this filing, the accountant's certificate is manually signed in the signed copy of this filing.
21. Subsidiaries of the Registrant.
23. Consents of experts and counsel.
24. Power of Attorney for certain members of the Board of Directors.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 1994.
(c) Exhibits -- The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules -- The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 25th day of August, 1994.
CHAPARRAL STEEL COMPANY
By: /s/GORDON E. FORWARD (Gordon E. Forward) President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
*By /s/RICHARD M. FOWLER (Richard M. Fowler) Attorney-in-Fact
ANNUAL REPORT ON FORM 10-K
ITEM 14 (A)(1) AND (2), (C) AND (D)
LIST OF FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED MAY 31, 1994
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
MIDLOTHIAN, TEXAS
FORM 10-K
ITEM 14 (a)(1) and (2) and ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of Chaparral Steel Company included in the annual report of the Company to its stockholders for the year ended May 31, 1994, are incorporated by reference in Item 8:
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets - May 31, 1994 and 1993 Consolidated Statements of Income - Years ended May 31, 1994, 1993 and Consolidated Statements of Cash Flows - Years ended May 31, 1994, 1993 and 1992 Consolidated Statements of Stockholders' Equity - Years ended May 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements - May 31, 1994
The following consolidated financial statement schedules for the years ended May 31, 1994, 1993 and 1992 are submitted herewith:
Schedule V - Property, plant and equipment Schedule VI - Accumulated depreciation, depletion and amortization of property, plant and equipment Schedule VIII - Valuation and qualifying accounts Schedule IX - Short-term borrowings Schedule X - Supplementary income statement information
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable and therefore, have been omitted.
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
For the Years Ended May 31, 1994, 1993 and 1992
(In thousands)
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the Years Ended May 31, 1994, 1993 and 1992
(In thousands)
(1) Charges capitalized for the large beam mill.
(2) The annual provisions for depreciation have been computed principally in accordance with the following ranges of rates:
Buildings and improvements 2% to 5% Machinery and equipment 5% to 20%
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended May 31, 1994, 1993 and 1992
(In thousands)
(1) Uncollectible receivables written off.
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
For the Years Ended May 31, 1994, 1993 and 1992
(Dollars in thousands)
(1) Computed on total of each month's ending balance divided by twelve.
(2) Computed by dividing interest expense for the period by the Average Amount Outstanding During the Period.
(3) The Company had no borrowings outstanding at the month-ends during fiscal 1993.
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
For the Years Ended May 31, 1994, 1993 and 1992
(In thousands)
Royalties and advertising costs did not exceed 1% of total revenues and therefore are not presented.
(1) Certain items in prior year amounts were reclassified to conform to current year presentation
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION - - ------- ----------- 3. Articles of Incorporation. (incorporated by reference from Chaparral Steel Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988) 4. Instruments defining rights of security holders. (incorporated by reference from Chaparral Steel Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988) 10. Material contracts. (incorporated by reference from Chaparral Steel Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988) 11. Statement re: computation of per share earnings. 13. Annual report to security holders--Registrant's annual report to security holders for its last fiscal year, except for those portions thereof which are expressly incorporated by reference in this filing, is furnished for the information of the Commission and is not to be deemed "filed" as part of this filing. Since the financial statements in the report have been incorporated by reference in this filing, the accountant's certificate is manually signed in the signed copy of this filing. 21. Subsidiaries of the Registrant. 23. Consents of experts and counsel. 24. Power of Attorney for certain members of the Board of Directors.