1
EXHIBIT 13
CHAPARRAL -- STEEL
1994 ANNUAL REPORT
2
CORPORATE PROFILE
Chaparral Steel Company, located in Midlothian, Texas, owns and
operates a technologically advanced steel mill which produces bar and
structural steel products by recycling scrap steel. The plant commenced
operations in 1975 and more than doubled in capacity in 1982. In 1992, a large
beam mill was completed which further expanded Chaparral's capacity and product
range. The Company now has two electric arc furnaces with continuous casters, a
bar mill, structural mill and a large beam mill which enable it to produce a
broader array of steel products than traditional mini mills.
Chaparral follows a market mill concept which entails the production
of a wide variety of products ranging from reinforcing bar and specialty
products to large-sized structural beams at low cost and is able to change its
product mix to recognize changing market conditions or customer requirements.
The Company's steel products include beams, reinforcing bars, special
bar quality rounds, channels and merchant quality rounds. These products are
sold principally to the construction industry and to the railroad, defense,
automotive, mobile home and energy industries. Chaparral's principal customers
are steel service centers, steel fabricators, cold finishers, forgers and
original equipment manufacturers.
The Company distributes its products primarily to markets in North
America, and under certain market conditions, to Europe and Asia. Chaparral is
listed on the New York Stock Exchange, and is 81 percent-owned by Texas
Industries, Inc.
FINANCIAL HIGHLIGHTS
1994 1993 1992
(In thousands except per share)
- - -----------------------------------------------------------------------
RESULTS OF OPERATIONS
Tons shipped:
Bar mill 424 422 484
Structural mills 938 962 914
- - -----------------------------------------------------------------------
TOTAL 1,362 1,384 1,398
Net sales:
Bar mill $138,353 $126,830 $141,538
Structural mills 320,210 289,862 272,474
Transportation service 3,712 3,518 2,598
- - -----------------------------------------------------------------------
TOTAL 462,275 420,210 416,610
Net income (loss) 11,919 (2,051) 7,090
- - -----------------------------------------------------------------------
PER SHARE INFORMATION
Net income (loss) .41 (.06) .25
Dividends .20 .20 .20
- - -----------------------------------------------------------------------
FOR THE YEAR
Net cash provided by
operating activities 10,603 25,087 28,841
Capital expenditures 7,805 7,424 12,616
- - -----------------------------------------------------------------------
YEAR END POSITION
Total assets 488,307 480,811 504,905
Net working capital 95,225 80,901 75,252
Stockholders' equity 265,623 259,598 267,584
1
3
TO OUR STOCKHOLDERS:
Several changes that were expected to improve the financial
performance of the Company were implemented at the beginning of this year. The
results of these changes have been satisfying-selling prices improved as
Chaparral began marketing its products closer to home and cost-reduction
programs were successful. These actions, carried out by our employees, have
contributed to a return to profitability.
The year ended with net income of $11.9 million compared to a net loss
of $2.1 million for the previous year. Average selling prices were up 12% over
last year while shipments of 1,362,000 tons were 2% lower than the previous
year.
At the same time Chaparral was implementing the steps to positively
impact its financial results, the scrap market was experiencing unprecedented
demand pull that increased scrap pricing. In spite of record prices for the raw
material used to manufacture Chaparral's products, gross profit per ton
improved by more than 40% this year. Higher scrap costs were a universal
problem for the entire steel industry. Chaparral believes that because of its
operational efficiency, it has an advantage over many of its competitors during
periods of rapidly escalating scrap prices.
A look at the two major markets served by Chaparral's products found
them moving in different directions in 1994. The markets for special bar
quality products were very strong as domestic manufacturing continued to
sustain its performance begun during the prior year. The construction industry
and corresponding consumption of structural beams continued to perform below
historic average levels. Chaparral continues to work on new applications for
lightweight, wide flange beams; but as with many new product development
applications, it takes time to accomplish meaningful change.
During the upcoming year Chaparral will continue to fine tune its
operations with improvements being made this summer to the melting operations.
The marketplace and the Company's role with its major customers are important
areas of management focus. Near-term market conditions for Chaparral's largest
product, wide flange beams, are not expected to improve quickly, but the
Company continues to pursue those products in which it has significant
competitive advantage.
/s/ GORDON E. FORWARD
Gordon E. Forward, Ph.D.
President and Chief Executive Officer
July 14, 1994
2
4
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
GENERAL
The Company's steel plant is a market mill with the flexibility to
produce a wide range of steel products. The ability to produce a variety of
products at low cost has enabled the Company to penetrate markets throughout
the United States and overseas. The principal components of the Company's cost
of sales are raw material and conversion costs. Scrap steel, the cost of which
fluctuates with market conditions, is the Company's primary raw material.
Conversion costs are comprised principally of energy, maintenance and labor.
RESULTS OF OPERATIONS
NET SALES
In 1994, net sales increased $42.1 million from the previous year as a
12% increase in average selling price was offset by a 22,000 ton decrease in
shipments. The change in pricing strategy for certain structural products
announced in the May 1993 quarter and general price increases in the current
fiscal year, intended to offset the continued escalation in scrap prices, have
combined to produce the improvement in selling price. Excess industry capacity
will continue to affect the structural beam market and the Company anticipates
average steel prices for these products to decrease slightly in fiscal 1995
unless current levels of demand change. Chaparral will continue to optimize its
product mix to remain competitive and maintain market share. Export sales were
7% of total shipments in 1994.
Net sales in 1993 increased $3.6 million from the prior year as a 2%
increase in average selling price offset a 14,000 ton decrease in shipments.
The Company's average net selling price increased despite numerous rebate and
free steel programs offered by competitors that Chaparral effectively matched
to stay competitive. Export sales were 6% of total shipments in 1993.
COST OF SALES
Higher scrap costs in 1994 accounted for a significant portion of the
7% increase in average cost per ton. All areas of melt shop conversion costs
were slightly lower than the previous year. Combined rolling conversion costs
were unchanged from 1993.
In 1993, cost of sales increased $11.7 million due primarily to a 4%
increase in average cost per ton. An increase in shipments of larger and higher
quality products contributed to the increase in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses generally fluctuated with
the provisions for employee incentive programs that are based on profitability
which amounted to $(.1) million, $(2.4) million and $.6 million for 1994, 1993
and 1992, respectively. In an effort to stay competitive and reduce costs, the
Company decreased its number of employees in the first quarter of fiscal 1994.
As a result, a non-recurring charge of $1.6 million for severance pay is
included in selling, general and administrative in 1994.
INTEREST EXPENSE
Payment of scheduled maturities of long-term debt during the three
years ended May 31, 1994 served to reduce the amount of interest expense. In
addition, interest deferred in connection with the large beam mill was $3.4
million in 1992.
PROVISION FOR INCOME TAXES
The provisions for income taxes fluctuated with income (loss) before
income taxes. The income tax rate differs from the statutory rate principally
due to non-deductible goodwill amortization. In August 1993, the Omnibus Budget
Reconciliation Act of 1993 was signed into law that contained a provision
raising the top effective rate for corporations to 35%. The rate increase, when
applied to the Company's temporary differences, resulted in a charge of $1.4
million which is included in the income tax provision in 1994.
NET INCOME (LOSS)
Net income (loss) improved $14 million in 1994 due primarily to a $36
increase in average selling price due to the change in pricing strategy and the
market reaction to higher raw material prices. Depreciation costs were
unchanged as the Company did not incur any major capital improvements during
1994. Amortization of
3
5
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
commissioning costs, that are being expensed over a five year period, totaled
$3 million in 1994. Amortization of goodwill totaled $2.3 million in the
current period.
Net income (loss) decreased $9.1 million to a loss of $2.1 million in
1993 caused principally by a 4% increase in cost of sales per ton due in part
to a shift in mix to higher cost products. Depreciation costs increased as a
complete year of large beam mill expense was recognized. Amortization of
commissioning costs, that are being expensed over a five year period, totaled
$3 million in 1993. Amortization of goodwill totaled $2.3 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $14.3 million to $95.2 million at May 31,
1994. Cash provided by operations decreased by $14.5 million as the increase in
net income of $14 million was offset by increases in inventory of $24.9 million
and accounts receivable of $7.5 million. At May 31, 1994, the Company had net
borrowings of $15 million from its short-term credit facilities. As a result,
cash and cash equivalents decreased $.6 million after the Company acquired $7.8
million of capital additions, repaid $12.8 million of long-term debt and paid
cash dividends of $5.9 million.
Capital expenditures for fiscal 1995 are currently estimated to be
approximately $17 million; which represents normal replacement and
technological upgrades of existing equipment. The Company currently does not
plan any major capital expenditures requiring significant capital resources
within the next two years.
The Company's capitalization of $361.8 million at May 31, 1994,
consisted of $96.2 million in long-term debt and $265.6 million of
stockholders' equity. The Company's stockholders' equity includes additional
paid-in-capital which resulted from the excess of cost over fair value of net
assets acquired, net of amortization. The long-term debt-to-capitalization
ratio was 27% at May 31, 1994 versus 31% at May 31, 1993. The decrease was
caused by the repayment of $12.8 million of long-term debt and the increase in
stockholders' equity which was due to the net income of $11.9 million minus the
payment of cash dividends of $5.9 million.
The Company's earnings improved in 1994 due primarily to the dramatic
increase in average selling price. Based on the current outlook for steel
consumption levels and its impact on prices, in 1995, the Company expects its
average selling price and cost per ton levels to remain virtually unchanged
from 1994. The Company plans to lower finished goods inventory to return to
previous years' levels. Significant changes in average selling price without a
corresponding change in the scrap raw material costs could have a substantial
effect on the Company's operating results and liquidity.
The Company has short-term credit facilities with two banks totaling
$20 million which will expire in January 1995, if not renewed by the banks or
the Company. The Company had maximum borrowings of $20 million at any one time
under these arrangements during fiscal 1994. At May 31, 1994, the Company had
$15 million of outstanding borrowings under these facilities. The Company
believes that it will be able to renew these credit facilities or negotiate
similar arrangements with other financial institutions if they are deemed
necessary. The Company expects the current financial resources, anticipated
cash provided from operations and reductions in certain working capital
components in fiscal 1995 will be sufficient to provide funds for capital
expenditures, meet scheduled debt payments and satisfy other known working
capital needs for fiscal 1995. If additional funds are required to accomplish
long-term expansion of its productive capabilities, the Company believes that
funding can be obtained to meet such requirements.
INFLATION
Energy, scrap and labor, which are the principal components of the
Company's manufacturing costs, are generally susceptible to inflationary
pressures, while finished product prices are more readily influenced by
competition within the steel industry. Since May 31, 1991, inflation has not
materially affected the Company's results of operations or financial condition.
4
6
SELECTED FINANCIAL DATA
Chaparral Steel Company and Subsidiaries
1994 1993 1992 1991 1990
(In thousands except per share)
- - -------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $462,275 $420,210 $416,610 $418,311 $404,155
Gross profit 81,777 58,624 66,678 81,478 80,188
Employee profit sharing 1,896 - 1,199 2,699 3,210
Interest expense 13,439 14,650 12,541 10,513 12,556
Net income (loss) 11,919 (2,051) 7,090 19,125 24,046
- - -------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
Net income (loss) $ .41 $ (.06) $ .25 $ .63 $ .74
Dividends .20 .20 .20 .20 .13
- - -------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net cash provided by operating activities $ 10,603 $ 25,087 $ 28,841 $ 45,827 $ 31,192
Capital expenditures 7,805 7,424 12,616 94,099 36,711
- - -------------------------------------------------------------------------------------------------------------
YEAR END POSITION
Total assets $488,307 $480,811 $504,905 $499,654 $382,621
Net working capital 95,225 80,901 75,252 55,459 87,509
Long-term debt 96,219 113,997 126,714 119,214 94,012
Stockholders' equity 265,623 259,598 267,584 266,429 181,021
5
7
CONSOLIDATED BALANCE SHEETS
Chaparral Steel Company and Subsidiaries
May 31
1994 1993
(In thousands)
- - -------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,203 $ 3,763
Trade accounts receivable, net
of allowance of $3.8 million
and $3.4 million, respectively 41,734 34,187
Inventories 117,583 92,672
Prepaid expenses 8,914 8,147
- - -------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 171,434 138,769
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 47,217 46,634
Machinery and equipment 434,041 430,614
Land 1,288 1,288
- - -------------------------------------------------------------------------------------
482,546 478,536
Less allowance for depreciation 247,660 222,974
- - -------------------------------------------------------------------------------------
234,886 255,562
OTHER ASSETS
Goodwill, commissioning costs and other
assets, net of accumulated amortization
of $16.9 million and $11.6 million,
respectively 81,987 86,480
- - -------------------------------------------------------------------------------------
$488,307 $480,811
=====================================================================================
1994 1993
(In thousands)
- - -------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 15,000 $ -
Trade accounts payable 28,667 27,202
Accrued interest payable 2,435 3,044
Other accrued expenses 12,124 14,902
Current portion of long-term debt 17,983 12,720
- - -------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 76,209 57,868
LONG-TERM DEBT 96,219 113,997
DEFERRED INCOME TAXES
AND OTHER CREDITS 50,256 49,348
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
500,000 authorized, none outstanding - -
Common stock, $.10 par value,
50,000,000 authorized, 29,679,900 and
29,675,400 outstanding 2,994 2,994
Paid-in capital 188,037 188,050
Retained earnings 77,096 71,113
Cost of common shares in treasury (2,504) (2,559)
- - -------------------------------------------------------------------------------------
265,623 259,598
- - -------------------------------------------------------------------------------------
$ 488,307 $ 480,811
=====================================================================================
See notes to consolidated financial statements.
6
8
CONSOLIDATED STATEMENTS OF INCOME
Chaparral Steel Company and Subsidiaries
Year Ended May 31
1994 1993 1992
(In thousands except per share)
- - -------------------------------------------------------------------------------------------------
Net sales $ 462,275 $ 420,210 $ 416,610
Costs and expenses:
Cost of sales 380,498 361,586 349,932
Selling, general and administrative 15,937 13,992 17,437
Depreciation and amortization 33,756 33,814 29,477
Interest 13,439 14,650 12,541
Other income (3,372) (2,072) (5,217)
- - -------------------------------------------------------------------------------------------------
440,258 421,970 404,170
- - -------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 22,017 (1,760) 12,440
Provision for income taxes 10,098 291 5,350
- - -------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 11,919 $ (2,051) $ 7,090
=================================================================================================
NET INCOME (LOSS) PER COMMON SHARE $ .41 $ (.06) $ .25
=================================================================================================
See notes to consolidated financial statements.
7
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Chaparral Steel Company and Subsidiaries
Year Ended May 31
1994 1993 1992
(In thousands)
- - -------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $11,919 $(2,051) $ 7,090
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 33,756 33,814 29,477
Provision for deferred income taxes 3,101 3,005 4,105
Other deferred credits (2,193) (3,044) (1,481)
Changes in operating assets and liabilities:
Trade accounts receivable, net (8,380) 2,362 (5,779)
Inventories (24,911) (2,177) (7,765)
Prepaid expenses (767) (3,472) (2,346)
Trade accounts payable 1,465 (6,102) 8,128
Accrued interest payable (609) (627) (550)
Other accrued expenses (2,778) 3,379 (2,038)
- - -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,603 25,087 28,841
INVESTING ACTIVITIES
Capital expenditures (7,805) (7,424) (12,616)
Commissioning costs and other 93 - (8,347)
- - -------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,712) (7,424) (20,963)
FINANCING ACTIVITIES
Short-term borrowings 30,000 7,000 18,000
Repayments on short-term debt (15,000) (7,000) (28,000)
Long-term borrowings 260 - 20,237
Repayments on long-term debt (12,775) (12,718) (14,305)
Dividends paid (5,936) (5,935) (5,935)
- - -------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,451) (18,653) (10,003)
- - -------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (560) (990) (2,125)
Cash and cash equivalents at beginning of year 3,763 4,753 6,878
- - -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,203 $ 3,763 $ 4,753
=================================================================================================
See notes to consolidated financial statements.
8
10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Chaparral Steel Company and Subsidiaries
Preferred Common Stock Paid-in Retained Treasury Stock
Stock Shares Amount Capital Earnings Shares Amount
(In thousands)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1991 $ - 29,940 $ 2,994 $ 188,050 $ 77,944 (265) $ (2,559)
Net income for the year
ended May 31, 1992 - - - - 7,090 - -
Dividends paid to
stockholders ($.20 per share) - - - - (5,935) - -
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1992 - 29,940 2,994 188,050 79,099 (265) (2,559)
Net loss for the year
ended May 31, 1993 - - - - (2,051) - -
Dividends paid to
stockholders ($.20 per share) - - - - (5,935) - -
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1993 - 29,940 2,994 188,050 71,113 (265) (2,559)
Net income for the year
ended May 31, 1994 - - - - 11,919 - -
Dividends paid to
stockholders ($.20 per share) - - - - (5,936) - -
Treasury stock issued for
options - 4,500 shares - - - (13) - 5 55
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1994 $ - 29,940 $ 2,994 $ 188,037 $ 77,096 (260) $ (2,504)
===================================================================================================================================
See notes to consolidated financial statements.
9
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chaparral Steel Company and Subsidiaries
May 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND RELATED MATTERS:
The consolidated financial statements include the operations of
Chaparral Steel Company (the "Company"), America Steel Transport and inactive
wholly-owned subsidiaries. The Company is 81% owned by Texas Industries, Inc.
("TXI").
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
The Company operates in the steel industry only; therefore, no
industry segment information is presented.
CASH EQUIVALENTS:
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
CREDIT RISK:
The Company extends credit to various companies in steel distribution,
fabrication and related industries. Such credit risk is considered by
management to be limited due to the Company's sizable customer base and the
geographical dispersion of the customer base. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
INVENTORIES:
Inventories are stated at the lower of cost (last-in, first-out) or
market, except rolls which are stated at cost (specific identification) and
supplies which are stated at average cost.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Depreciation of
property, plant and equipment is computed using the straight-line method over
the estimated useful lives of the property.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED:
The amount of goodwill net of amortization, arising from the purchase
of 50% of the outstanding securities of the Company by TXI, was recorded using
the purchase method of accounting and totaled $73 million and $75.3 million at
May 31, 1994 and 1993, respectively. This goodwill is being amortized over 40
years using the straight-line method and reduced earnings by $2.3 million in
1994, 1993 and 1992.
COMMISSIONING COSTS:
The Company's policy for new facilities is to capitalize certain costs
until the facility is substantially complete and ready for its intended use.
INCOME TAXES:
The Company, its subsidiaries and TXI have tax sharing agreements (the
"Agreements") whereby the Company and its subsidiaries are included in the
consolidated income tax return of TXI. The Agreements provide that the Company
will account for income taxes on a stand-alone basis. Accordingly, the Company
and its subsidiaries make payments to or receive payments from TXI in amounts
equal to the income taxes they would have otherwise paid or received.
The Company adopted the provisions of Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes," (SFAS 109) effective
June 1, 1992. As permitted under SFAS 109, prior years' financial statements
have not been restated and no cumulative effect resulted from this change.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share is calculated based upon a weighted
average of 29,721,000, 29,675,000 and 29,722,000 shares outstanding (including
common stock equivalents that are not antidilutive) during 1994, 1993 and 1992,
respectively.
The calculations of net income (loss) per common share for periods
after August 31, 1990, contain an adjustment for the previous amortization of
an estimated amount of goodwill.
10
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following:
May 31 1994 1993
(In thousands)
- - ----------------------------------------------------
Finished goods $ 72,946 $ 49,596
Work in process 14,477 7,817
Raw materials:
Scrap 10,407 10,843
Crushed cars - 171
Rolls 15,602 14,579
Supplies 14,878 14,684
LIFO adjustment (10,727) (5,018)
- - ----------------------------------------------------
$ 117,583 $ 92,672
====================================================
NOTE C - COMMISSIONING COSTS
In fiscal 1990, the Company began construction of the large beam mill
and commissioning commenced in February 1991.
The Company's policy for new facilities is to capitalize certain costs
until the facility is substantially complete and ready for its intended use.
The mill was substantially complete and ready for its intended use in the third
quarter of fiscal 1992 with a total of $15.1 million of costs deferred. The
amounts of amortization charged to income were $3 million, $3 million and $1
million in 1994, 1993 and 1992, respectively, based on a five year period.
NOTE D - CONTINGENCIES
The Company and subsidiaries are defendants in lawsuits which arose in
the normal course of business. In management's judgement (based on the opinion
of counsel) the ultimate liability, if any, from such legal proceedings will
not have a material effect on the Company's financial position.
The Company has no post-retirement health benefits and, therefore,
realizes no effect from accounting requirements under Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Post-retirement
Benefits Other Than Pensions" (SFAS 106).
The Company is subject to federal, state and local environmental laws
and regulations concerning, among other matters, air emissions, furnace dust
disposal and wastewater discharge. The Company believes it is in substantial
compliance with applicable environmental laws and regulations. Notwithstanding
such compliance, if damage to persons or property or contamination of the
environment has been or is caused by the conduct of the Company's business or
by hazardous substances or wastes used in, generated or disposed of by the
Company, the Company may be held liable for such damages and be required to pay
the cost of investigation and remediation of such contamination. The amount of
such liability could be material. Changes in federal or state laws, regulations
or requirements or discovery of unknown conditions could require additional
expenditures by the Company. At May 31, 1994, the Company had approximately
$1.5 million accrued for environmental matters.
11
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LONG-TERM DEBT
Outstanding long-term debt is as follows:
May 31 Interest Rate 1994 1993
(In thousands)
- - -------------------------------------------------------------------------------
First mortgage notes payable:
$61.4 million note, due in
annual installments through
January 2001 14.2% $ 26,595 $ 30,687
$70.9 million note, due in 10.2% - 8,502
semiannual installments 1.5% to
through June 1995 2% over
Libor (1) 7,257 7,257
- - -------------------------------------------------------------------------------
33,852 46,446
$80 million senior unsecured
notes due in annual
installments from April 1995
through 2004 10.2% 80,000 80,000
Other notes payable, due
through 1998 Various 350 271
- - -------------------------------------------------------------------------------
114,202 126,717
Less current portion 17,983 12,720
- - -------------------------------------------------------------------------------
$ 96,219 $113,997
===============================================================================
(1) London Interbank Offered Rate (Libor) (3.5% at May 31, 1994).
Scheduled maturities of long-term debt at May 31, 1994 for each of the
five succeeding fiscal years are as follows:
(In thousands)
1995 $17,983
1996 13,766
1997 12,128
1998 12,096
1999 12,092
Substantially all of the assets of the Company except accounts
receivable, inventories and certain equipment not forming an integral part of
the mill have been pledged as collateral on the first mortgage notes.
The Company has arrangements for up to $20 million of short-term
borrowings with banks for which it pays quarterly fees at an annual rate of 3/8
of 1% on the unused portion of the commitment. These short-term credit lines
are due to expire in January 1995, if not renewed by the banks or the Company.
The terms of the loan agreements impose certain restrictions on the
Company, the most significant of which require the Company to maintain minimum
amounts of working capital, limit the incurrence of certain indebtedness and
restrict payments of cash dividends and purchases of treasury stock. The
amounts of earnings available for restricted payments were approximately $33
million at May 31, 1994 and 1993.
Interest payments were $14 million, $15.2 million and $16.4 million in
1994, 1993 and 1992, respectively. In addition, interest deferred as
commissioning costs totaled $3.4 million in 1992.
NOTE F - INCOME TAXES
The provisions for income taxes are comprised of:
Year ended May 31 1994 1993 1992
(In thousands)
- - -------------------------------------------------------------------------------
Current $ 6,982 $ 3,196 $ 470
Deferred 3,116 (2,905) 4,880
- - -------------------------------------------------------------------------------
$10,098 $ 291 $5,350
===============================================================================
The reasons for the differences between the provisions for income taxes and the
amounts computed by applying the statutory federal income tax rates to income
(loss) before income taxes are:
Year ended May 31 1994 1993 1992
(In thousands)
- - -------------------------------------------------------------------------------
Statutory rate applied
to income (loss) before
income taxes $ 7,706 $(598) $4,230
Increase in taxes resulting from:
Change in statutory federal
tax rate 1,443 - -
Goodwill amortization 811 787 787
State income tax 135 48 234
Other - net 3 54 99
- - -------------------------------------------------------------------------------
$10,098 $ 291 $5,350
===============================================================================
12
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income tax expense result from:
Year ended May 31 1992
(In thousands)
- - --------------------------------------------------------------------
Depreciation $ 3,439
Commissioning costs 3,236
Deferred compensation 498
Environmental costs 128
Recognition of minimum
tax credit carryforwards (2,986)
Expenses not currently
tax deductible 565
- - --------------------------------------------------------------------
$ 4,880
====================================================================
The components of the net deferred tax liability as of May 31, 1994 and 1993
are summarized below:
Year ended May 31 1994 1993
(In thousands)
- - ------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 290 $ 1,027
Accounts receivable 1,347 1,164
Uniform capitalization expense 1,388 1,262
Net operating loss carryforwards 15 2,068
Alternative minimum tax
credit carryforwards 6,491 6,983
Expenses not currently tax
deductible 1,302 1,626
- - ------------------------------------------------------------------
Total deferred tax assets 10,833 14,130
Deferred tax liabilities:
Accelerated tax depreciation (53,085) (52,506)
Commissioning costs (2,817) (3,762)
Other - net (268) (83)
- - ------------------------------------------------------------------
Total deferred tax liabilities (56,170) (56,351)
- - ------------------------------------------------------------------
Net deferred tax liability (45,337) (42,221)
Current portion 4,038 4,053
- - ------------------------------------------------------------------
Non-current portion of
deferred tax liability $ (49,375) $ (46,274)
==================================================================
Deferred income taxes and other credits as reflected on the
consolidated balance sheets include deferred income tax liability of $49.4
million and $46.3 million at May 31, 1994 and 1993, respectively. On June 1,
1992, the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). This standard, which changes the
classification of current versus non-current deferred taxes, did not have a
material effect on the Company's financial position or operating results. In
August 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law
and contained a provision raising the top effective rate for corporations to
35%. This rate increase, when applied to the Company's temporary differences,
resulted in a charge of $1.4 million which is included in the income tax
provision in the August 1993 quarter. The Company made income tax payments of
$7.2 million, $2.5 million and $4.3 million in 1994, 1993 and 1992,
respectively. The amounts of federal income taxes currently payable were $1
million and $1.3 million at May 31, 1994 and 1993, respectively.
13
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - RETIREMENT PLAN
There exists a non-contributory defined contribution plan to provide
retirement benefits for substantially all employees. The Company makes a
regular contribution of 1% of annual compensation for each participant and a
variable contribution equal to 1/2 of 1% of pre-tax income, as defined, to this
plan. The amounts of expense charged to income for this plan were $.5 million,
$.4 million and $.4 million in 1994, 1993 and 1992, respectively. It is the
Company's policy to fund the plan to the extent of charges to income.
NOTE H - INCENTIVE PLANS
The Company has a profit-sharing plan which provides that all
personnel employed as of May 31 share currently in the pre-tax income, as
defined, of the Company for the year then ended based on a predetermined
formula. The duration of the plan is one year and is subject to annual renewal
by the Board of Directors. The provisions for this plan were $1.9 million, $-0-
and $1.2 million for 1994, 1993 and 1992, respectively.
In 1987, the Board of Directors approved a deferred compensation plan
for certain executives of the Company. The plan is based on a five-year average
of earnings. Amounts recorded as expense (income) under this plan were ($2)
million, ($2.4) million and ($.6) million for 1994, 1993 and 1992,
respectively. The amount of deferred compensation currently payable was $.2
million and $.6 million at May 31, 1994 and 1993, respectively. The amount of
accrued deferred compensation was $.8 million and $3 million at May 31, 1994
and 1993, respectively.
NOTE I - STOCK OPTION PLAN
In 1989, the stockholders approved a stock option plan whereby options
to purchase Common Stock may be granted to officers and key employees at prices
not less than the market value at the date of grant. Generally, options become
exercisable beginning two years after date of grant, and expire ten years after
the date of grant.
A summary of option transactions for the two years ended May 31, 1994,
follows:
Shares under Option Aggregate
Option Price Option Price
(In thousands except option price)
- - ---------------------------------------------------------------------------------
Outstanding at May 31, 1992 1,110 $ 8.88 - 12.13 $ 12,053
Terminated (40) 8.88 - 12.13 (438)
- - ---------------------------------------------------------------------------------
Outstanding at May 31, 1993 1,070 8.88 - 12.13 11,615
Granted 108 10.625 1,162
Terminated (63) 8.88 - 12.13 (691)
Exercised (5) 8.88 (40)
- - ---------------------------------------------------------------------------------
Outstanding at May 31, 1994 1,110 $ 8.88 - 12.13 $ 12,046
=================================================================================
May 31 1994 1993
(In thousands)
- - ------------------------------------------------------------------
Shares at end of year:
Exercisable 785 413
Available for future grants 390 430
The options outstanding at May 31, 1994, expire on various dates to
January 13, 2004.
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts at May 31, 1994 and
1993 have been determined by the Company using available market information and
the following methodologies:
* Cash and cash equivalents, accounts receivable, accounts payable: The
carrying amounts of these items are a reasonable estimate of their
fair values at May 31, 1994 and 1993.
* Long-term debt: Interest rates that are currently available to the
Company for issuance of the debt with similar terms and remaining
maturities are used to estimate fair value for debt issues using
discounted cash flow analysis.
May 31 1994 1993
(In millions)
- - ------------------------------------------------------------------
Long-term debt:
Carrying amount $ 114.2 $ 126.7
Estimated fair value 130.0 150.0
14
16
QUARTERLY FINANCIAL INFORMATION
The following table is a summary of quarterly financial information
for the two years ended May 31, 1994:
Three months ended May Feb. Nov. Aug.
(In thousands except per share)
- - -------------------------------------------------------------------------------------------
1994
Net sales $ 124,467 $ 118,687 $ 117,225 $ 101,896
Gross profit 20,454 22,403 22,371 16,549
Net income (loss) 3,962 4,408 4,423 (874)
- - -------------------------------------------------------------------------------------------
Net income (loss) per
common share .14 .15 .15 (.03)
1993
Net sales $ 108,688 $ 103,396 $ 106,568 $ 101,558
Gross profit 14,906 15,800 16,630 11,288
Net income (loss) (999)1) 590 667 (2,309)
- - -------------------------------------------------------------------------------------------
Net income (loss) per
common share (.03) .02 .03 (.08)
1) The Company's fourth quarter results in fiscal 1993 contain an income tax
rate in excess of the effective rate used in the previous quarters due to
lower than expected pre-tax income.
QUARTERLY STOCK PRICES AND DIVIDENDS
The Company's common stock is listed on the New York Stock Exchange
(ticker symbol CSM). The number of record holders of the Company's common stock
at May 31, 1994 was 1,013. High and low stock prices and dividends for the last
two years were:
1994 Stock Prices Dividends
Quarter High Low
- - -----------------------------------------------------------------------------
First 10 1/8 7 7/8 $ .05
Second 10 1/8 8 3/8 .05
Third 11 1/2 9 1/4 .05
Fourth 12 1/4 8 7/8 .05
1993 Stock Prices Dividends
Quarter High Low
- - -----------------------------------------------------------------------------
First 11 5/8 8 5/8 $ .05
Second 10 1/8 8 1/4 .05
Third 12 9 1/4 .05
Fourth 11 7/8 8 7/8 .05
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Chaparral Steel Company
Midlothian, Texas
We have audited the accompanying consolidated balance sheets of
Chaparral Steel Company and subsidiaries as of May 31, 1994 and 1993, and the
related consolidated statements of income, cash flows and stockholders' equity
for each of the three years in the period ended May 31, 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Chaparral Steel Company and subsidiaries at May 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1994, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
July 14, 1994
15
17
CHAPARRAL STEEL COMPANY
DIRECTORS OFFICERS
Robert D. Rogers Gordon E. Forward
Chairman of the Board President and Chief
Executive Officer
Gordon E. Forward
President and Chief Kenneth R. Allen
Executive Officer Director-Investor Relations
Robert Alpert Dennis E. Beach
Chairman of the Board Vice President-
Alpert Companies Administration
Dallas, Texas
Larry L. Clark
John M. Belk Vice President-Controller
Chairman of the Board and Assistant Treasurer
Belk Stores Services, Inc.
Charlotte, North Carolina David A. Fournie
Vice President-Operations
Lic. Eugenio Clariond Reyes
Director General and Chief Richard M. Fowler
Executive Officer Senior Vice President-
Grupo IMSA, S.A. Finance
Monterrey
Richard T. Jaffre
Gerald R. Heffernan Vice President-Raw Materials
President
G.R. Heffernan & Robert C. Moore
Associates, Ltd. Vice President-General
Toronto, Ontario Counsel and Secretary
Dr. Gerhard Liener Libor F. Rostik
Chief Financial Officer Senior Vice President-
Daimler-Benz AG Engineering
Stuttgart
Jeffry A. Werner
Senior Vice President-
Commercial
Peter H. Wright
Vice President-Quality
Control and SBQ Sales
TRANSFER AGENT AND REGISTRAR OF STOCK
Chemical Bank
Common Stock
Stockholder Inquiries
1-800-635-9270
STOCK EXCHANGE LISTING
New York Stock Exchange
FORM 10-K REQUESTS
Stockholders may obtain, without charge, a copy of the Company's Form
10-K for the year ended May 31, 1994, as filed with the Securities and Exchange
Commission. Written requests should be addressed to the Director-Investor
Relations.
The information contained herein is not given in connection with any
sale or offer of, or solicitation of any offer to buy, any securities.
ANNUAL MEETING
The Annual Meeting of Stockholders of Chaparral Steel Company will be
held Wednesday, October 19, 1994, at 9:30 a.m., CDT, at The Ballpark in
Arlington, 1000 Ballpark Way, Arlington, Texas.
16