-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WBSDoxmwNrMFnWbvicRduthRyISKJOe8zmMrjcsaYqz8mz1smDW3xAPPkkHCHb7U 3QOvJna+yntbHSqf+UCKeg== /in/edgar/work/0000950134-00-010091/0000950134-00-010091.txt : 20001122 0000950134-00-010091.hdr.sgml : 20001122 ACCESSION NUMBER: 0000950134-00-010091 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL METALS CO CENTRAL INDEX KEY: 0000022444 STANDARD INDUSTRIAL CLASSIFICATION: [5051 ] IRS NUMBER: 750725338 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04304 FILM NUMBER: 774637 BUSINESS ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: P O BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 BUSINESS PHONE: 2146894300 MAIL ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: PO BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 10-K405 1 d82018e10-k405.txt FORM 10-K FOR FISCAL YEAR END AUGUST 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (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, 2000 _____ 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.) 7800 STEMMONS FREEWAY, DALLAS, TEXAS 75247 (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 13, 2000, HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $25.1875 PER SHARE ON NOVEMBER 13, 2000, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY $301,827,807. (FOR PURPOSES OF DETERMINATION OF THIS AMOUNT, ONLY DIRECTORS, EXECUTIVE OFFICERS AND 10% OR GREATER STOCKHOLDERS HAVE BEEN DEEMED AFFILIATES). INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF NOVEMBER 13, 2000: COMMON STOCK, $5.00 PAR -- 13,025,272. 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 25, 2001 -- PART III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Commercial Metals Company was incorporated in 1946 in Delaware as a successor to a secondary metals recycling business in existence since approximately 1915. Commercial Metals maintains executive offices at 7800 Stemmons Freeway, Dallas, Texas 75247, telephone 214/689-4300. The terms "Commercial Metals," "we," "us," "our," or "Company" as used in this annual report include Commercial Metals Company and its consolidated subsidiaries. Our fiscal year ends August 31 and all references to years refer to the fiscal year ended August 31 of that year unless otherwise noted. We consider our businesses to be organized into three segments - (i) manufacturing, (ii) recycling and (iii) marketing and trading. Our activities are primarily concerned with metals related activities. Financial information for the last three fiscal years concerning the segments is incorporated herein by reference from "Note 12 Business Segments," of the notes to consolidated financial statements at Part II, Item 8. THE MANUFACTURING SEGMENT The manufacturing segment is our dominant and most rapidly expanding segment in terms of assets employed, capital expenditures, operating profit and number of employees. It consists of two entities, the CMC steel group and the Howell Metal Company subsidiary, a manufacturer of copper tubing. The steel group is by far the more significant entity in this segment, with subsidiaries operating four steel minimills, twenty-six steel fabrication plants, four steel joist and two castellated and cellular beam manufacturing facilities, four steel fence post manufacturing plants, a heat treating plant, eight metals recycling plants, a railcar rebuilding facility, twenty-two concrete related product warehouses, an industrial products supply facility and a railroad salvage company. Subject to market conditions, we endeavor to operate all four minimills at full capacity to minimize product costs. We emphasize increases in capacity, productivity and enhancements in product mix through both operating and capital improvements. The steel minimill business is capital intensive, with substantial capital expenditures required on a regular basis to remain competitive as a low cost producer. Over the past three fiscal years, approximately $207 million, or 62% of our total capital expenditures, have been for minimill projects. Construction interference and equipment start-up related to major capital improvement projects at two minimills together with unprecedented levels of steel imports resulted in decreased minimill production and shipments in 1999, but the general increase in productivity resumed during 2000.
1998 1999 2000 ------------ ------------- --------- Tons Melted 1,932,000 1,582,000 1,848,000 Tons Rolled 1,693,000 1,410,000 1,765,000 Tons Shipped 2,008,000 1,685,000 1,853,000
Our largest steel minimill, acquired in 1963, is located at Seguin, Texas, near San Antonio. Our steel minimill in Birmingham, Alabama, was acquired in 1983. Our South Carolina minimill, located in Cayce, South Carolina, was acquired in November 1994 as part of the acquisition of Owen Steel 1 3 Company, Inc. and affiliates. A fourth, much smaller mill, has been in operation since 1987 and is located near Magnolia, Arkansas. The Texas, Alabama and South Carolina mills consist of melt shops with electric arc furnaces that melt steel scrap, continuous casting facilities to shape the molten metal into billets, reheating furnaces, rolling mills, mechanical cooling beds, finishing facilities and supporting facilities. The mills utilize both a fleet of trucks we own and private haulers to transport finished products to customers and our fabricating shops. The capacity of our Texas minimill is approximately 900,000 tons per year melted and 800,000 rolled. Our Alabama mill's annual capacity is approximately 600,000 tons melted and 575,000 rolled. Our South Carolina mill's annual capacity is approximately 700,000 tons melted and 800,000 tons rolled. Our Texas minimill manufactures steel reinforcing bars, angles, rounds, channels, flats, and special sections used primarily in highways, reinforced concrete structures and manufacturing. Our Texas minimill sells primarily to the construction, service center, energy, petrochemical, and original equipment manufacturing industries. Its primary markets are located in Texas, Louisiana, Arkansas, Oklahoma and New Mexico, although products are shipped to approximately 30 states and Mexico. Our Texas minimill melted 769,000 tons during 2000, compared to 670,000 tons during the prior year, and rolled 687,000 tons, an increase of 49,000 tons from 1999. The Alabama mill recorded 2000 melt shop production of 523,000 tons up 95,000 from the prior year with 414,000 tons rolled, an increase of 122,000 tons from 1999. Our Alabama minimill primarily manufactures products that are larger in size than our other three minimills, such as mid-size structural steel products including angles, channels, up to eight-inch wide flange beams and special bar quality rounds and flats. Customers include primarily service centers, as well as the construction, manufacturing, and fabricating industries in the primary market areas of Alabama, Georgia, Tennessee, North and South Carolina, and Mississippi. Our South Carolina minimill manufactures primarily steel reinforcing bars along with angles, rounds, squares, fence post sections and flats. Its primary market area includes the Southeast and mid-Atlantic area south through Florida and north into southern New England. During 2000, the South Carolina minimill melted 556,000 tons and rolled 532,000 tons compared to 484,000 and 363,000 tons, respectively, during 1999. The primary raw material for our Texas, Alabama and South Carolina minimills is secondary, or scrap, ferrous metal purchased primarily from suppliers generally within a 300 mile radius of each mill. A portion of the ferrous raw material, generally less than half, is supplied from recycling plants we own. The supply of scrap is believed to be adequate to meet future needs but has historically been subject to significant price fluctuations. All three minimills also consume large amounts of electricity and natural gas, both of which are believed to be readily available although subject to fluctuating prices based on overall energy supply and demand. No melting facilities are located at our Arkansas minimill since this mill utilizes rail salvaged from abandoned railroads for rerolling and, on occasion, billets from Company minimills or other suppliers as its raw materials. The rail or billets are heated in a reheat furnace and processed on a rolling mill and finished at facilities similar to, but on a smaller scale, than the other mills. Our Arkansas minimill's finished product is primarily metal fence post stock, small diameter reinforcing bar, sign posts and bed frame angles with some high quality bar products being rolled. Fence post stock is fabricated into studded "T" metal fence posts at our facilities at the Arkansas mill site, San Marcos, Texas, Brigham City, Utah, and West Columbia, South Carolina. Because of this mill's lack of melting capacity, it is dependent on an adequate supply of competitively priced billets or used rail, the availability of which fluctuates with the pace of railroad abandonments, rail replacement by railroads and demand for used rail from domestic and foreign rail rerolling mills. Capacity at our Arkansas minimill is approximately 150,000 tons rolled per year. 2 4 Our steel group's downstream processing facilities engage in the fabrication of reinforcing and structural steel, steel warehousing, joist manufacturing, fence post manufacturing and railcar repair and rebuilding. Steel fabrication capacity now exceeds 1.1 million tons, with a record 955,000 tons of fabricated steel shipped in 2000, an increase of 114,000 tons from 1999. During 2000 we purchased three additional rebar fabrication facilities, two in Southern California with operations in Rancho Cucamonga, San Marcos, Stockton and Fontana and one facility in Naples, Florida. In addition to these new locations, fabrication activities are also conducted at various locations in Texas in the cities of Beaumont, Buda (near Austin), Corpus Christi, Dallas, Houston, San Marcos, Seguin, Victoria, and Waco; Baton Rouge and Slidell, Louisiana; Magnolia and Hope, Arkansas; Brigham City, Utah; Starke and Whitehouse, Florida; Fallon, Nevada; Cayce, Columbia, and Taylors, South Carolina; Lawrenceville, Georgia; Gastonia, North Carolina and Fredericksburg, Virginia. Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, including high-rise office or hotel towers, hospitals, convention centers, industrial plants, power plants, highways, arenas, stadiums, and dams. Sales of fabricated steel are generally made in response to bid solicitation from construction contractors or owners on a competitive bid basis and less frequently on a negotiated basis. Steel for fabrication may be obtained from unrelated vendors as well as our own mills. Secondary metals recycling plants near our minimills in Texas and South Carolina and in Austin, together with five smaller feeder facilities nearby, operate as part of the steel group due to the predominance of secondary ferrous metals sales to the nearby SMI minimills. The South Carolina and Texas recycling facilities each operate automobile shredders. Our joist manufacturing operation headquartered in Hope, Arkansas, manufactures steel joists for roof supports using steel obtained primarily from the steel group's minimills at locations in Hope, Starke, Florida, Cayce, South Carolina, and Fallon, Nevada. A new facility located at Iowa Falls, Iowa, purchased subsequent to fiscal 2000 is being prepared for additional joist manufacturing capacity. Joist consumers are typically construction contractors or large chain store owners. Joists are generally made to order and sales, which may include custom design and fabrication, are primarily obtained on a competitive bid basis. During 1999, we began limited production and sales of castellated and cellular steel beams. Two new facilities specifically dedicated to this product line, one located adjacent to the Hope joist facility and a second at Farmville, Virginia are being prepared for increased capacity. These beams, recognizable by their hexagonal or circular pattern of voids, permit greater design flexibility in steel construction, especially floor structures. Our facility in Victoria, Texas repairs, rebuilds and provides custom maintenance with some manufacturing of railroad freight cars owned by railroad companies and private industry. That work is obtained primarily on a bid and contract basis and may include maintenance of the cars. We sell concrete related supplies, including the sale or rental of equipment to the concrete installation trade, at fourteen warehouse locations in Texas, six Louisiana locations, and one location each in Mississippi and Georgia. During 2000 we expanded the Houston, Texas, area operation by purchasing substantially all of the operating assets of Bell-Barcelona Accessories, Inc. A smaller operation which emphasizes a broader industrial product supply is located in Columbia, South Carolina. Allegheny Heat Treating, Inc., of Chicora, Pennsylvania, is the steel group's heat treating operation. Allegheny Heat Treating works closely with our Alabama minimill and other steel mills that sell specialized heat-treated steel for customer specific use, primarily in original or special equipment manufacturing. Our operating capacity in this business is approximately 30,000 tons per year. The copper tube minimill operated by our Howell Metal Company subsidiary is located in New Market, Virginia. It manufactures primarily copper water tube as well as air conditioning and refrigeration tubing in straight lengths and coils for use in commercial, industrial and residential construction. Its customers, largely equipment manufacturers and wholesale plumbing supply firms, are located primarily east of the Mississippi River. Demand for copper tube is dependent mainly on the level of new residential construction and renovation. High quality copper scrap supplemented occasionally by virgin copper ingot is the raw material used in the melting and casting of billets. Copper scrap is readily available, subject to rapid price fluctuations generally related to the price or supply of virgin copper. A small portion of the scrap is supplied by our metal recycling yards. Howell's facilities include melting, casting, piercing, extruding, drawing, finishing and other departments. Capacity is approximately 55,000,000 pounds per 3 5 year. During 2000, Howell continued construction of an enlarged facility as part of a two-year expansion project which, when complete in 2001, should increase capacity by approximately fifty percent. No single customer purchases ten percent or more of the manufacturing segment's production. The nature of certain stock products sold in the manufacturing segment are, with the exception of the steel fabrication and joist jobs, not characteristic of a long lead time order cycle. Orders for other stock products are generally filled promptly from inventory or near term production. As a result, we do not believe backlog levels are a significant factor in evaluating most operations. Backlog in our steel group at 2000 year-end was approximately $312,389,000. Backlog at 1999 year-end was approximately $287,164,000. Because most of the segment's sales are to consumers located in the sunbelt where construction activity generally continues throughout the year, demand for our products is not considered seasonal, although adverse weather can slow shipments. THE RECYCLING SEGMENT Our recycling segment is engaged in processing secondary, or scrap, metals for further recycling into new metal products. This segment consists of thirty three secondary metals processing divisions' recycling plants, which excludes eight such facilities operated by our steel group as a part of the manufacturing segment, and two automobile salvage yards located in Florida. Our metal recycling plants purchase ferrous and nonferrous secondary or scrap metals, processed and unprocessed, in a variety of forms. Sources of metals for recycling include manufacturing and industrial plants, metal fabrication plants, electric utilities, machine shops, factories, railroads, refineries, shipyards, ordinance depots, demolition businesses, automobile salvage and wrecking firms. Numerous small secondary metals collection firms are also, in the aggregate, major suppliers. These plants processed and shipped approximately 1,670,000 tons of scrap metal during 2000 and 1,439,000 tons during the prior year. Ferrous metals comprised the largest tonnage of metals recycled at approximately 1,438,000 tons, which was approximately 195,000 more than the prior year. Shipments of non-ferrous metals, primarily aluminum, copper and stainless steel, were approximately 233,000 tons, compared to 196,000 in 1999. We also purchased and sold an additional 156,000 tons of metals processed by other metal recycling facilities. With the exception of precious metals, practically all metals capable of being recycled are processed by these plants. Our steel group's eight metals recycling facilities processed and shipped an additional 640,000 tons of primarily ferrous scrap metal during 2000. The metal recycling plants generally consist of an office and warehouse building equipped with specialized equipment for processing both ferrous and nonferrous metal. Most of the larger plants are equipped with scales, shears, baling presses, briquetting machines, conveyors and magnetic separators. Two locations have extensive equipment for mechanically processing large quantities of insulated wire to segregate metallic content. All ferrous processing centers are equipped with either presses, shredders or hydraulic shears, locomotive and crawler cranes and railway tracks to facilitate shipping and receiving. The segment operates six large shredding machines capable of pulverizing obsolete automobiles or other ferrous metal scrap. Two additional shredders operated by the manufacturing segment's recycling facilities are located at or near two steel minimills in that segment. A typical recycling plant includes several acres of land used for receiving, sorting, processing and storage of metals. Several recycling plants devote a small portion of their site or a nearby location for display and sales of metal products considered reusable for their original purpose. Recycled metals are sold to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, secondary lead smelters, specialty steel mills, high temperature alloy manufacturers and other consumers. Sales of material processed through our recycling plants are coordinated through the recycling segment's office in Dallas. Export sales are negotiated through our network of foreign offices as well as the Dallas office. 4 6 No single source of material or customer of the recycling segment represents a material part of purchases or revenues of the Company but one customer of the recycling segment made purchases aggregating approximately 11% of segment revenues. The recycling segment competes with other secondary processors and primary nonferrous metals producers, both domestic and foreign, for sales of nonferrous materials. Consumers of nonferrous scrap metals often have the capability to utilize primary or "virgin" ingot processed by mining companies interchangeably with secondary metals. The prices for nonferrous scrap metals are normally closely related to but generally less than, the prices of the primary or "virgin" metal producers. Ferrous scrap is the primary raw material for electric arc furnaces such as those operated by our steel minimills. Some minimills supplement purchases of scrap metal with direct reduced iron and pig iron for certain product lines. THE MARKETING AND TRADING SEGMENT The marketing and trading segment buys and sells primary and secondary metals, fabricated metals and other industrial products through a network of trading offices located around the globe. Steel, nonferrous metals, specialty metals, chemicals, industrial minerals, ores, concentrates, ferroalloys, and other basic industrial materials are purchased primarily from producers in domestic and foreign markets. On occasion these materials are purchased from trading companies or industrial consumers with surplus supplies. Long-term contracts, spot market purchases and trading or barter transactions are all utilized to obtain materials. A large portion of these transactions involve fabricated semi-finished or finished product. Customers for these materials include industrial concerns such as the steel, nonferrous metals, metal fabrication, chemical, refractory and transportation sectors. Sales are generally made directly to consumers through and with coordination of offices in Dallas; Fort Lee and Englewood Cliffs, New Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug, Switzerland; Hong Kong, and Surrey, and Sandbach, United Kingdom and Bergisch Gladbach, Germany. We also maintain representative offices in Moscow, Seoul, and Beijing, as well as agents in other significant international markets. These offices form a network for the exchange of information on the materials we market, as well as servicing sources of supply and purchasers. In most transactions we act as principal and often as a marketing representative. We utilize agents when appropriate and occasionally act as broker. We participate in transactions in practically all major markets of the world where trade by American-owned companies is permitted. This segment focuses on the marketing of physical products as contrasted to traders of commodity futures contracts who frequently do not take delivery of the commodity. Sophisticated global communications and the development of easily accessible, although not always accurate, quoted market prices for many products has resulted in our emphasis on creative service functions for both sellers and buyers. Actual physical market pricing and trend information, as contrasted with sometimes more speculative metal exchange market information, technical information and assistance, financing, transportation and shipping (including chartering of vessels), storage, warehousing, just in time delivery, insurance, hedging and the ability to consolidate smaller purchases and sales into larger, more cost efficient transactions are examples of the services we offer. We attempt to limit exposure to price fluctuations by offsetting purchases with concurrent sales and entering into foreign exchange contracts as economic hedges of sales and purchase commitments denominated in foreign currencies. We do not, as a matter of policy, speculate on changes in the markets. During 2000 the segment made investments to acquire approximately eleven percent of the outstanding stock of a Czech Republic steel mill and twenty four percent of a Belgium greenfield venture being built to process and pickle hot rolled steel coil. Both investments have related marketing activities. During the past year, our marketing and trading segment sold approximately 1.7 million tons of steel products. The Australian office maintains three warehousing facilities for just in time delivery of steel and industrial products and operates a heat treating facility for steel products. 5 7 COMPETITION Our steel manufacturing, steel fabricating, and copper tube manufacturing businesses compete with regional, national and foreign manufacturers and fabricators of steel and copper. Price, quality and service are the primary methods of competition. During 2000 imports to the United States of certain steel products, including steel concrete reinforcing bars, increased substantially. In June, 2000, our minimills joined other steel manufacturers in an antidumping petition filed with the United States International Trade Commission (ITC) seeking the imposition of duties on rebar imported from several countries and sold at less than fair value. In August the ITC determined that there is a reasonable indication of material or threatened injury to rebar manufacturers within the United States as a result of unfairly priced imports of rebar from eight of the countries. The investigation is still pending with no final determination of what, if any, duties may be imposed. We do not produce a significant percentage of the total national output of most of our products but are considered a substantial supplier in the markets near our facilities. We believe that our joist facilities are the second largest manufacturer of joists in the United States, although significantly smaller than the largest joist supplier. We believe that we are the largest manufacturer of steel fence posts in the United States. We believe the recycling segment is among the larger entities that recycle nonferrous secondary metals and is also a major regional processor of ferrous scrap. Active consolidation occurred in the scrap processing industry in 1997 and 1998, with aggressively priced acquisitions of significant operations by several relatively new industry members. Poor markets for secondary metals and poor results for many scrap processors commencing in 1998 and continuing into 2000 resulted in an abrupt halt to acquisitions by most of these competitors, with bankruptcy proceedings by three consolidators and attempts to sell some recently acquired facilities. The secondary metals business is subject to cyclical fluctuations depending upon the availability and price of unprocessed scrap metal and the demand in steel and nonferrous metals consuming industries. All phases of our marketing and trading business are highly competitive. Many of the marketing and trading segment's products are standard commodity items. The principal elements of competition are price, quality, reliability, financing alternatives, and additional services. This segment competes with other domestic and foreign trading companies, some of which are larger and may have access to greater financial resources or be able to pursue business without regard for the laws and regulations governing the conduct of corporations subject to the jurisdiction of the United States. We also compete with industrial consumers who purchase directly from suppliers and importers and manufacturers of semi-finished ferrous and nonferrous products. The impact of competition from internet ecommerce sites specializing in metals is not yet believed to be significant although we are reviewing opportunities for participation in this rapidly developing area. ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, federal and supranational environmental laws and regulations concerning, among other matters, solid waste disposal, air emissions, waste and storm water effluent and disposal and employee health. Our manufacturing and recycling operations produce significant amounts of by-products, some of which are handled as industrial waste or hazardous waste. For example, the electric arc furnace, or EAF dust generated by our minimills is classified as a hazardous waste by the Environmental Protection Agency because of lead, cadmium and chromium content and requires special handling and recycling for recovery of zinc or disposal. Additionally, our scrap metal recycling facilities operate eight shredders for which the primary feed materials are automobile hulks and obsolete household appliances. Approximately twenty percent of the weight of an automobile hulk consists of 6 8 material, known as shredder fluff, which remains after the segregation of ferrous and saleable non-ferrous metals. Federal environmental regulations require shredder fluff to pass a toxic leaching test to avoid classification as a hazardous waste. We endeavor to have hazardous contaminants removed from the feed material prior to shredding and as a result we believe the shredder fluff generated is properly not considered a hazardous waste. Should the laws, regulations or testing methods change with regard to EAF dust processing or shredder fluff disposal, we may incur additional significant expenditures. To date, we have not experienced difficulty in contracting for recycling of EAF dust or disposing of shredder fluff in municipal or private landfills. We may also be required from time to time to clean up or take certain remediation action with regard to sites formerly used in connection with our operations. Furthermore, we may be required to pay for a portion of the costs of clean up or remediation at sites we never owned or on which we never operated if we are found to have arranged for treatment or disposal of hazardous substances on the sites. We have been named a potentially responsible party, or PRP, at several federal Superfund sites because the Environmental Protection Agency, or EPA, contends that we and other PRP scrap metal suppliers are liable for the cleanup of those sites solely as a result of having sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacture of new products. Our position is that an arms length sale of valuable scrap metal for use as a raw material in a manufacturing process over which we exercise no control should not, contrary to the EPA's assertion, constitute "an arrangement for disposal or treatment of hazardous substances" within the meaning of federal law. During 2000 the Superfund Recycling Equity Act was approved by Congress and signed into law. This new statute should, subject to satisfaction of certain conditions, provide some relief from Superfund liability at the federal level for legitimate sellers of scrap metal for recycling. Despite this clarification of the intent of the law by Congress various state environmental agencies may still interpret state law and regulations to impose such liability. We believe this result is contrary to public policy objectives and legislation encouraging recycling and promoting the use of recycled materials. New federal, state and local laws, regulations and changing interpretations, together with uncertainty regarding adequate control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors which impact our future expenditures to comply with environmental requirements. It is not possible to predict the total amount of capital expenditures or increases in operating costs or other expenses or whether such costs can be passed on to customers through product price increases. During 2000, we incurred environmental costs including disposal, permit, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately $11.5 million. In addition, we estimate that approximately $600,000 of capital expenditures put in service during 2000 were for environmental projects. We believe that our facilities are in material compliance with currently applicable environmental laws and regulations and do not presently anticipate material capital expenditures for new environmental control facilities during 2001. EMPLOYEES As of October, 2000, we had approximately 8,378 employees. Approximately 6,972 were employed by the manufacturing segment, 1,016 by the recycling segment, 319 by the marketing and trading segment, 36 in general corporate management and administration, with 35 employees providing service functions for divisions and subsidiaries. Production employees at one metals recycling plant and one fabrication operation are represented by unions for collective bargaining. We believe that our labor relations are generally good to excellent and our work force is highly motivated. 7 9 ITEM 2. PROPERTIES Our Texas steel minimill is located on approximately 600 acres of land we own. Facilities including buildings occupying approximately 760,000 square feet, are used for manufacturing, storage, office and related uses. Our Alabama steel mill is located on approximately 36 acres, with buildings occupying approximately 445,000 square feet used for manufacturing, storage, office and related use. Our South Carolina minimill is located on approximately 82 acres, with buildings occupying approximately 660,000 square feet. Our Magnolia, Arkansas facility is located on approximately 124 acres, with buildings occupying approximately 200,000 square feet. Approximately 30 acres of the Alabama mill property and all Arkansas and South Carolina mill property are leased in conjunction with revenue bond financing or property tax incentives and may be purchased by us at the termination of the leases or earlier for a nominal sum. The steel fabricating operations, including the fabrication plants, fence post and joist operations, own approximately 1,038 acres of land and lease approximately 16 acres of land at various locations in Texas, Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North Carolina, Nevada, Iowa and California. Our Howell Metal subsidiary owns approximately 30 acres of land, with buildings occupying about 325,000 square feet, including construction in process, in New Market, Virginia. Our recycling plants occupy in the aggregate approximately 450 acres we own in Austin, Beaumont, Dallas, Galveston, Houston, Lubbock, Midland, Odessa, Victoria and Vinton, all in Texas; as well as the Jacksonville, Ocala, Leesburg, Gainesville, Lake City, Orlando, and Tampa, Florida; and Shreveport, Louisiana; Chattanooga, Tennessee; Springfield and Joplin, Missouri; Burlington, North Carolina and Frontenac, Kansas plants. It leases the real estate at Clute and Laredo,Texas; and Ocala, Florida. The smaller of two locations at Beaumont and Victoria, Texas, are leased. The Fort Worth, Corpus Christi, and smaller Houston, Texas, Miami, Oklahoma and Independence, Kansas, recycling plants are partially owned and partially leased. Most small feeder yard locations are leased. The corporate headquarters, all domestic marketing and trading offices and all foreign offices occupy leased premises. One warehouse building in Australia is owned but located on leased real estate with the other Australian warehouses being leased. The leases on the leased properties described above will expire on various dates within the next ten years. Several of the leases have renewal options and we have had little difficulty in renewing such leases as they expire. Our minimum annual rental obligation for real estate operating leases in effect at August 31, 2000, to be paid during fiscal 2001 is approximately $5,236,000. We also lease a portion of the equipment used in our plants. Our minimum annual rental obligation for equipment operating leases in effect at August 31, 2000, to be paid during fiscal 2001, is approximately $5,736,000. ITEM 3. LEGAL PROCEEDINGS Our structural steel fabrication subsidiary, SMI - Owen Steel Company, Inc., or SMI - Owen, frequently works on large and complex construction projects, some of which generate significant disputes. SMI - Owen entered into a fixed price contract with Fluor Daniel, Inc., or F/D, as design/builder general contractor 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 owned by Aladdin Gaming, LLC, or Aladdin. In connection with the contract, F/D secured insurance from St. Paul Fire & Marine Insurance Company under a subcontractor/vendor default protection policy which named SMI - Owen as an insured in lieu of performance and payment bonds. A large subcontractor to SMI - Owen defaulted, and SMI - Owen incurred unanticipated costs to complete the work. We have made a claim under the policy for all losses, costs, and expenses incurred by SMI - Owen arising from or related to the default. Although St. Paul paid or escrowed partial payment of certain claims resulting from the default, it has terminated such payments and reserved all rights to contest the nature and extent of the policy's coverage and may take the position that the policy is void due to misrepresentations and omissions by F/D, the insurance broker, J & H Marsh McClennan, Inc. or others. We filed suit against St. Paul and J & H Marsh McClennan in March, 2000 (C.A. No. G-00-149 United 8 10 States District Court Southern District of Texas). Management intends to vigorously pursue recovery of all damages we incur resulting from the default as well as damages arising from the insurance company's breaches of duties owed to us under the policy. The project is complete and no material additional construction costs are anticipated. Other disputes concerning the Aladdin project have been submitted to binding arbitration. In August 2000, we filed a claim for $27.4 million against F/D. The claim seeks recovery of damages to the extent coverage is denied under the insurance policy discussed above, unpaid contract receivables, amounts for delay claims and change orders all of which have not been paid by F/D. F/D has not disputed certain amounts owed under the contract, but contends that other deductive items reduce the contract balance by approximately $6.3 million which together with other F/D claims (discussed below) exceed the unpaid contract balance. We dispute the deductive items and intend to vigorously pursue recovery of the contract balance in addition to all amounts, if any, not recovered under the insurance policy as a result of misrepresentations or omissions by F/D. Aladdin as project owner and F/D have filed joint claims in the arbitration proceeding against us, primarily for alleged delay damages, in the amount of $127 million which includes alleged delay damages in construction of a retail area adjacent to the project. Management believes the claims are generally unsubstantiated, we have valid legal defenses against such claims and intends to vigorously defend these claims. As of August 31, 2000, we have received notices from the EPA or state agency with similar responsibility that we and numerous other parties are considered potentially responsible parties, or PRPs, and may be obligated under the Comprehensive Environmental Response Compensation and Liability Act of 1980, or CERCLA, or similar state statute to pay for the cost of remedial investigation, feasibility studies and ultimately remediation to correct alleged releases of hazardous substances at approximately fourteen locations. We may contest our designation as a PRP with regard to certain sites, while at other sites we are participating with other named PRPs in agreements or negotiations that we expect will result in agreements to remediate the sites. The locations, none of which involve real estate we ever owned or conducted operations upon, are commonly referred to by the EPA or state agency as the Peak Oil Site (Tampa, FL), the NL Industries/Taracorp Site (Granite City, IL), the Sapp Battery Site (Cottondale, Florida), the Interstate Lead Company ("ILCO") Site (Leeds, Alabama), the Poly-Cycle Industries Site (Techula, Texas), the Jensen Drive Site (Houston, TX), the SoGreen/Parramore Site (Tifton, GA), the Stoller Site (Jericho, SC), the RSR Corporation Site (Dallas, TX), the Sandoval Zinc Company Site (Marion County, IL), the Ross Metals Site (Rossville, TN), the Li Tungsten Site (Glen Cove, NY), the NL Industries Site (Pedricktown, NJ) and the Danmark Site (Tampa, FL). We have periodically received information requests with regard to other sites which are apparently under consideration for recommendation under CERCLA or similar state statutes. We do not know if any demand will ultimately be made against us as a result of those inquiries. The EPA has notified us and other alleged PRPs that under Sec. 106 of CERCLA the PRPs could be subject to a maximum penalty fine of $25,000 per day and the imposition of treble damages if the PRPs refused to clean up the Peak Oil, Sapp Battery, NL/Taracorp, SoGreen/Parramore and Stoller sites as ordered by the EPA. We are presently participating in a PRP organization at the Peak Oil, Sapp Battery, SoGreen/Parramore and Stoller sites and do not believe that the EPA will pursue any fine against us so long as we continue to participate in the PRP groups or have adequate defenses to any attempt by the EPA to impose fines in these matters. CMC Oil Company (CMC Oil), a wholly-owned subsidiary which has been inactive since 1985, is subject to a final judgment resulting from an order entered in 1993 by the Federal Energy Regulatory Commission (the "FERC Order"). Judgment upholding the FERC Order was entered by Federal District Court in November 1994 and affirmed by the Court of Appeals in November 1995. The FERC Order found CMC Oil liable for overcharges constituting violations of crude oil reseller regulations from December 1977 to January 1979, in joint venture transactions with RFB Petroleum, Inc. The overcharges total approximately $1,330,000 plus interest from the transaction dates calculated under the Department of 9 11 Energy's interest rate policy to the date of the District Court judgment with interest thereafter at 6.48% per annum. Although CMC Oil accrued a liability on its books during 1995, it does not have sufficient assets to satisfy the judgment. No claim has ever been asserted against Commercial Metals Company arising out of the CMC Oil litigation. We will vigorously contest liability should any such claim be asserted. While we are unable to estimate the ultimate dollar amount of exposure to loss in connection with the above-described legal proceedings, environmental matters, government proceedings, and disputes that could result in additional litigation, some of which may have a material impact on earnings and cash flows for a particular quarter, it is the opinion of our management that the outcome of the suits and proceedings mentioned, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on our business or consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The table below summarizes the high and low sales prices reported on the New York Stock Exchange for Commercial Metals' common stock and cash dividends paid for the past two fiscal years.
Price Range 2000 of Common Stock Fiscal ------------------------- Cash Quarter High Low Dividends ------- ---- --- --------- 1st $ 33.50 $ 26.56 13c. 2nd 33.94 27.13 13c. 3rd 31.13 22.13 13c. 4th 29.38 24.38 13c.
Price Range 1999 of Common Stock Fiscal ------------------------- Cash Quarter High Low Dividends ------- ---- --- --------- 1st $ 28.50 $ 21.56 13c. 2nd 27.75 22.56 13c. 3rd 25.44 19.69 13c. 4th 34.19 23.50 13c.
Since 1982, Commercial Metals' common stock has been listed and traded on the New York Stock Exchange. From 1959 until the NYSE listing in 1981, the common stock was traded on the American Stock Exchange. The number of shareholders of record of Commercial Metals' common stock at November 10, 2000, was approximately 2,646. 10 12 ITEM 6. SELECTED FINANCIAL DATA The table below sets forth a summary of selected consolidated financial information of Commercial Metals for the periods indicated:
FOR THE YEARS ENDED AUGUST 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net Sales 2,661,420 2,251,442 2,367,569 2,258,388 2,322,363 Net Earnings 46,255 47,120 42,714 38,605 46,024 Diluted Earnings 3.25 3.22 2.82 2.54 3.01 Per Share Total Assets 1,172,862 1,079,337 1,002,617 839,061 766,756 Stockholders' Equity 420,616 418,458 381,389 354,872 335,133 Long-term Debt 261,884 265,590 173,789 185,211 146,506 Cash Dividends Per Share .52 .52 .52 .52 .48
11 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. CONSOLIDATED RESULTS
Year ended August 31, ------------------------------------- (in millions except share data) 2000 1999 1998 - ------------------------------- ---------- ---------- ---------- Net sales $ 2,661 $ 2,251 $ 2,368 Net earnings 46.3 47.1 42.7 Cash flows* 116.1 102.9 93.5 International sales 879 760 752 As % of total 33% 34% 32% LIFO effect on net earnings (3.4) 12.6 5.0 Per diluted share (.24) .86 .33 LIFO reserve 8.2 3.0 22.5 % of inventory on LIFO 71% 72% 72%
*before changes in operating assets and liabilities Significant events affecting the Company this year: 1. Best net sales, cash flows and diluted earnings per share ever. 2. Share repurchase program resulted in 9% decrease in shares issued and outstanding. 3. Outstanding copper tube profitability, solid steel fabrication operations, as well as record shipments at SMI-Alabama and SMI-Arkansas, sustained the manufacturing segment in spite of significant losses on large structural fabrication contracts and a slower marketing ramp-up in South Carolina. 4. LIFO expense was $3.4 million after tax, compared to 1999 LIFO income of $12.6 million. 5. The recycling segment was profitable each quarter, a major turnaround from the prior year. 6. The marketing and trading segment continued its profitable performance in spite of challenging global market conditions, including a strong U.S. dollar. SEGMENTS Financial results for the Company's reportable segments have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. Using this approach, the Company has three reportable segments:manufacturing, recycling, and marketing and trading. Net sales and operating profit (loss) by business segment are shown in the following table:
Year ended August 31, ------------------------------------- (in millions) 2000 1999 1998 - ------------- ---------- ---------- ---------- Net sales: Manufacturing $ 1,357 $ 1,206 $ 1,234 Recycling 463 302 415 Marketing and Trading 903 802 788 Operating profit (loss): Manufacturing 74.7 83.8 74.8 Recycling 5.8 (5.0) (1.4) Marketing and Trading 19.2 22.6 20.6
12 14 2000 COMPARED TO 1999 MANUFACTURING The manufacturing segment includes the CMC steel group and Howell Metal Company. Net sales for the fiscal year ended August 31, 2000, for the manufacturing segment increased by 13% from the prior year. This increase was primarily due to increased tons shipped. Operating profit for the segment decreased by 11% from the prior year's record earnings. This decrease was caused by an increase in scrap costs for the steel mills (which was only partially mitigated by year-to-year mill total sales price increases) and a decline in fabrication sales prices. Also, losses were sustained at the South Carolina mill and on several large, complex structural steel fabrication jobs at SMI-Owen. These factors were partially offset by record earnings at the copper tube mill. The Company incurred pre-tax LIFO expense of $5.2 million, a substantial difference from the $15.9 million LIFO income reported in the prior year.
August 31, ----------- 2000 1999 ---- ---- Average mill selling price-total sales $306 $299 Average mill selling price- finished goods only 314 317 Average fab selling price 647 677 Average scrap purchase price 91 76
Operating profit for the four steel mills was 26% below fiscal 1999 primarily due to a loss at the South Carolina mill, difficult markets, and increased depreciation, amortization and interest expenses. Tons melted and rolled increased 17% and 25%, respectively, while shipments rose by 10% to 1.9 million tons. Production increased substantially at both SMI-Alabama and SMI-South Carolina, benefiting from the significant capital investments made in the prior year. For the year ended August 31, 2000, the average mill selling price for finished goods decreased $3 per ton (1%), and in the fourth quarter declined by $19 per ton from the third quarter to end the year at an average of $314. Margins were squeezed as the average scrap purchase cost for the mills increased $15 per ton (20%) in the current year to $91 per ton. Sales prices were impacted negatively by unprecedented import levels in some of the major product lines. Also, higher energy costs impacted mill operating results. The Company received $2.3 million pre-tax in fiscal 2000 versus $8.1 million in 1999 from graphite electrode antitrust litigation settlements. Excluding the graphite electrode settlements, operating profit at SMI-Alabama increased 55% from the prior year and was substantially the same at SMI-Texas. Also, operating profit at SMI-Arkansas improved 32% from the prior year. Although production at the new SMI-South Carolina rolling mill was at record levels, marketing was slower than anticipated while depreciation and amortization expenses increased by $8.9 million. Intercompany interest costs increased by $6.3 million as little interest was capitalized. The net result was a $9.7 million operating loss at this location. The computer migration project was substantially completed during the first half of fiscal 2000. Computer migration costs were $3.7 million pre-tax, substantially less than the $10.9 million incurred in the prior year. Fiscal 2000 was another good year in the Company's downstream steel fabrication businesses. Net sales increased by 9% from 1999, but operating profits (excluding the large steel fabrication jobs at SMI-Owen) decreased 7%. Fabricated steel shipments totaled 955,000, 14% more than the previous record setting year. This was offset by a decrease in prices of $30 per ton (4%) caused by competitive pressures, and $21 million of operating losses from some large, older and complex structural steel jobs fabricated by SMI-Owen. SMI-Owen realized a net pre-tax gain of $5.5 million from the sale of land and improvements. In May 2000, the Company 13 15 acquired substantially all of the assets of two rebar fabrication operations in Southern California: Fontana Steel, Inc., with operations in Rancho Cucamonga, San Marcos and Stockton, and C&M Steel, Inc. in Fontana. These acquisitions expanded the Company's market penetration to the largest rebar market in the United States. Also, in March 2000, the Company purchased substantially all of the operating assets of Bell-Barcelona Concrete Accessories, further expanding its concrete-related products business in the Houston, Texas, area. The purchase prices for these acquisitions were not significant to the Company. The new cellular beam facility in Arkansas continued to progress as an adjunct to the steel joist business. Fiscal 2000 was a record year for Howell Metal Company, the Company's copper tube mill in Virginia. Production increased by 12%, and operating profit increased by nearly 50% from the prior year. Shipments increased by 13% to a record 58 million pounds. Metal spreads improved by 19%. Residential construction, the principal economic driver, remained strong during fiscal 2000. Capital improvements for the Company decreased significantly to $70 million from the record $142 million spent in 1999, primarily in the manufacturing segment. The prior year's amount included the completion of the new rolling mill and ancillary equipment at SMI-South Carolina and a new finishing line at SMI-Alabama. During fiscal year 2000, significant projects included the planned expansion in progress at the copper tube mill and the installation of a ladle metallurgical station at SMI-South Carolina. The copper tube mill expansion will ultimately increase production by approximately 50%, improve productivity and expand the product lines. RECYCLING The recycling segment generated operating profit of $5.8 million for the year ended August 31, 2000, compared to a $5.0 million operating loss in the prior year. Fiscal 2000 was a record year for tons processed and shipped, which increased 16%. With an increase in selling prices of $15 per ton above the previous depressed period, net sales increased 53%. Ferrous prices, however, fell consistently during the second half of fiscal 2000. The supply of scrap, including continued high imports of ferrous raw materials, was plentiful and more than met demand. Nonferrous markets were relatively firm and supply was more balanced; consequently, prices were steadier. Nonferrous prices and volumes were up approximately 19% and 18%, respectively. Processing costs for the segment decreased from 16.4% of sales in 1999 to 13.2% in fiscal 2000 as a result of the regional organizational restructuring implemented in 1999. The total volume of scrap processed and shipped in 2000, including the CMC steel group operations, increased 17% to 2.4 million tons. MARKETING AND TRADING The marketing and trading segment's performance was consistent despite unstable and relatively poor global conditions in many of its product lines. Net sales increased in fiscal 2000 by 13% to $903 million. Operating profits were 15% lower than the prior year because most steel prices denominated in U.S. dollars fell during the latter part of the year, and gross margins in steel marketing and distribution as well as steel trading were tight. Anti-dumping activity and other forms of protectionism around the world, as well as the strong U.S. dollar and weak Euro, continued to affect the regional flow of products. The Company achieved further market penetration in highly competitive markets for nonferrous metal products and maintained profitability through product line expansion. Profits were lower for industrial raw materials and products although shipments generally were higher. The Company continued to build its business in the marketing of ferrous raw materials. During fiscal 2000, the Company added and developed quality people in sales and administration to provide for long-term growth. This was achieved by continuing to diversify and build the business in added product and geographic areas and expanding regional trade. The Company continued to increase its presence in the processing of the materials and products, 14 16 which it buys and sells. As marketing and trading functions constantly evolve, the Company has been a leader in instituting changes. During the fourth quarter, the Company acquired an 11% stake and executed a long-term marketing and trading agreement with a Czechoslovakian steel mill, Trinecke Zelezarny, one of its key European suppliers. NEAR-TERM OUTLOOK Despite currently poor market conditions for many of the Company's products, management anticipates that fiscal year 2001 will be more profitable than the current year, primarily based on internal improvements. The second half of the new year should be better than the first half, as the earlier part of the year will be impacted by the strong U.S. dollar, customer inventory reductions, high energy prices and a slowing of the global economy. Management expects some easing of these conditions by mid-year fiscal 2001. Construction markets should remain firm, especially spending for highways and bridges, institutional buildings and power plants. Highway construction should accelerate because projects have been behind schedule. The Company's successes of recent years and strong financial condition leave it in an excellent position for further growth. Overall, the Company anticipates higher sales, production and shipments from its steel mills in fiscal 2001. Although several price decreases that were announced during the fourth quarter 2000 will pressure margins for the first half of fiscal 2001, a favorable development occurred on August 14, 2000, when the U.S. International Trade Commission continued the rebar dumping trade cases against eight of the offending countries which comprise about 80% of rebar imports. As the new year progresses, rebar and merchant bar prices should increase moderately, and shipments should accelerate. Management anticipates that the operating results at SMI-South Carolina will improve with better market conditions and a product mix balanced with higher value-added products. Also, the CMC steel group plans to continue its growth in rebar fabrication, joists, specialty beams, niche applications of structural steel, fence posts, concrete-related products, heat treating of steel and other related fabricated steel products and components. For example, the Company is expanding its new cellular beam product line with a new facility in Virginia. During the latter part of fiscal 2000, the Company began to show progress in improving the operations at SMI-Owen. Management expects that this improvement will continue into the new fiscal year. Production and shipments are expected to increase during fiscal 2001 with the commissioning of the 50% expansion of the Company's copper tube mill. Also, the product line will be broader with this addition. Both ferrous and nonferrous operations in the recycling segment should be profitable for fiscal 2001, although the first half of the year will be difficult because of the poor steel scrap market. The Company is poised to capitalize on better markets and to continue its turnaround and rationalization at underperforming facilities. The marketing and trading segment began the new year with continued penetration in marketing and distribution while maintaining a strong presence in the trading or indent side of the business. During 2001, management will further its focus on value-added businesses whereby the product range is broadened and more services are provided to both the customer and the supplier. Following two years of record levels of capital expenditures, spending was reduced to $70 million in fiscal 2000. The Company plans to increase capital expenditures by 19% to $83 million for fiscal 2001. The increase is partially due to several projects that were deferred and 15 17 carried over from the prior year. There are no major projects planned at the steel mills for fiscal 2001, rather smaller enhancements and maintenance expenditures. The Company plans to continue its expansion in downstream businesses, both acquisitions and greenfield operations. All segments will also focus on improving or disposing of underperforming operations, especially if they no longer fit the Company's strategic direction. The Company's business plan also provides for repurchases of the Company's undervalued shares. Overall, pricing and volume in the Company's segments should improve as supply and demand come into better balance in the second half of fiscal 2001. Additionally, the share repurchases will have an even greater impact on earnings per share than they did for fiscal 2000. LONG-TERM OUTLOOK The Company is poised to move to the next level in net sales and net income at its steel minimills. The mills are versatile, flexible, highly productive and produce high quality products. Finished product capacity at the combined mills has increased to 2.3 million tons. Steel fabrication will continue to be an essential element of the Company's vertical integration strategy and a growing part of its overall business. Infrastructure growth in the U.S. and elsewhere will be a catalyst for increased demand for the Company's steel products. The Company's strong regional presence in the copper tube industry is a solid building block for further profitability and expansion. Management believes that the long-term demand for scrap will continue to grow and that the Company's regional volume will increase. In the marketing and trading segment, the Company will continue to diversify and build business in new products and geographic areas. The segment will build further on strategic alliances among suppliers and customers. To achieve profits and return on capital employed, management believes that consolidation within the steel industry is imperative. The reasons are compelling, the foremost of which are the depressed equity valuations in the entire metals sector, the fact that very few companies in the industry earn their cost of capital, the necessity for the rationalization of non-competitive capacity and more effective marketing. The Company is committed to creating long-term growth and building earnings through continuous internal improvements, a focus on cash flows, strong regional positions and outstanding people. The sections regarding segments and near- and long-term outlook contain forward-looking statements regarding the outlook for the Company's financial results including product pricing and demand, capacity increases, efficiency improvements and general market conditions. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from management's current opinion. Developments that could impact the Company's expectations include interest rate changes, construction activity, difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes, metals pricing over which the Company exerts little influence, increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, global factors including credit availability, currency fluctuations, energy prices, and decisions by governments impacting the level and pace of overall economic activity. 16 18 1999 COMPARED TO 1998 SEGMENTS MANUFACTURING Although net sales decreased 2%, operating profit increased 12% for the year ended August 31, 1999. These were record earnings despite weaker steel mill prices stemming from low-priced steel imports. Shipments by the four minimills totaled 1.7 million tons versus 2.0 million tons the prior year. 1999 was another record year in the downstream steel fabrication businesses with 841,000 tons shipped, a slight increase from fiscal year 1998. Copper tube results were outstanding as the strong housing market and lower copper scrap prices doubled operating profit. Copper tube annual shipments were comparable at 51 million pounds. Lower prices in the manufacturing segment resulted in pre-tax LIFO income of $15.9 million, a substantial increase from the $3.2 million reported in 1998.
August 31, ----------- 1999 1998 ---- ---- Average mill selling price $299 $322 Average fab selling price 677 660 Average scrap purchase price 76 113
Operating profit for the four steel minimills combined was 13% below 1998. Although underlying demand was strong, shipments declined 16% to 1.7 million tons while production levels were down comparably because of construction interference caused by capital projects in South Carolina and Alabama and the unprecedented import levels. Conversely, margins were aided by lower scrap purchase prices. While the average mill selling price was $23 per ton (7%) below the prior year, average scrap purchase costs were lower by $37 per ton (33%). The Company received pre-tax $8.1 million in settlements from graphite electrode antitrust litigation. Primarily as a result of the decline in shipments, operating profit at SMI-Arkansas, SMI-Alabama, and SMI-South Carolina decreased by 20%, 59% and 38%, respectively. In spite of transformer downtime, strong results continued at SMI-Texas, with a 17% increase in operating profit from the prior year. Computer migration costs were $10.9 million in 1999 compared to $8.6 million in 1998. The Company had a record $142 million in capital spending for fiscal 1999, primarily at the steel minimills. The major capital projects for 1999 were the completion of the new rolling mill and ancillary equipment at SMI-South Carolina and a new finishing line at SMI-Alabama. Commissioning was in April and June 1999, respectively. Fiscal year 1999 was another record year in the CMC steel group's downstream fabrication businesses. Net sales increased by 8% from 1998, and operating profits increased 39%. This strong performance was in spite of $13.1 million in operating losses sustained on some large and complex structural steel jobs. While fabricated steel shipments totaled 841,000 tons, only marginally increased from the prior year, the average fab selling price rose $17 per ton (3%), partially due to product mix. Additionally, a new castellated beam and cellular beam product line was developed as an adjunct to the steel joist business. During the third quarter 1999, the Company acquired substantially all of the assets of Construction Materials, Inc., headquartered in Baton Rouge, Louisiana, which complements the Shepler's group concrete-related products business. The purchase price was not significant to the Company. 17 19 Production increased by 3%, and earnings more than doubled for the Company's copper tube mill for 1999. Although shipments only increased by 1%, spreads increased by 34% benefiting from lower copper scrap prices. The principal economic driver remained housing starts and renovation, as residential construction remained strong during fiscal year 1999. RECYCLING The recycling segment continued to be hampered by difficult market conditions during 1999. The secondary metals processing division reported an operating loss of $5.0 million compared with an operating loss of $1.4 million for the prior year. However, cash flows from operations (before changes in operating assets and liabilities) were positive for the year. Together with very weak market conditions for ferrous and nonferrous scrap, the failed consolidation of the industry had a major negative influence on profitability in 1999. The poor markets were reflected in a 27% drop in net sales, from $415 million for 1998 to $302 million for 1999. Processing costs also decreased, but margins fell even further. The average price of steel scrap fell by $33 per ton to $90, and ferrous scrap volume was 3% lower. Consequently, ferrous scrap operations were unprofitable even though costs were reduced. Nonferrous prices, on the other hand, stabilized in a trading range, shipments increased by 4% and nonferrous operations were slightly profitable. The division's regional management restructuring which occurred in the prior year resulted in lower operating costs and inventories. In fiscal year 1999, a number of operational improvements continued to be made including installation of a new shear in Houston which started up during late August 1999. The total volume of scrap processed in 1999, including the CMC steel group operations, increased 5% to 2.0 million tons. MARKETING AND TRADING During 1999, the marketing and trading segment continued its remarkable performance in the face of crises in Asia, Russia and Latin America. Net sales increased by 2% to $802 million, and operating profit was 10% higher for 1999 than the prior year. Steel prices were substantially lower in 1999 than the prior year, and gross margins in steel marketing and distribution as well as steel trading remained tight. Anti-dumping activity and other forms of protectionism around the world continued to affect the flow of products. Nevertheless, sales into the United States and Europe increased and compensated for the decreased sales into Asia. The segment achieved further market penetration in highly competitive markets for nonferrous metal products and maintained profitability through product line expansion. Profits were moderately lower for industrial raw materials and products, but shipments generally were higher. Participation in the marketing of ferrous raw materials continued to grow. During 1999, the segment continued to diversify and build business in new product and geographic areas, and added key personnel. The marketing and trading segment's international division reaped the rewards from a 1998 joint venture with a large European mill giving the Company exclusive rights to sell steel to the German market. Resulting net sales from this endeavor were significantly more than anticipated. Regional trade continued to grow, as well as increased presence in the processing of the materials and products which are bought and sold. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations (before changes in operating assets and liabilities) for the year ended August 31, 2000, were a record $116 million compared to $103 million for fiscal year 1999. However, increases in operating assets reduced the cash flows from operating activities from the prior year's record levels. Accounts receivable significantly increased in all segments mostly due to increased sales volumes and prices. Also, accounts receivable in the steel group was higher 18 20 due to acquisitions during fiscal 2000. Inventories increased in the steel group due to higher scrap purchase prices as well as the new operations acquired in fiscal 2000. Other assets increased due to refundable federal income taxes, increased funding for the Company's nonqualified employee benefits plan, and increased claims receivable on a large structural steel job in the steel group. Also depreciation and amortization expenses increased primarily due to the fiscal 1999 capital projects at South Carolina and Alabama. Cash flows from operating activities were invested in new equipment, primarily in the manufacturing segment (particularly at the South Carolina mill for a new ladle metallurgical station and at Howell Metal Company's plant expansion). During fiscal 2000, the steel group sold land and improvements grossing $8.4 million after which costs related to the sale and escrows resulted in a net gain of $5.5 million (pre-tax). Net working capital was $276 million as of August 31, 2000, compared to $288 million last year. The current ratio decreased slightly to 1.6 versus 1.8 at the prior year end. The Company's sources of short-term funds include a commercial paper program of $200 million, an increase of $100 million from the prior year. The Company's commercial paper is rated in the second highest category by Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch (F-2). Formal bank credit lines equal to 100% of the amount of all commercial paper outstanding are maintained. In 1999 the Company filed a shelf registration of $200 million of long- and medium-term notes, of which $100 million were sold in February 1999. The proceeds were then used to retire short-term borrowings. The Company's $250 million long-term notes issued in February 1999 ($100 million), July 1997 ($50 million) and July 1995 ($100 million) are rated investment grade by Standard & Poor's Corporation and Fitch (BBB+) and by Moody's Investors Service (Baa1). 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. Management believes it has adequate capital resources available from internally generated funds and from short-term and long-term capital markets to meet anticipated working capital needs, planned capital expenditures, dividend payments to shareholders, stock repurchases and to take advantage of new opportunities requiring capital. Capital investments in property, plant and equipment were $70 million in 2000 compared to a record $142 million the prior year. Capital spending for fiscal 2001 is projected to be $83 million. The most important planned projects are the expansion of the downstream businesses in steel fabrication, both through acquisition and greenfield operations. Total capitalization was $714 million at the end of fiscal 2000, slightly up from the prior year. The ratio of long-term debt to capitalization was 36.7%, down from 37.5% last year. Stockholders' equity was $421 million or $31.93 per share. During the fiscal year, the Company repurchased 1,465,100 shares of Company stock at an average cost of $28.62 per share. At year end, the Company had remaining an additional 305,281 shares authorized for repurchase. On August 31, 2000, 2,959,908 treasury shares were held by the Company. There were 13,172,675 shares outstanding at year end. 19 21 CONTINGENCIES CONSTRUCTION CONTRACT DISPUTES 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 (Project). In connection with the contract, the D/B secured insurance under a subcontractor/vendor default protection policy (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 has made a claim under the Policy for all losses, costs, and expenses incurred by the Company arising from or related to the default, of which $6.6 million was recorded in other assets at August 31, 2000. Although the insurance company paid or escrowed partial payment of certain claims resulting from the default, it is now contesting the nature and extent of the Policy's coverage and may take the position that the Policy is void due to misrepresentations and omissions by the D/B and the insurance broker. The Company filed suit against the insurance company and broker in March 2000. Management intends to vigorously pursue recovery of all damages incurred by the Company resulting from the default as well as damages arising from the insurance company's breaches of duties owed to the Company under the Policy. The Project is complete and no material additional construction costs are anticipated. Disputes between the Company and the D/B have been submitted to binding arbitration. In August 2000, the Company filed a claim for $27.4 million against the D/B. The claim seeks recovery of damages to the extent coverage is denied under the Policy discussed above, unpaid contract receivables, amounts for delay claims and change orders all of which have not been paid by the D/B. At August 31, 2000 and 1999, the Company maintained contract receivables of $7.2 million and $6.4 million, respectively, 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, if any, not recovered under the Policy 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, in the amount of $127 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. Management 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 accounts 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. 20 22 The Company's origin and one of its core businesses for over eight decades has been metals recycling. In the present era of conservation of natural resources and ecological concerns, the Company has a continuing commitment to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, are presently at odds with goals of greater recycling and expose the Company and the industry to potentially significant risks. Such exposures are causing the industry to shrink, leaving fewer operators as survivors to face the challenge. The Company believes that materials that are recycled are commodities that are neither discarded nor disposed. They are diverted by recyclers 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 would 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 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 investigation, 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 which, from time to time, may have a material impact on earnings and cash flows for a particular quarter. 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. 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 business or consolidated financial position of the Company. In fiscal 2000, the Company incurred environmental expense of $11.5 million. This included the cost to staff environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessment, remediation, consultant fees, baghouse dust removal and various other expenses. The Company estimates that approximately $600 thousand of its capital expenditures for fiscal 2000 related to costs directly associated with environmental compliance. At August 31, 2000, $5.0 million remained accrued for environmental liabilities, of which $2.0 million was in other long-term liabilities. 21 23 DIVIDENDS Quarterly cash dividends have been paid in each of the past 36 consecutive years. The annual dividend in 2000 was 52 cents a share paid at the rate of 13 cents each quarter. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, (as amended) is effective for the Company as of September 1, 2000. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Adoption of these new accounting standards will result in cumulative after-tax increases in net earnings of $315 thousand and other comprehensive income of $126 thousand in the first quarter of fiscal 2001. The adoption will also impact associated assets and liabilities. Certain of the Company's derivative instruments will not be designated as hedges for accounting purposes. Management believes that the changes in fair value of these instruments will not significantly impact the results of operations or financial position of the Company. The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December, 1999, and it is effective for the Company beginning in the first quarter of fiscal 2001. The SAB (as amended) summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management believes that its revenue recognition policies are in substantial compliance with the SAB and the effect of implementation will not be material. EURO Effective January 1, 1999, eleven of the fifteen member countries of the European Union adopted the Euro as their common legal currency and established fixed conversion rates between their existing sovereign currencies and the Euro. The existing sovereign currencies remain legal tender in the participating countries during the transition period ending on January 1, 2002. The Company has adequate information systems for compliance with the requirements of this new currency. The Company does not anticipate that the adoption of the Euro will have a material impact on its results of operations, financial position or liquidity. 22 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK APPROACH TO MINIMIZING MARKET RISK The Company's product lines and its worldwide operations expose it to risks associated with fluctuations, sometimes volatile, in exchange and interest rates and commodity prices. It employs various strategies to mitigate the effects of this volatility. None of the instruments used are entered into for trading purposes or speculation; all are economically effective as hedges of underlying physical transactions. The accompanying information mandated by the Securities and Exchange Commission should be read in conjunction with footnotes 1 and 4 to the annual financial statements. FOREIGN EXCHANGE The Company enters into foreign exchange contracts as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency. Effects of changes in currency rates are therefore minimized. No single currency poses a primary risk to the Company; fluctuations that cause temporary disruptions in one market segment tend to open opportunities in other segments. Certain information in the accompanying chart assumes that the foreign exchange contracts were settled at August 31, 2000; this would defeat their purpose as economic hedges on transactions that will not occur for some period after year-end. Due to customary weight and quality settlements on physical transactions, small gains and losses do occur upon close of the foreign exchange contracts. INTEREST RATES Substantially all of the Company's short- and long-term debt is denominated in United States dollars. The Company's financial results as affected by interest rates are most vulnerable to swings in short-term commercial borrowing rates. At August 31, 2000, $7 million Australian dollars notional amount of debt was covered by an interest rate swap. The swap is variable to fixed, terminating June 2, 2003, intending to match physical asset lives with debt provisions in one foreign subsidiary. The variable rate at year end was 6.59% and the fixed rate 5.5%. At August 31, 2000, it had a fair value of $128,000. COMMODITY PRICES Pricing of certain sales and purchase commitments is fixed to forward metal commodity exchange quotes. The Company enters into metal commodity contracts for copper, aluminum, and zinc to mitigate the risk of unanticipated declines in gross margins on these commitments due to the volatility of the metal commodity indexes. Of these, copper is the most predominant. The derivative instruments are closed when the underlying sales and purchase commitments are priced, and gain or loss is recognized when the sale or purchase is recorded. In general the Company is most affected in periods of declining commodity prices as spreads narrow and sources withhold recycled metals from the market. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to small gains and losses at settlement. The following table provides certain information regarding the financial instruments discussed above. 23 25 FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST 31, 2000:
Range of U.S. $ Amount Currency Hedge Rates Equivalent - ---------- ----------------- ------------- ------------ 6,519,000 German mark 1.8601-2.2105 $ 3,134,000 15,011,000 ECU .944-1.111 13,823,000 5,500,000 Swiss franc 1.646-1.718 3,381,000 1,300,000 Singapore dollar 1.7155-1.7225 757,000 4,631,000 British pound .6592-.6910 6,846,000 29,235,000 Australian dollar .5698-.6666 17,429,000 1,140,000 Canadian dollar .6727-.6917 776,000 - ---------- ----------------- ------------- ------------ 46,146,000 Revaluation as of August 31, 2000, at quoted market 44,727,000 - --------------------------------------------------- ------------ Settlement gain $ 1,419,000
o Substantially all foreign currency exchange contracts mature within one year. o As of August 31, 2000, foreign currency exchange contracts had no book carrying value until maturity. They were considered reductions in otherwise available bank credit lines. AS OF AUGUST 31, 1999: Revaluation at quoted market $ 65,388,000 Settlement gain $ 356,000
METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUST 31, 2000:
Range of Total Contract Long/ # of Standard Total Hedge Rates Value at Terminal Exchange Metal Short Lots Lot Size Weight Per MT Inception - ----------------- ----- ----- ---- -------- ------ ----------- -------------- London Metal Exchange (LME) Copper Long 55 25 MT 1375 MT $ 1540-1885 $ 2,424,000 Copper Short 65 25 MT 1625 MT 1582-1876 2,863,000 Zinc Long 10 25 MT 250 MT 1077-1135 278,000 Aluminum Long 16 25 MT 400 MT 1517-1586 619,000 Aluminum Short 27 25 MT 675 MT 1555-1617 1,075,000 New York Mercantile Per 100/wt. Exchange Copper Long 208 25,000 lbs. 5.2 MM lbs. 69.10-89.50 4,451,000 Commodities Division (Comex) Copper Short 178 25,000 lbs. 4.5 MM lbs. 86.25-89.70 3,915,000 - -------------------- ------ ----- ---- ----------- ----------- ----------- ----------- 15,625,000 Revaluation as of August 31, 2000, at quoted market 15,491,000 - --------------------------------------------------- ----------- Settlement gain $ 134,000
o Three lots mature after one year o MT = Metric Tons o MM = Millions o As of August 31, 2000, metal commodity contracts had no book carrying value until maturity. A two million dollar letter of credit stands as margin requirement for Comex transactions. AS OF AUGUST 31, 1999: Revaluation at quoted market $10,101,000 Settlement gain $ 288,000
24 26 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) 2000 1999 1998 - --------------------------------- ---------- ---------- ---------- Net sales $2,661,420 $2,251,442 $2,367,569 Costs and expenses: Cost of goods sold 2,333,930 1,948,596 2,083,036 Selling, general and administrative expenses 208,808 192,233 178,961 Interest expense 27,319 19,650 18,055 Employees' retirement plans 18,108 15,933 19,448 ---------- ---------- ---------- 2,588,165 2,176,412 2,299,500 ---------- ---------- ---------- Earnings before income taxes 73,255 75,030 68,069 Income taxes 27,000 27,910 25,355 ---------- ---------- ---------- Net earnings $ 46,255 $ 47,120 $ 42,714 ========== ========== ========== Basic earnings per share $ 3.30 $ 3.25 $ 2.88 ========== ========== ========== Diluted earnings per share $ 3.25 $ 3.22 $ 2.82 ========== ========== ==========
See notes to consolidated financial statements. 25 27 Commercial Metals Company and Subsidiaries CONSOLIDATED BALANCE SHEETS
August 31, ------------------------ (in thousands, except share data) 2000 1999 - --------------------------------- ---------- ---------- ASSETS Current assets: Cash $ 20,067 $ 44,665 Accounts receivable (less allowance for collection losses of $7,868 and $7,714) 357,719 297,849 Inventories 277,455 249,688 Other 59,777 53,894 ---------- ---------- Total current assets 715,018 646,096 Property, plant and equipment: Land 27,984 25,927 Buildings 97,566 87,796 Equipment 676,369 635,054 Leasehold improvements 31,507 30,119 Construction in process 22,702 25,351 ---------- ---------- 856,128 804,247 Less accumulated depreciation and amortization (448,616) (401,975) ---------- ---------- 407,512 402,272 Other assets 50,332 30,969 ---------- ---------- $1,172,862 $1,079,337 ========== ==========
See notes to consolidated financial statements. 26 28
August 31, --------------------------- (in thousands, except share data) 2000 1999 - --------------------------------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Commercial paper $ 79,000 $ 10,000 Notes payable 13,466 4,382 Accounts payable 194,538 191,508 Other payables and accrued expenses 142,680 139,977 Income taxes payable 678 2,025 Current maturities of long-term debt 8,828 9,873 ----------- ----------- Total current liabilities 439,190 357,765 Deferred income taxes 31,131 23,263 Other long-term liabilities 20,041 14,261 Long-term debt 261,884 265,590 Commitments and contingencies Stockholders' equity: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share: authorized 40,000,000 shares; issued 16,132,583 shares; outstanding 13,172,675 and 14,406,260 shares 80,663 80,663 Additional paid-in capital 14,231 14,131 Accumulated other comprehensive loss (1,591) (774) Retained earnings 407,128 368,177 ----------- ----------- 500,431 462,197 Less treasury stock 2,959,908 and 1,726,323 shares at cost (79,815) (43,739) ----------- ----------- 420,616 418,458 ----------- ----------- $ 1,172,862 $ 1,079,337 =========== ===========
See notes to consolidated financial statements. 27 29 Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
August 31, ------------------------------------ (in thousands) 2000 1999 1998 - -------------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 46,255 $ 47,120 $ 42,714 Adjustments to earnings not requiring cash: Depreciation and amortization 66,583 52,054 47,460 Provision for losses on receivables 948 1,877 2,898 Deferred income taxes 7,868 1,887 542 Gain on sale of property and other (5,570) (68) (164) --------- --------- --------- Cash Flows from Operations Before Changes in Operating Assets and Liabilities 116,084 102,870 93,450 Changes in Operating Assets and Liabilities: Decrease (increase) in accounts receivable (60,818) 18,929 (33,104) Decrease (increase) in inventories (27,767) 7,543 (36,587) Decrease (increase) in other assets (29,046) (5,809) (30,457) Increase (decrease) in accounts payable, accrued expenses, and income taxes 4,385 29,155 42,968 Increase (decrease) in other long-term liabilities 5,780 5,606 4,161 --------- --------- --------- Net Cash Flows from Operating Activities 8,618 158,294 40,431 CASH FLOWS USED BY INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (69,627) (141,752) (119,915) Sales of property, plant and equipment 9,323 4,247 1,418 Other investments (2,966) -- -- --------- --------- --------- Net Cash Used by Investing Activities (63,270) (137,505) (118,497) CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: Commercial paper-net change 69,000 (30,000) 40,000 Notes payable-net change 9,084 (56,427) 60,809 New long-term debt -- 100,000 -- Payments on long-term debt (4,750) (9,809) (11,441) Stock issued under stock option, purchase, and bonus plans 5,958 3,679 9,134 Treasury stock acquired (41,934) (7,012) (14,732) Dividends paid (7,304) (7,540) (7,717) --------- --------- --------- Net Cash Provided (Used) by Financing Activities 30,054 (7,109) 76,053 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents (24,598) 13,680 (2,013) Cash and Cash Equivalents at Beginning of Year 44,665 30,985 32,998 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 20,067 $ 44,665 $ 30,985 ========= ========= =========
See notes to consolidated financial statements. 28 30 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, 1997 16,132,583 $ 80,663 $ 13,627 Comprehensive Income: Net earnings Other comprehensive loss-- Foreign currency translation adjustment, net of taxes of $859 $ (1,596) Comprehensive Income Cash dividends--$.52 per share Treasury stock acquired Stock received from escrow upon settlement of Owen lawsuit Stock issued under stock option, purchase and bonus plans (237) Tax benefits related to stock option plan 895 ---------- ---------- ---------- ---------- Balance, August 31, 1998 16,132,583 80,663 14,285 (1,596) ---------- ---------- ---------- ---------- Comprehensive Income: Net earnings Other comprehensive income-- Foreign currency translation adjustment, net of taxes of $442 822 Comprehensive Income Cash dividends--$.52 per share Treasury stock acquired Stock issued under stock option, purchase and bonus plans (560) Tax benefits related to stock option plan 406 ---------- ---------- ---------- ---------- Balance, August 31, 1999 16,132,583 80,663 14,131 (774) ---------- ---------- ---------- ---------- Comprehensive Income: Net earnings Other comprehensive loss-- Foreign currency translation adjustment, net of taxes of $440 (817) Comprehensive Income Cash dividends--$.52 per share Treasury stock acquired Stock issued under stock option, purchase and bonus plans (174) Tax benefits related to stock option plan 274 ---------- ---------- ---------- ---------- Balance, August 31, 2000 16,132,583 $ 80,663 $ 14,231 $ (1,591) ========== ========== ========== ========== Treasury Stock -------------------------------- Retained Number of (in thousands, except share data) Earnings Shares Amount Total - --------------------------------- ---------- ----------- ----------- ---------- Balance, September 1, 1997 $ 293,600 (1,371,653) $ (33,018) $ 354,872 Comprehensive Income: Net earnings 42,714 42,714 Other comprehensive loss-- Foreign currency translation adjustment, net of taxes of $859 (1,596) --------- Comprehensive Income 41,118 Cash dividends--$.52 per share (7,717) (7,717) Treasury stock acquired (496,000) (14,732) (14,732) Stock received from escrow upon settlement of Owen lawsuit (47,316) (1,286) (1,286) Stock issued under stock option, purchase and bonus plans 351,997 8,476 8,239 Tax benefits related to stock option plan 895 ---------- ---------- ---------- --------- Balance, August 31, 1998 328,597 (1,562,972) (40,560) 381,389 ---------- ---------- ---------- --------- Comprehensive Income: Net earnings 47,120 47,120 Other comprehensive income-- Foreign currency translation adjustment, net of taxes of $442 822 --------- Comprehensive Income 47,942 Cash dividends--$.52 per share (7,540) (7,540) Treasury stock acquired (314,400) (7,012) (7,012) Stock issued under stock option, purchase and bonus plans 151,049 3,833 3,273 Tax benefits related to stock option plan 406 ---------- ---------- ---------- --------- Balance, August 31, 1999 368,177 (1,726,323) (43,739) 418,458 ---------- ---------- ---------- --------- Comprehensive Income: Net earnings 46,255 46,255 Other comprehensive loss-- Foreign currency translation adjustment, net of taxes of $440 (817) --------- Comprehensive Income 45,438 Cash dividends--$.52 per share (7,304) (7,304) Treasury stock acquired (1,465,100) (41,934) (41,934) Stock issued under stock option, purchase and bonus plans 231,515 5,858 5,684 Tax benefits related to stock option plan 274 ---------- ---------- ---------- --------- Balance, August 31, 2000 $ 407,128 (2,959,908) $ (79,815) $ 420,616 ========== ========== ========== =========
See notes to consolidated financial statements. 29 31 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 trades steel and nonferrous metal products and other industrial products worldwide. As more fully discussed in footnote 12, 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 material intercompany transactions and balances are eliminated in consolidation. REVENUE RECOGNITION Generally, sales are recognized when title passes to the customer based on customary industry practice. Certain 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. 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. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and is depreciated at annual rates based upon the estimated useful lives of the assets. Substantially all depreciation is calculated using the straight-line method. 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. ASSETS HELD FOR SALE Included within other assets is equipment which is no longer used for manufacturing operations and is being held for sale. The assets are recorded at management's best estimate of the amounts expected to be realized upon sale. The amounts the Company will ultimately realize could differ substantially from management's estimates. START-UP COSTS Start-up costs associated with the acquisition and expansion of manufacturing and recycling facilities are expensed as incurred. INCOME TAXES Deferred income taxes are provided for temporary differences between financial and tax reporting. The principal differences are described in footnote 5. Benefits from tax credits are reflected currently in earnings. 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. Gain or loss on foreign currency exchange contracts designated as economic hedges is deferred and recognized upon settlement of the related trade receivable or payable. 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. 30 32 CASH FLOWS For purposes of the statements of cash flows, the Company considers investments that are short-term (generally with original maturities of three months or less) and highly liquid to be cash equivalents. RECLASSIFICATIONS Certain reclassifications have been made in the 1999 and 1998 financial statements to conform to the classifications used in the current year. ACCOUNTING STANDARDS The Company adopted the American Institute of Certified Public Accountants' (AICPA)Accounting Standards Executive Committee Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," on September 1, 1999. This SOP requires that entities capitalize certain internal-use software costs once specific criteria are met. The adoption of this SOP did not have a significant impact on the Company's consolidated financial position or results of operations. Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended) is effective for the Company as of September 1, 2000. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Adoption of these new accounting standards will result in cumulative after-tax increases in net earnings of $315 thousand and other comprehensive income of $126 thousand in the first quarter of fiscal 2001. The adoption will also impact associated assets and liabilities. Certain of the Company's derivative instruments will not be designated as hedges for accounting purposes. Management believes that the changes in fair value of these instruments will not significantly impact the results of operations or financial position of the Company. The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, in December, 1999, and is effective for the Company beginning in the first quarter of fiscal 2001. The SAB (as amended) summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management believes that its revenue recognition policies are in substantial conformity with the SAB and the effect of implementation will not be material. NOTE 2. INVENTORIES Before deduction of LIFO reserves of $8,218,000 and $2,993,000 at August 31, 2000 and 1999, respectively, inventories valued under the first-in, first-out method approximated replacement cost. At August 31, 2000 and 1999, 71% and 72%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to international business. NOTE 3. CREDIT ARRANGEMENTS The Company is active in the commercial paper market with a program that permits borrowings up to $200 million. It is the Company's policy to maintain formal bank credit lines equal to 100% of the amount of all commercial paper outstanding. On August 15, 1996, the Company arranged a five-year, $40 million unsecured revolving credit loan facility with a group of four banks. On October 29, 1998, an additional five-year, $60 31 33 million facility was finalized with three banks. On July 14, 2000, the Company arranged an additional 364 day, $100 million unsecured revolving credit loan facility with a group of four banks. The agreements provide for borrowing in United States dollars indexed to the reference rate or to the offshore dollar interbank market rate. Commitment fees of 0.1125%, 0.1800% and 0.1000% per annum are payable on the 1996, 1998 and 2000 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. The Company filed a shelf registration for $200 million of long- and medium-term notes, of which $100 million of investment grade, unsecured notes were sold in February 1999 with a coupon rate of 6.75%, and an effective rate of 6.76% due in February 2009. The proceeds from the notes were used to retire short-term borrowings. The remaining $100 million securities included in the shelf registration can be issued until February 2001. Long-term debt and amounts due within one year as of August 31, are as follows:
(in thousands) 2000 1999 - -------------- --------- --------- 6.75% notes due 2009 $ 100,000 $ 100,000 7.20% notes due 2005 100,000 100,000 6.80% notes due 2007 50,000 50,000 8.49% notes due 2001 14,285 21,428 8.75% notes due 1999 -- 2,141 Other 6,427 1,894 --------- --------- 270,712 275,463 Less current maturities 8,828 9,873 --------- --------- $ 261,884 $ 265,590 ========= =========
All interest on these notes is payable semiannually. The 6.75% notes are due in February 2009; the 7.20% notes are due in July 2005; the 6.80% notes in August 2007. The 8.49% notes provide for annual principal repayments that began in December 1995. Certain of the note agreements include various covenants. The most restrictive of these requires maintenance of consolidated net current assets of $75 million and net worth (as defined) of $150 million. At August 31, 2000, approximately $221 million of retained earnings was available for cash dividends under these covenants. The aggregate amounts of all long-term debt maturities for the five years following August 31, 2000 are (in thousands): 2001 -- $8,828; 2002 -- $9,028; 2003 -- $882; 2004 -- $879; 2005 and thereafter -- $251,095. Interest expense is comprised of the following:
Year ended August 31, -------------------------------- (in thousands) 2000 1999 1998 - -------------- -------- -------- -------- Long-term debt $ 18,419 $ 12,013 $ 11,568 Commercial paper 4,816 2,257 1,547 Notes payable 4,084 5,380 4,940 -------- -------- -------- $ 27,319 $ 19,650 $ 18,055
32 34 Interest of $808,000, $4,547,000, and $2,290,000 was capitalized in the cost of property, plant and equipment constructed in 2000, 1999, and 1998, respectively. Interest of $27,536,000, $24,334,000, and $20,691,000 was paid in 2000, 1999, and 1998, respectively. NOTE 4. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK Management believes that the historical financial statement presentation is the most useful for displaying the Company's financial position. However, 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. Because of this, management believes this information may be of limited usefulness in understanding the Company and minimal value in making comparisons between companies. 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 temporary investments o Accounts receivable/payable o Commercial paper o Notes payable The Company's long-term debt is both publicly and privately held. Fair value was determined for private debt by discounting future cash flows at current market yields and for public debt at indicated market values.
(in thousands) 2000 1999 - -------------- -------- -------- Long-Term Debt: Carrying amount $270,712 $275,463 Estimated fair value $248,208 $264,715 ======== ========
In 1998, the Company entered into an interest rate swap (variable to fixed) effective as a hedge for certain debt outstanding of its Australian subsidiary. The instrument's notional amount is seven million Australian dollars and terminates June 2, 2003. The variable rate at year end was 6.59% and the fixed rate 5.5%. At August 31, 2000, it had a fair value of $128,000. The Company does not have significant risk from off-balance-sheet financial instruments. It enters into foreign exchange and commodity contracts to mitigate risk when trade commitments or anticipated commitments are denominated in currencies other than the functional currency. Effects of changes in currency rates are therefore minimized. The notional amount of foreign currency exchange contracts outstanding at year end was $46,146,000. The fair value of these contracts effective as hedges if settled at August 31, 2000, would result in a gain of $1,419,000. The Company does not hold financial instruments for trading purposes. Pricing of certain sales and purchase commitments is fixed to forward metal commodity exchange quotes. The Company enters into metal commodity contracts (predominantly copper) to mitigate the risk of unanticipated declines in gross margins on these commitments due to the volatility of the metal commodity indices. The derivative instruments are generally closed when 33 35 the underlying sales and purchase commitments are priced, and gain or loss is recognized when the sale or purchase is recorded. The notional amount of forward commodity contracts outstanding at year-end was $15,625,000. The fair value of these contracts effective as hedges if settled at August 31, 2000 would result in a gain of $134,000. The Company maintains both corporate and divisional credit departments. Limits are set for customers and countries. Credit insurance is used for a number of the Company's divisions. Letters of credit issued or confirmed through 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. NOTE 5. INCOME TAXES The provisions for income taxes include the following:
Year ended August 31, --------------------------- (in thousands) 2000 1999 1998 - -------------- ------- ------- ------- Current: United States $15,661 $22,443 $21,651 Foreign 573 672 782 State and local 2,637 2,689 2,558 ------- ------- ------- 18,871 25,804 24,991 Deferred 8,129 2,106 364 ------- ------- ------- $27,000 $27,910 $25,355 ======= ======= =======
Taxes of $26,363,000, $32,515,000 and $21,444,000 were paid in 2000, 1999 and 1998, 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 tax liabilities (assets) associated with these differences are:
August 31, -------------------- (in thousands) 2000 1999 - -------------- -------- -------- Tax on difference between tax and book depreciation $ 30,665 $ 23,388 U.S. taxes provided on foreign income and foreign taxes 11,542 11,497 Net operating losses (less allow- ances of $1,200 and $660) (1,090) (2,671) Alternative minimum tax credit (1,713) (1,713) Other accruals (2,559) (2,878) Other (5,714) (4,360) -------- -------- Total $ 31,131 $ 23,263 ======== ========
34 36 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 $63 million of state net operating losses that expire during the tax years ending from 2006 to 2020. 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 Company's effective tax rates were 36.9% for 2000, and 37.2% for both 1999 and 1998. Reconciliations of the United States statutory rates to the effective rates are as follows:
Year ended August 31, -------------------------- 2000 1999 1998 ----- ----- ----- Statutory rate 35.0% 35.0% 35.0% State and local taxes 2.3 2.3 2.6 Other (.4) (.1) (.4) ---- ---- ---- Effective tax rate 36.9% 37.2% 37.2% ==== ==== ====
NOTE 6. CAPITAL STOCK STOCK PURCHASE PLAN Substantially 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 price. Annual activity of the stock purchase plan was as follows:
2000 1999 1998 -------- -------- -------- Shares subscribed 165,000 187,460 161,130 Price per share $ 23.49 $ 19.50 $ 24.59 Shares purchased 136,990 39,810 138,640 Price per share $ 19.50 $ 24.59 $ 23.80 Shares available 337,891
The Company recognized compensation expense for this plan of $890,000, $326,000 and $1,053,000 in 2000, 1999 and 1998, respectively. STOCK OPTION PLANS The 1986 Stock Incentive Plan (1986 Plan) terminated November 23, 1996, except as to 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. In 1999, the shareholders of the Company authorized an amendment to the 1996 Plan resulting in additional authorized shares of 743,994 in 1999 and 26,063 in 2000. In January 2000, the Company's stockholders approved the 1999 Non-Employee Director Stock Option Plan and authorized 200,000 shares to be made available for grant. Under this Plan, each outside director of the Company will receive annually an option to purchase 1,500 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. 35 37 Combined share information for the three plans is as follows:
Weighted Average Price Exercise Range Number Price Per Share ---------- -------- ----------- September 1, 1997 Outstanding 1,919,308 $23.99 $8.72-28.00 Exercisable 1,108,337 21.32 8.72-27.61 Granted 364,841 29.81 29.81 Exercised (229,277) 19.05 8.72-28.00 Forfeited (9,859) 27.35 8.72-29.81 --------- August 31, 1998 Outstanding 2,045,013 $25.56 $12.61-29.81 Exercisable 1,454,626 24.14 12.61-28.00 Granted 7,000 24.01 21.94-26.69 Exercised (118,587) 18.44 12.61-29.81 Forfeited (22,665) 28.59 13.64-29.81 Increased Authorized 743,994 --------- August 31, 1999 Outstanding 1,910,761 $25.96 $12.61-29.81 Exercisable 1,712,318 25.56 12.61-29.81 Granted 386,900 30.90 30.88-31.94 Exercised (100,866) 22.98 12.61-29.81 Forfeited (21,365) 29.69 24.50-30.88 Increased Authorized 226,063 --------- August 31, 2000 Outstanding 2,175,430 $26.94 $12.61-31.94 Exercisable 1,779,655 26.11 12.61-30.88 Authorized Shares Remaining 619,386 =========
Share information for options at August 31, 2000:
Outstanding Exercisable - -------------------------------------- ------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Yrs) Price Outstanding Price - -------------------------------------- ------------------------------- $12.61-18.42 150,697 1.5 $17.54 150,697 $17.54 20.20-24.50 382,337 3.5 22.54 380,363 22.54 26.25-29.81 1,265,021 4.5 28.21 1,248,495 28.22 30.88-31.94 377,375 6.1 30.91 100 30.88 --------- --------- $12.61-31.94 2,175,430 4.4 $26.94 1,779,655 $26.11
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. 36 38 The Black-Scholes option pricing model used requires the following assumptions:
2000 1999 1998 ---------- ---------- ---------- Risk-free interest rate 6.34% 4.80% 5.44% Expected life 4.06 years 4.15 years 4.60 years Expected volatility .248 .214 .170 Expected dividend yield 1.9% 1.7% 1.8%
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 2000 pro forma information includes options granted in preceding years.
2000 1999 1998 ------- ------- ------- Net earnings (in thousands) As reported $46,255 $47,120 $42,714 Pro forma 44,762 45,598 41,120 Net earnings per diluted share As reported $ 3.25 $ 3.22 $ 2.82 Pro forma 3.14 3.12 2.72
The weighted-average fair value of options granted in 2000, 1999 and 1998 was $7.77, $5.07 and $6.06, 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. 37 39 NOTE 7. 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 $18,108,000, $15,933,000, and $19,448,000, for 2000, 1999 and 1998, respectively. During 1998 the Company settled its only remaining defined benefit plan, which it had terminated in 1997. Included in 1998 is pension expense of $3,310,000, substantially all of which was a settlement liability. NOTE 8. 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. NOTE 9. COMMITMENTS AND CONTINGENCIES Minimum rental commitments payable by the Company and its consolidated subsidiaries for noncancelable operating leases in effect at August 31, 2000, are as follows for the fiscal periods specified:
Real (in thousands) Equipment Estate - -------------- --------- ------- 2001 $ 5,736 $ 5,236 2002 3,786 4,101 2003 2,534 3,522 2004 1,192 1,706 2005 and thereafter 517 1,635 ------- ------- $13,765 $16,200 ======= =======
Total rental expense was $10,664,000, $9,100,000 and $9,634,000 in 2000, 1999 and 1998, respectively. CONSTRUCTION CONTRACT DISPUTES 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 (Project). In connection with the contract, the D/B secured insurance under a subcontractor/vendor default protection policy (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 has made a claim under the Policy for all losses, costs, and expenses incurred by the Company arising from or related to the default, of which $6.6 million was recorded in other assets at August 31, 2000. Although the insurance company paid or escrowed partial payment of certain claims resulting from the default, it is now contesting the nature and extent of the Policy's coverage and may take the position that the Policy is void due to misrepresentations and omissions by the D/B and the insurance broker. The Company filed suit against the insurance company and broker in March 2000. Management intends to vigorously pursue recovery of all damages incurred by the Company resulting from the default as well as damages arising from the insurance company's breaches of duties owed to the 38 40 Company under the Policy. The Project is complete and no material additional construction costs are anticipated. Disputes between the Company and the D/B have been submitted to binding arbitration. In August 2000, the Company filed a claim for $27.4 million against the D/B. The claim seeks recovery of damages to the extent coverage is denied under the Policy discussed above, unpaid contract receivables, amounts for delay claims and change orders all of which have not been paid by the D/B. At August 31, 2000 and 1999, the Company maintained contract receivables of $7.2 million and $6.4 million, respectively, 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, if any, not recovered under the Policy 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, in the amount of $127 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. Management 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 accounts 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 39 41 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 10. 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 May 12, 1997, June 11, 1998, October 22, 1999 and January 27, 2000, with total outstanding share commitments of 1,062,178 at year end, are antidilutive.
August 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Shares outstanding for basic earnings per share 14,018,026 14,510,882 14,829,515 Effect of dilutive securities: Stock options/ purchase plans 232,059 115,658 291,271 ---------- ---------- ---------- Shares outstanding for dilutive earnings per share 14,250,085 14,626,540 15,120,786
NOTE 11. OTHER PAYABLES AND ACCRUED EXPENSES
August 31, -------------------- (in thousands) 2000 1999 - -------------- -------- -------- Salaries, wages and commissions $ 42,281 $ 33,609 Employees' retirement plans 18,741 15,327 Freight 10,726 10,280 Insurance 9,778 10,755 Taxes other than income taxes 9,413 7,704 Litigation accrual 7,650 7,650 Accrual for contract losses 5,327 7,132 Advance billings on contracts 4,548 15,130 Environmental 3,088 3,338 Interest 2,830 3,412 Other accrued expenses 28,298 25,640 -------- -------- $142,680 $139,977 ======== ========
NOTE 12. 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. 40 42 The Company has three reportable segments consisting of manufacturing, recycling, and marketing and trading. 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 trading 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 operating profit, profit before tax and return on net assets 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. 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) 2000 1999 1998 - -------------- ---------- ---------- ---------- United States $1,782,189 $1,491,371 $1,615,893 Non United States 879,231 760,071 751,676 ---------- ---------- ---------- Total $2,661,420 $2,251,442 $2,367,569 ========== ========== ==========
Long-Lived Assets as of August 31, --------------------------------- (in thousands) 2000 1999 1998 - -------------- -------- -------- -------- United States $447,580 $426,476 $322,620 Non United States 10,264 6,765 6,497 -------- -------- -------- Total $457,844 $433,241 $329,117 ======== ======== ========
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) 2000 1999 1998 - -------------- -------- -------- -------- Net sales-unaffiliated customers $343,805 $306,279 $330,772 ======== ======== ======== Operating profit $ 5,627 $ 5,521 $ 4,491 ======== ======== ======== Total assets $ 68,178 $101,434 $107,422 ======== ======== ========
41 43 NOTE 12. BUSINESS SEGMENTS (CONTINUED): The following is a summary of certain financial information by reportable segment:
Adjustments Marketing and 2000 (dollars in thousands) Manufacturing Recycling and Trading Corporate Eliminations Consolidated - --------------------------- ------------- --------- ----------- --------- ------------ ------------ 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 ========== ========= ========= ======== ======== =========== Operating profit 74,731 5,841 19,244 758 -- 100,574 ========== ========= ========= ======== ======== =========== Profit (loss) before income taxes 74,525 5,806 17,017 (24,093) -- 73,255 ========== ========= ========= ======== ======== =========== 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 $ 772,306 $ 115,532 $ 242,568 $ 42,456 $ -- $ 1,172,862 ========== ========= ========= ======== ======== =========== Operating profit return on net assets 13.1% 6.2% 14.9% -- -- 12.7% ========== ========= ========= ======== ======== =========== 1999 (dollars in thousands) - --------------------------- Net sales-unaffiliated customers $1,202,057 $ 283,635 $ 765,673 $ 77 $ -- $ 2,251,442 Intersegment sales 3,948 18,300 35,941 -- (58,189) -- ---------- --------- --------- -------- -------- ----------- Net sales 1,206,005 301,935 801,614 77 (58,189) 2,251,442 ========== ========= ========= ======== ======== =========== Operating profit (loss) 83,796 (5,024) 22,606 (6,698) -- 94,680 ========== ========= ========= ======== ======== =========== Profit (loss) before income taxes 83,710 (5,074) 19,956 (23,562) -- 75,030 ========== ========= ========= ======== ======== =========== Interest expense 4,068 2,373 2,115 15,641 (4,547) 19,650 ========== ========= ========= ======== ======== =========== Capital expenditures 130,098 6,468 1,291 3,895 -- 141,752 ========== ========= ========= ======== ======== =========== Depreciation and amortization 38,841 11,767 1,050 396 -- 52,054 ========== ========= ========= ======== ======== =========== Total assets $ 683,910 $ 114,807 $ 242,547 $ 38,073 $ -- $ 1,079,337 ========== ========= ========= ======== ======== =========== Operating profit return on net assets 16.7% -- 17.2% -- -- 14.1% ========== ========= ========= ======== ======== =========== 1998 (dollars in thousands) - --------------------------- Net sales-unaffiliated customers $1,229,016 $ 386,002 $ 752,501 $ 50 $ -- $ 2,367,569 Intersegment sales 4,925 28,884 35,991 -- (69,800) -- ---------- --------- --------- -------- -------- ----------- Net sales 1,233,941 414,886 788,492 50 (69,800) 2,367,569 ========== ========= ========= ======== ======== =========== Operating profit (loss) 74,766 (1,354) 20,582 (7,870) -- 86,124 ========== ========= ========= ======== ======== =========== Profit (loss) before income taxes 74,753 (1,358) 17,660 (22,986) -- 68,069 ========== ========= ========= ======== ======== =========== Interest expense 5,375 1,614 1,688 11,668 (2,290) 18,055 ========== ========= ========= ======== ======== =========== Capital expenditures 90,036 27,391 1,360 1,128 -- 119,915 ========== ========= ========= ======== ======== =========== Depreciation and amortization 35,364 10,925 939 232 -- 47,460 ========== ========= ========= ======== ======== =========== Total assets $ 622,694 $ 118,905 $ 236,968 $ 24,050 $ -- $ 1,002,617 ========== ========= ========= ======== ======== =========== Operating profit return on net assets 17.6% -- 18.0% -- -- 15.1% ========== ========= ========= ======== ======== ===========
42 44 NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 2000, 1999 and 1998 are as follows (in thousands except per share data):
Three Months Ended 2000 --------------------------------------- Nov. 30 Feb. 29 May 31 Aug. 31 -------- -------- -------- -------- Net sales $612,427 $637,624 $701,209 $710,160 Gross profit 77,434 79,132 87,076 83,848 Net earnings 10,233 10,358 12,961 12,703 Basic EPS .71 .72 .93 .95 Diluted EPS .70 .70 .92 .94
Three Months Ended 1999 --------------------------------------- Nov. 30 Feb. 29 May 31 Aug. 31 -------- -------- -------- -------- Net sales $548,831 $ 550,065 $583,171 $569,375 Gross profit 73,775 69,799 76,848 82,424 Net earnings 11,011 8,386 11,002 16,721 Basic EPS .76 .57 .76 1.16 Diluted EPS .75 .57 .76 1.15
Three Months Ended 1998 --------------------------------------- Nov. 30 Feb. 29 May 31 Aug. 31 -------- -------- -------- -------- Net sales $550,501 $ 568,178 $606,099 $642,791 Gross profit 63,801 66,284 73,836 80,375 Net earnings 8,053 8,348 11,391 14,922 Basic EPS .55 .57 .77 1.01 Diluted EPS .54 .56 .75 1.00
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. Fourth quarter 2000 net earnings decreased $1,203,000 after the final determination of inventory quantities and prices was made. In recording accruals for workers' compensation expense, management relies on prior year experience in making estimates. The actual amounts were not known until year end reports were received from the third party administrator. Actual results at the end of fiscal year 2000 indicated a decline in the number of claims from the prior year resulting in a $2.6 million reduction in the accrual during the fourth quarter of 2000. During 2000, the Company's Board of Directors authorized the purchase of up to 1,500,000 shares of the Company's common stock, 500,000 of which was authorized in the fourth quarter. As of August 31, 2000, 305,281 shares remained authorized for repurchase. 43 45 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, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended August 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Dallas, Texas October 13, 2000 44 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No reportable event took place. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Some of the information required in response to this item with regard to directors is incorporated by reference into this annual report from Commercial Metals' definitive proxy statement for the annual meeting of shareholders to be held January 25, 2001, which will be filed no later than 120 days after the close of Commercial Metals' fiscal year. The following is a listing of employees believed to be considered "Executive Officers" of Commercial Metals as of August 31, 2000, as defined under Rule 3b-7:
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE - ---- ------------------------ --- ------------- Louis A. Federle Treasurer 51 1979 Hugh M. Ghormley Vice President and 71 1981 CMC Steel Group - President Fabrication Plants Harry J. Heinkele Vice President and Secondary Metals 68 1981 Processing Division - President A. Leo Howell Vice President and 79 1977 Howell Metal Company - President; Director and Chairman of the Executive Committee William B. Larson Vice President and 47 1995 Chief Financial Officer Murray R. McClean Vice President and Marketing and 52 1995 Trading Segment - President Malinda G. Passmore Controller 41 1999 Stanley A. Rabin Chairman of the Board, 62 1974 President and Chief Executive Officer; Director
45 47 Marvin Selig CMC Steel Group - Chairman 77 1968 and Chief Executive Officer; Director Clyde P. Selig Vice President and 68 1981 CMC Steel Group - President and Chief Operating Officer David M. Sudbury Vice President, Secretary and 55 1976 General Counsel
The executive officers are employed by the board of directors of Commercial Metals or a subsidiary, usually at its first meeting after Commercial Metals' annual stockholders meeting, and continue to serve for terms set from time to time by the board of directors in its discretion. All of the executive officers of Commercial Metals have been employed by Commercial Metals in the positions indicated above or in positions of similar responsibility for more than five years, except for Ms. Passmore. Ms. Passmore was employed in April 1999 as Controller, having formerly been President and CEO of System Health Providers, Inc. since January 1998, and Chief Financial Officer from January 1997, until January 1998. Prior to 1997, Ms. Passmore was a consultant and employed as Executive Director of Financial Services and Controller with Kaiser Foundation Health Plan of Texas from 1991 to September 1996. Mr. Federle was named Treasurer in April 1999, having been employed since 1977 and Assistant Treasurer since 1979. Mr. Larson was employed in June 1991 as Assistant Controller, named Controller in March 1995, and elected Vice President and Chief Financial Officer in April 1999. Mr. McClean was elected to the newly created position of President of the Marketing and Trading Segment as of September 1, 1999, having been employed since 1985 and President of the International Division of that segment since 1995. Mr. Rabin was elected to the additional position of Chairman of the Board in March 1999. Marvin Selig is the brother of Clyde P. Selig. There are no other family relationships among the officers of the registrant or among the executive officers and directors. ITEM 11. EXECUTIVE COMPENSATION Information required in response to this Item is incorporated by reference into this annual report from Commercial Metals' definitive proxy statement for the annual meeting of shareholders to be held January 25, 2001, which will be filed no later than 120 days after the close of Commercial Metals' fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this item is incorporated by reference from Commercial Metals' definitive proxy statement for the annual meeting of shareholders to be held January 25, 2001, which will be filed no later than 120 days after the close of Commercial Metals' fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS To the extent applicable, information required in response to this item is incorporated by reference into this annual report from Commercial Metals' definitive proxy statement for the annual meeting of shareholders to be held January 25, 2001, which will be filed no later than 120 days after the close of Commercial Metals' fiscal year. 46 48 PART IV ITEM 14. 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 and Index required to be filed by Item 601 of Regulation S-K: (3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). (3)(i)a- Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(i)b- Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(i)c- Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Filed as Exhibit 2 to the Company's Form 8-A filed August 3, 1999 and incorporated herein by reference). (3)(ii)By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated hereby by reference). (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 the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed as Exhibit 1 to the Company's Form 8-A filed August 3, 1999 and incorporated herein by reference). (10)(iii) Material Contracts - Employment Agreement of Murray R. McClean as amended..............................E1-E17 (21) Subsidiaries of Registrant..................................E-18 47 49 (23) Independent Auditors' consent to incorporation by reference of report dated October 13, 2000, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2000, into previously filed Registration Statements No. 033-61073, No. 033-61075, 333-27967 and 333-42648 on Form S-8 and Registration Statements No. 33-60809 and 333-61379 on Form S-3................................................E-19 (27) Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 48 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ Stanley A. Rabin ----------------------------------- By: Stanley A. Rabin Chairman of the Board, President and Chief Executive Officer Date: November 20, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: - -------------------------------------- Albert A. Eisenstat, November 20, 2000 Director /s/ Moses Feldman - -------------------------------------- Moses Feldman, November 20, 2000 Director /s/ A. Leo Howell - -------------------------------------- A. Leo Howell, November 20, 2000 Vice President and Director /s/ Ralph E. Loewenberg - -------------------------------------- Ralph E. Loewenberg, November 20, 2000 Director /s/ Anthony A. Massaro - -------------------------------------- Anthony A. Massaro, November 20, 2000 Director /s/ Dorothy G. Owen - -------------------------------------- Dorothy G. Owen, November 20, 2000 Director /s/ Stanley A. Rabin - -------------------------------------- Stanley A. Rabin, November 20, 2000 Chairman of the Board, President, And Chief Executive Officer /s/ Marvin Selig - -------------------------------------- Marvin Selig, November 20, 2000 Chairman and Chief Executive Officer CMC Steel Group and Director /s/ Robert R. Womack - -------------------------------------- Robert R. Womack, November 20, 2000 Director /s/ William B. Larson - -------------------------------------- William B. Larson, November 20, 2000 Vice President and Chief Financial Officer /s/ Malinda G. Passmore - -------------------------------------- Malinda G. Passmore, November 20, 2000 Controller 49 51 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, 2000 and 1999, and for each of the three years in the period ended August 31, 2000, and have issued our report thereon dated October 13, 2000; 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 14. 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. /s/ DELOITTE & TOUCHE LLP Dallas, Texas October 13, 2000 52 SCHEDULE VIII COMMERCIAL METALS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 (In thousands) Allowance for collection losses deducted from notes and 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 ---- --------- ---------- -------- ---------- ------- 1998 6,116 2,898 261 1,155 8,120 1999 8,120 1,877 332 2,615 7,714 2000 7,714 948 567 1,361 7,868
(A) Recoveries of accounts written off. (B) Write-off of uncollectible accounts. 53 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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 and Index required to be filed by Item 601 of Regulation S-K: (3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). (3)(i)a- Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(i)b- Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(i)c- Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Filed as Exhibit 2 to the Company's Form 8-A filed August 3, 1999 and incorporated herein by reference). (3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated hereby by reference). (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 the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed as Exhibit 1 to the Company's Form 8-A filed August 3, 1999 and incorporated herein by reference). (10)(iii) Material Contracts - Employment Agreement of Murray R. McClean as amended..............................E1-E17 (21) Subsidiaries of Registrant..................................E-18
54 (23) Independent Auditors' consent to incorporation by reference of report dated October 13, 2000, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2000, into previously filed Registration Statements No. 033-61073, No. 033-61075, 333-27967 and 333-42648 on Form S-8 and Registration Statements No. 33-60809 and 333-61379 on Form S-3................................................E-19 (27) Financial Data Schedule
EX-10 2 d82018ex10.txt EMPLOYMENT AGREEMENT OF MURRAY R. MCCLEAN/AMENDED 1 EXHIBIT 10(iii) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered into as of September 1, 1999, by and between Commercial Metals Company, a Delaware corporation (the "COMPANY"), and Murray R. McClean (the "EXECUTIVE"). RECITALS: WHEREAS, the Executive has been employed by direct or indirect wholly-owned subsidiaries of the Company since 1985 in various capacities, most recently as a Vice President and President of the International Division of the Company's Marketing and Trading segment with the Executive's principal office and residence near Sydney, Australia; and WHEREAS, the Company desires to employ the Executive as a Vice President and President of the Marketing and Trading segment which will require the Executive to relocate his office and residence to the Company's corporate headquarters in Dallas, Texas; and WHEREAS, the Executive desires to accept the promotion and employment by the Company; NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Company and Executive agree as follows: ARTICLE I 1.1 Employment. The Company hereby agrees to employ the Executive and the Executive hereby accepts employment by the Company for the period and upon the terms and conditions contained in this Agreement. The Executive hereby represents and warrants to the Company that the execution of this Agreement by the Executive and the Executive's performance of his duties hereunder will not conflict with, cause a default under, or give any party a right to damages under any other agreement to which the Executive is a party or is bound. 1.2 Office and Duties. (a) Position. The Executive shall have the responsibility and authority to carry out the duties as a Vice President of the Company and President of the Marketing and Trading segment of the Company as described in Exhibit "A" attached hereto and as may be further authorized and directed from time to time by the President and Chief Executive Officer of the Company. E-1 2 (b) Relocation of Office and Residence. On or before the 1st day of September, 2000, Executive shall relocate his principal office and shall perform his duties primarily from and based out of an office located at the Company's headquarters offices in Dallas, Texas. On or before the 1st day of January, 2001, Executive shall relocate his principal residence and cause his immediate family to move from their current residence in the vicinity of Sydney, Australia, to a residence in the vicinity of Dallas, Texas. (c) Commitment. Throughout the Initial Term and any Renewal Term (both as hereinafter defined) of this Agreement, the Executive shall devote substantially all of his time, energy, skill and professional efforts to the performance of his duties hereunder in a manner that will faithfully and diligently further the business and interests of Company and its subsidiaries. 1.3 Initial Term and Renewal Term. The INITIAL TERM of this Agreement shall mean the period commencing September 1, 1999, and ending on August 31, 2002, unless earlier terminated in accordance with the terms of this Agreement (in which case "Initial Term" shall refer to such shorter period). In the event neither party has delivered a Notice of Termination (as herein defined) to the other Party on or before the last day of the Initial Term this Agreement shall be automatically extended for a one-year period commencing on September 1, 2002 and ending on August 31, 2003 (a "RENEWAL TERM") and shall continue to be automatically extended upon expiration of the first Renewal Term for two consecutive one-year periods thereafter (each subsequent one-year period a "Renewal Term") unless the Company or the Executive delivers a Notice of Termination as defined in Section 1.05(d). The parties may in their discretion thereafter extend this Agreement on mutually satisfactory terms although neither party shall have any obligation to do so. 1.4 Compensation. (a) Base Salary. The Company shall pay the Executive as compensation a salary of Three Hundred Thousand Dollars ($300,000) per year, or such greater amount as may be approved by the Company's Board of Directors, payable in accordance with Company's policies and practices applicable to non-exempt employees. (b) Discretionary Bonus Payment. The Company may, in its sole discretion and subject to approval of the Company's Board of Directors, pay the Executive a discretionary annual bonus for each fiscal year beginning September 1 and ending August 31 during the term of this Agreement. (c) Payment and Reimbursement of Expenses. During the Initial Term and any Renewal Term, the Company shall pay or reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in performing his obligations under this Agreement in accordance with the policies and procedures of the E-2 3 Company for its employees, provided that the Executive properly accounts therefor in accordance with the policies and procedures of the Company. (d) Fringe Benefits and Perquisites. During the Initial Term and any Renewal Term, the Executive shall be entitled to participate in or receive benefits under any plan or arrangement generally made available to the employees or executive officers of the Company, including periodic grants of stock options, all subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements and as approved by the Company's Board of Directors. To the extent permitted by law and the terms of the Company's benefit plans, including the Company's Profit Sharing and 401(k) Plan and Benefit Restoration Plan, prior service by the Executive with a subsidiary of the Company shall be credited as service with the Company for purposes of vesting of any benefit. The Company shall furnish Executive with an automobile equipped with telephone consistent with the Company's policies on automobiles furnished senior corporate executives during the Initial Term and any Renewal Term. (e) Vacations. During the Initial Term and any Renewal Term and in accordance with the regular policies of the Company, the Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its employees generally, but not fewer than twenty business days in any calendar year (prorated in any calendar year in which the Executive is employed hereunder for less than the entire year in accordance with the number of days in such calendar year during which the Executive is so employed). (f) Insurance. Commencing on the date the Executive completes the relocation of his principal office to Company's headquarters office in Dallas, Texas, pursuant to Section 1.2(b) and for the Initial Term and any Renewal Term, the Company shall, to the extent the Executive is insurable under the insurance policy or policies procured by the Company for its employees, provide life insurance coverage, disability insurance and hospital, surgical, medical and/or dental benefits for the Executive and his qualified dependents on such terms as the Company normally provide such items for its salaried employees and executive officers. (g) Moving Expenses and Relocation Assistance. The Company shall, subject to and on a basis consistent with the policies and procedures of the Company, pay or reimburse the Executive for expenses arising from the relocation of Executives' primary residence to the vicinity of Dallas, Texas, including the cost of moving household goods, personal items, spouse and dependent travel to Executive's new residence. In addition to payment or reimbursement of customary moving expenses, the Company shall pay the Executive Twenty-Five Thousand Dollars ($25,000) for miscellaneous costs and expenses not subject to reimbursement which Executive may incur associated with the relocation of his residence pursuant to Section 1.2(b). This payment shall be made within ten (10) days following notice from Executive that he has completed the relocation of his residence. All such reimbursement and payments E-3 4 by the Company, to the extent required by law, shall be considered compensation to Executive and subject to any applicable tax withholding requirements. (h) Personal Travel. Each twelve months during the Initial Term or any Renewal Term, the Company shall provide Executive with four round trip airplane tickets between Dallas, Texas and Sydney, Australia, for the personal use of Executive and his family. Two of the tickets shall be Business Class or equivalent and two shall be Tourist (Economy Class) or equivalent. The cost of such tickets shall be paid by the Company and, to the extent required by law, considered compensation to Executive and subject to any applicable tax withholding requirements. (i) Outstanding Loan. The outstanding loan from CMC (Australia) Pty. Limited to the Executive in the unpaid principal amount of $A 150,000.00 as of October 13, 1999, and secured by real property located at 660 Port Hacking Road South Dolon Bay NSW Australia, evidenced by a second mortgage note dated the 6th day of June, 1994, shall, at the Executive's option, be repaid from either (i) the proceeds of the sale of Executive's residence in Australia or (ii) the proceeds of a new loan from the Company in the amount of the unpaid principal and interest and upon terms and conditions satisfactory to the Company and secured by a Deed of Trust lien in favor of the Company on Executive's residence in the vicinity of Dallas, Texas, at the time Executive completes relocation of his residence to Dallas, Texas. (j) Payroll Transition. Until such time as Executive has relocated his principal residence to Dallas, Texas pursuant to Section 1.2(b), and, at such time, is transferred to the Company's payroll, the Company shall cause CMC (Australia) Pty. Limited to pay Executive the base salary described in Section 1.4(a) and to provide such benefits, insurance coverage and perquisites as are provided other employees of CMC (Australia) Pty. Limited or as the Executive received prior to the effective date of this Agreement. The Executive acknowledges that obligations of the Company to provide the compensation described in Section 1.4 shall be satisfied by compensation received from the payroll of CMC (Australia) Pty. Limited until such time as Executive has relocated his personal residence and is transferred to the Company's payroll. 1.5 Termination. (a) Nonperformance due to Disability. During the Initial Term or any Renewal Term, the Company may terminate the Executive's employment for Nonperformance due to Disability. "NONPERFORMANCE DUE TO DISABILITY" shall exist if because of ill health, physical or mental disability, or any other reason beyond his control, and notwithstanding reasonable accommodations made by the Company, the Executive shall have been unable, unwilling or shall have failed to perform the essential functions of his job, as determined in good faith by Company's Board of Directors, for a period of 100 days in any 365-day period, irrespective of whether or not such days are consecutive. E-4 5 (b) Cause. During the Initial Term or any Renewal Term, the Company may terminate the Executive's employment for Cause. Termination for "CAUSE" shall mean termination because of the Executive's (i) conviction of, or a plea of nolo contendere to, (A) a felony or (B) a misdemeanor involving moral turpitude that causes harm to the Company or any of its affiliates that, in the good faith judgment of the Company, has damaged or interfered with the relationships of the Company or any of its affiliates with any of their customers, suppliers, employees or other agents; (ii) willful misconduct that causes material economic harm to the Company or that brings substantial discredit to the reputation of the Company or any of its affiliates; (iii) substance abuse or illegal use of drugs that impairs the Executive's performance, that causes harm to the Company or any of its affiliates or that, in the reasonable judgment of the Company, has damaged or interfered with the relationships of the Company or any of its affiliates with any of their customers, suppliers, employees or other agents; (iv) material violation of any written policy of the Company or material breach by the Executive of this Agreement, other than a breach of Section 2.2 (Confidential Information) or Section 2.3 (Non-Competition Agreement); provided, however, that the foregoing shall not constitute Cause unless (A) the Company first notifies the Executive in writing of such violation or breach, specifying in reasonable detail the basis therefor and stating that it is grounds for termination for Cause and (B) the Executive then fails to finally cure such matter within ten (10) business days after such notice is sent or given under this Agreement; (v) commission of an act of fraud, illegality, theft or dishonesty in the course of the Executive's employment with the Company and relating to the assets, activities, operations or employees of the Company or any of its affiliates; or (vi) breach by the Executive of Section 2.2 (Confidential Information) or Section 2.3 (Non-Competition Agreement) of this Agreement. The term "AFFILIATE" shall mean a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Company, or other applicable entity. (c) Without Cause. During the Initial Term or any Renewal Term, the Company may terminate the Executive's employment Without Cause. Termination "WITHOUT CAUSE" shall mean termination of the Executive's employment by the Company other than termination for Cause or termination for Nonperformance due to Disability. (d) Explanation of Termination of Employment. In addition to any notice required by clause (iv) of Section 1.5(b) (Cause), the party terminating this Agreement shall give prompt written notice ("NOTICE OF TERMINATION") to the other party hereto advising such other party of the termination of this Agreement. If the Company has terminated the Agreement, within thirty (30) days after notification that the Agreement has been terminated, the Company shall deliver to the Executive a written explanation, which shall state in reasonable detail the basis for such termination. E-5 6 (e) Date of Termination. "DATE OF TERMINATION" shall mean the date on which Notice of Termination is sent or given under this Agreement or the date of the Executive's death, whichever occurs first. 1.6 Compensation Upon Termination. (a) Termination by the Company for Cause or Nonperformance due to Disability; Termination by the Executive. If the Company terminates the Executive's employment for Cause, or for Nonperformance due to Disability, or if the Executive terminates his employment for any reason, then Company's obligation to pay compensation pursuant to Section 1.4 (Compensation) shall terminate, except that the Company shall pay the Executive his accrued but unpaid salary and provide the fringe and insurance benefits specified in Section 1.4 (Compensation) through the Date of Termination. Thereafter the Company shall provide Executive only such benefits to the extent and for the period of time as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA) or similar statute applicable to Executive's employment by the Company. (b) Termination Upon Death of the Executive. If the Executive dies prior to the expiration of this Agreement, then the Executive's employment and other obligations under this Agreement shall automatically terminate and Company's obligation to pay compensation pursuant to Section 1.4 (Compensation) shall terminate, except that the Company shall pay the Executive's estate his accrued but unpaid salary and provide the fringe and insurance benefits specified in Section 1.4 (Compensation) through the end of the month in which the Executive's death occurs. Thereafter the Company shall provide the surviving spouse or eligible dependants only such benefits to the extent and for the period of time as may be required by COBRA or similar statute applicable to Executive's employment by the Company. (c) Termination by the Company Without Cause. If the Company shall terminate the Executive's employment Without Cause, then the Company shall continue to pay the base salary then applicable pursuant to Section 1.4 (a) (Compensation) for a period of two years following the date of Notice of Termination during the Initial Term or for twelve months if Notice of Termination occurs during any Renewal Term. No other form of compensation including those specified in Section 1.4 will be paid to or for Executive except as may be required by COBRA or similar statute applicable to Executive's employment by the Company. ARTICLE II 2.1 Acknowledgments by the Executive. The Executive acknowledges that he will occupy a position of trust and confidence with the Company and will have the opportunity to become familiar with the following, any and all of which constitute E-6 7 confidential information of the Company (collectively, "CONFIDENTIAL INFORMATION"): (i) any and all trade secrets and proprietary information concerning the business and affairs of the Company, product pricing, contract terms, hedging practices, data, know-how, formulae, compositions, processes, samples, inventions and ideas, past, current and planned product development, supplier lists, customer lists, current and anticipated customer requirements, market studies, marketing plans and strategies, supply or sourcing information, business plans and computer software and programs of the Company and any other information, whether or not documented in any manner, of the Company that is a trade secret within the meaning of applicable trade secret law; (ii) any and all information concerning the businesses and affairs of the Company (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, new product development information, supplier or customer information, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and (iii) any and all notes, analyses, compilations, studies, summaries, and other material prepared by or for the Company containing or based, in whole or in part, on any information included in the foregoing. The Executive further acknowledges that the business of the Marketing and Trading Segment of the Company is conducted throughout the United States of America from offices in New York, New Jersey, California and Texas and from approximately fourteen offices through the world (the "BUSINESS AREA"); the Marketing and Trading Segment of the Company buys and sells products throughout the Business Area; the provisions of Section 2.2 (Confidential Information) and Section 2.3 (Non-Competition Agreement) are reasonable and necessary to protect and preserve the business of the Company; and the Company would be irreparably damaged if the Executive were to breach the covenants set forth in Section 2.2 (Confidential Information) and Section 2.3 (Non-Competition Agreement). 2.2 Confidential Information. The Executive acknowledges and agrees that all Confidential Information known or obtained by the Executive, whether before or after the date hereof, is the property of the Company. Therefore, the Executive agrees that he shall not, at any time, other than in the Executive's good faith pursuit of the Company's business in the course and scope of the Executive's employment, use or disclose to any unauthorized individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, governmental or quasi-governmental authority of any nature, or other entity (collectively, a "PERSON") or use for his own account or for the benefit of any third party any Confidential Information, whether the Executive has such information in his memory or embodied in writing or other physical form, without the Company's prior written consent, unless and to the extent that the Confidential Information is or becomes generally known to and available for use by the public other than as a result of the Executive's actions or the actions of any other Person bound by a duty of confidentiality to the Company or E-7 8 one of its affiliates. If the Executive becomes legally compelled by deposition, subpoena or other court or governmental action to disclose any of the Confidential Information, then the Executive will give the Company prompt notice to that effect, and will cooperate with the Company if the Company seeks to obtain a protective order concerning the Confidential Information. The Executive will disclose only such Confidential Information as his counsel shall advise is legally required. The Executive agrees to deliver to the Company, at any time the Company may request, all documents, memoranda, notes, plans, records, reports, and other documentation, models, components, devices, or computer software, whether embodied in a disk or in other form (and all copies of all of the foregoing), relating to the businesses, operations, or affairs of the Company or any of its affiliates and any other Confidential Information that the Executive may then possess or have under his control. 2.3 Non-Competition Agreement. The Executive agrees and covenants with the Company that for a period beginning on the date hereof and ending on that date that is two (2) years after the Date of Termination, he will not, except pursuant to any written consulting or employment agreement with the Company, directly or indirectly either (a) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing, or control of, or be employed by or connected in any manner with any business which is or proposes to engage in any business conducted during the Initial Term or any Renewal Term of this Agreement by the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment, (b) solicit or in any manner attempt to influence or induce any employee employed, now or in the future, by the Company or any affiliate of the Company in the Marketing and Trading Segment, to leave such employment, (c) solicit or in any manner attempt to influence or induce any sales or purchasing agent with whom the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment, enters or has entered into an agreement, now or in the future, to act as a sales or purchasing agent with respect to the territories and goods covered by such agreement, (d) induce any Person who is or has been a customer of the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment to patronize any business directly or indirectly in competition with the business conducted by the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment, (e) canvass, solicit or accept from any Person who is or has been a customer of the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment, any such competitive business, or (f) request or advise any Person who is or has been a customer of the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment to withdraw, curtail or cancel any such customer's business with the Marketing and Trading Segment of the Company or any affiliate of the Company in the Marketing and Trading Segment. 2.4 Exceptions. Notwithstanding the foregoing restrictions, nothing in this Agreement shall be construed to restrict or prohibit ownership by the Executive of E-8 9 stock of any company listed on the New York or American Stock Exchanges or the Nasdaq National Market System; provided, that the Executive's ownership interest is not more than five percent (5%) or more of the outstanding voting shares of such company. 2.5 Remedies. The parties agree that in the case of a breach by the Executive of any of the foregoing agreements, damages would be difficult, if not impossible, to prove, and the Company shall be entitled to injunctive relief as its primary, but not exclusive remedy, against the breaching Executive. If the Executive is found to have violated any of the foregoing agreements, the parties agree that the duration of the non-competition period set forth above shall be automatically extended by the same period of time that the Executive is determined to be in violation of the foregoing agreements. The parties hereby further agree that the restrictions and obligations herein set forth are (a) reasonable and necessary to protect the substantial value of the Company, and (b) directly benefit the Executive. The representations and covenants contained in this Article II on the part of the Executive will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Executive against the Company or any officer, director, or stockholder of the Company whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement against the Executive of the covenants of the Executive contained in this Article II. Notwithstanding any other provision of this Agreement, the provisions of this Article II and the rights and remedies to enforce such provisions shall be assignable in favor of any successor or assign of the Company. ARTICLE III 3.1 Executive's Sole Remedy. The Executive's sole remedy shall be against the Company (or any assignee or successor to all or substantially all the assets of the Company (collectively, "ASSIGNS")) for any Executive Claim (defined below). The Executive shall have no claim or right of any nature whatsoever against any of the Company's (or any subsidiary's or owner's) directors, officers, employees, direct and indirect stockholders, owners, trustees, beneficiaries or agents, irrespective of when any such person held such status (collectively, the "THE COMPANY AFFILIATES") (other than Assigns) arising out of any Executive Claim. The Executive hereby releases and covenants not to sue any person other than the Company or its Assigns over any Executive Claim. The Company Affiliates shall be third-party beneficiaries of this Agreement for purposes of enforcing the terms of this Section 3.1 against the Executive. Except as set forth in the immediately preceding sentence, nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, the Company and the Company's Assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, and no person who is not a party to this Agreement may rely on the terms hereof. E-9 10 Upon termination of the Executive's employment, the sole claim of the Executive against the Company and its Assigns for Executive Claims will be for the amounts described in Section 1.6 (Compensation Upon Termination), and the Executive shall have no claim against the Company or its Assigns for any Executive Claim, other than those set forth in Section 1.6 (Compensation Upon Termination), or against any the Company Affiliate (other than Assigns) for Executive Claims, including, without limitation, any claim for damages of any nature, be they actual, direct, indirect, special, punitive or consequential. The Executive hereby releases and covenants not to sue for, collect or otherwise recover any amount against the Company or its Assigns for any Executive Claim, other than the amounts set forth in Section 1.6 (Compensation Upon Termination), or against any the Company Affiliate (other than Assigns) for any Executive Claim. IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT THE LIMITATIONS ON THE EXECUTIVE'S REMEDIES EXPRESSED IN THIS SECTION 3.1 APPLY WITHOUT LIMITATION TO EXECUTIVE CLAIMS RELATING TO NEGLIGENCE. "EXECUTIVE CLAIM" shall mean any claim, liability or obligation of any nature whatsoever arising out of this Agreement or an alleged breach of this Agreement or for any other claim arising out of the Executive's employment by the Company or the termination thereof. 3.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon the earlier of delivery thereof if by hand or upon receipt if sent by mail (registered or certified mail, postage prepaid, return receipt requested) or on the second next business day after deposit if sent by a recognized overnight delivery service or upon transmission if sent by telecopy or facsimile transmission (with request of assurance of receipt in as a manner customary for communication of such type) as follows: (a) if to the Company, to: Commercial Metals Company 7800 Stemmons Freeway Dallas, TX 75247 Attention: Stanley A. Rabin - Chief Executive Officer Facsimile No.: 214/689-4326 with copies to: David M. Sudbury, Esq. General Counsel Commercial Metals Company 7800 Stemmons Freeway Dallas, Texas 75247 Facsimile No.: 214/689-4326 E-10 11 (b) if to the Executive, to: Murray R. McClean 660 Port Hacking Road South Dolans Bay, NSW Australia 2229 Any party by written notice to the other party pursuant to this Section may change the address or the persons to whom notices or copies thereof shall be directed. 3.3 Assignment. This Agreement and the rights and duties hereunder shall be binding upon and inure to the benefit of the parties hereto and the successors, representatives and assigns of each of the parties to this Agreement. No rights, obligations or liabilities hereunder shall be assignable by any party without the prior written consent of the other parties, except that the Company may assign their rights under this Agreement without obtaining the prior written consent of the other party hereto to (i) any person who directly or indirectly acquires (whether in a single transaction or a series of related transactions) (a) all or substantially all of the assets of the Company or (b) a majority of the outstanding capital stock of the Company or (ii) any direct or indirect wholly-owned subsidiary of the Company. Any purported assignment in violation of this Agreement shall be void. 3.4 Amendment. This Agreement may be amended or modified only by an instrument in writing duly executed by the parties to this Agreement. 3.5 Waivers. Any waiver by any party hereto of any breach of or failure to comply with any provision of this Agreement by any other party hereto shall be in writing and shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other breach of, or failure to comply with, any other provision of this Agreement. 3.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute a single instrument. 3.7 Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no agreements, representations, warranties or covenants other than those expressly set forth herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 3.8 Provisions Separable. The provisions hereof are independent of and separable from each other, and no provision shall be affected or rendered invalid or E-11 12 unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. If any provision hereof, or the application thereof to any situation or circumstance, shall be invalid or unenforceable in whole or in part, then the parties shall seek in good faith to replace any such legally invalid provision or portion thereof with a valid provision that, in effect, will most nearly effectuate the parties' intentions in entering into this Agreement. If the parties are not able to agree on a substitute provision within 30 days after the provision initially is determined to be invalid or unenforceable, then the parties agree that the invalid or unenforceable provision or portion thereof shall be reformed pursuant to Section 3.13 (Arbitration) and the new provision shall be one that, in effect, will most nearly effectuate the parties' intentions in entering into this Agreement. 3.9 Headings; Index. The headings of paragraphs and Sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. The words "herein," "hereof," "hereto" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. 3.10 Governing Law. This Agreement shall be governed by and construed, interpreted and applied in accordance with the laws of the State of Texas, excluding any choice-of-law rules that would refer the matter to the laws of another jurisdiction. 3.11 Survival. The covenants and agreements of the parties set forth in this Article III are of a continuing nature and shall survive the expiration, termination or cancellation of this Agreement, regardless of the reason therefor. 3.12 Voluntary Agreement. The Executive acknowledges that he has had sufficient time and opportunity to read and understand this Agreement and to consult with his legal counsel and other advisors regarding the terms and conditions set forth in this Agreement. 3.13 Arbitration. Unless otherwise provided in this Agreement, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, including the validity or enforceability of this Section 3.13, shall be settled by arbitration in Dallas, Texas, (unless the Company and the Executive agree upon another location) before three arbitrators in accordance with the rules then in effect of the American Arbitration Association. The Company and the Executive shall each, within 30 days from the date of the demand for arbitration, designate one arbitrator, and such designated arbitrators shall mutually agree on, and shall designate, a third arbitrator; provided, however, that, failing such agreement within 30 days after their appointment, the third arbitrator shall be named by the American Arbitration Association. Should any of the arbitrators appointed die, resign, refuse or become unable to act before a decision is given, the vacancy shall be filled by the method set E-12 13 forth above for the original designation. The Company and the Executive shall each pay the fees and expenses of their respectively designated arbitrators and shall bear equally the fees and expenses of the third arbitrator. The written final decision of the majority of the arbitrators shall be furnished to the Company and the Executive in writing and shall binding upon the Company and the Executive and shall not be contested by either of them. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed on its behalf by its duly authorized officer or has signed this Agreement on his behalf, as applicable, as of the day and year first above written. /s/ Murray R. McClean ------------------------------ MURRAY R. McCLEAN COMMERCIAL METALS COMPANY By: /s/ Stanley A. Rabin --------------------------- Name: STANLEY A. RABIN Title: President and Chief Executive Officer E-13 14 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT entered into as of September 1, 1999, (the "AGREEMENT") by and between Commercial Metals Company, a Delaware corporation (the "COMPANY"), and Murray R. McClean (the "EXECUTIVE") is made this 10th day of July, 2000. RECITALS: WHEREAS, the Company and the Executive entered into the Agreement as of September 1, 1999; and WHEREAS, the Company and the Executive wish to amend the Agreement to provide for loans from the Company for certain of the Executive's relocation expenses; NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Company and Executive agree to amend the Agreement as follows: Paragraph 1.4(i) is hereby omitted in its entirety. The following new Paragraph 1.4(i) is substituted thereof: (i) Mortgage Relocation Loan and Other Relocation Expense Loan. In connection with the Executive's relocation from Australia to the Dallas headquarters office, the Company shall loan to the Executive a total of Six Hundred Seventy Five Thousand Dollars ($675,000.00) of which Three Hundred Eighty-Five Thousand Dollars ($385,000.00) shall be used solely for the purpose of the payment of a portion of the purchase price of a new principal residence by the Executive. This mortgage relocation loan shall be secured by a second lien mortgage on the Executive's new principal residence and shall be due and payable in five annual equal installments of Seventy Seven Thousand Dollars ($77,000.00) to be deducted from Executive's net after tax annual bonus payments as may be paid by the Company to Executive in October of each year commencing in October, 2001. Should any annual bonus payment due Executive not equal any installment then due, the unpaid balance of that installment shall be added to and shall be due at the time of the next year's installment, provided that all the remaining unpaid balance shall become due and payable on October 31, 2005. The unpaid balance of the mortgage relocation loan shall become due and payable in full within 120 days of the termination of the Executive's employment with the Company for any reason or upon sale of the residence. The mortgage relocation loan shall not be transferable to a subsequent purchaser of the Executive's principal residence. In connection with the mortgage relocation loan, the Executive hereby certifies to the Company that the Executive reasonably expects to be entitled to and will E-14 15 itemize deductions in calculating the Executive's Federal Income Tax liability for each year the loan is outstanding. It is the intent of the Company and the Executive that this loan shall meet the requirements of regulations set forth under the Internal Revenue Code of 1986 (the "Code") Section 1.7872-5T(b)(6) and (c)(1) so as to qualify as an employee relocation loan exempt from the application of Code Section 7872. In addition to the mortgage relocation loan, the Company shall loan the Executive an additional Two Hundred Ninety Thousand Dollars ($290,000.00) for other relocation expenses to be drawn down periodically as requested by Executive on or after July 10, 2000. A portion of the proceeds of this other relocation expense loan shall be used by Executive to repay in full on or before August 31, 2000, the outstanding principal and interest on the loan from CMC Australia Pty. Ltd. to the Executive in the unpaid principal amount of $A 150,000.00 as of October 13, 1999, secured by real property owned by Executive located at 660 Port Hacking Road South, Dolans Bay NSW Australia, (the "Australian Property") as evidenced by a second mortgage note dated the 6th day of June, 1994. This other relocation expense loan shall be evidenced by an appropriate promissory note providing for payment of accrued interest and ten equal payments of principal, each in the amount of Twenty-Nine Thousand Dollars ($29,000.00), to be deducted from Executive's net after tax annual bonus payment as may be paid by the Company to Executive in October of each year commencing in October, 2001. Should any annual bonus payment due Executive not equal the installment then due, the unpaid balance of principal only shall be added to the next year's installment with all the remaining unpaid principal balance and accrued interest due and payable on or before October 31, 2010. All accrued interest for each period preceding a installment payment date shall be paid by Executive no later than October 31 of each year either by deduction from Executive's net after tax annual bonus payment or directly by Executive if the bonus payment is not sufficient. The note evidencing the other relocation expense loan shall further provide that it shall be due and payable in full within 120 days of the termination of the Executive's employment with the Company for any reason. Furthermore, the note shall provide for interest at a rate equal to the one-year United States Treasury constant maturity rate for the month of July, 2000, as published by the Federal Reserve Board of Governors plus one percent (1%) and shall be adjusted commencing September 1, 2001 and annually each September 1 thereafter to the then most recently published one year constant maturity rate for the month of July of each succeeding year plus one percent (1%). At the option and expense of the Company, the Executive's obligations under the note may be secured by a second mortgage note on the Australian Property. E-15 16 Except as specifically provided herein, the Agreement is in all respects ratified and confirmed, and all the terms, conditions and provisions thereof shall be and remain in full force and effect for any and all purposes. From and after the date of this First Amendment, any and all references to the Agreement shall refer to the Agreement as hereby amended. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the date first above written. /s/ Murray R. McClean ------------------------------------ MURRAY R. McCLEAN COMMERCIAL METALS COMPANY BY: /s/ Stanley A. Rabin --------------------------------- STANLEY A. RABIN President and Chief Executive Officer E-16 17 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT THIS SECOND AMENDMENT TO THE EMPLOYMENT AGREEMENT entered into as of September 1, 1999, as amended July 10, 2000, (the "AGREEMENT") by and between Commercial Metals Company, a Delaware corporation (the "COMPANY"), and Murray R. McClean (the "EXECUTIVE") is made this 2nd day of October 2000. RECITALS: WHEREAS, the Company and the Executive entered into an Employment Agreement as of September 1, 1999, which was amended by a First Amendment dated July 10, 2000; and WHEREAS, the Company and the Executive wish to further amend the Agreement to provide Executive with funds for unanticipated expenses incurred by the Executive and related to the Executive's relocation from Australia to the United States; NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Company and Executive agree to amend the Agreement as follows: Paragraph 1.4(g) is hereby amended to provide that the amount to be paid to Executive for miscellaneous costs and expenses, which do not qualify as reimbursable moving expenses, shall be changed from Twenty Five Thousand Dollars ($25,000.00) to Fifty Thousand Dollars ($50,000.00). In all other respects Paragraph 1.4(g) remains as written. Except as specifically provided herein, the Agreement is in all respects ratified and confirmed, and all the terms, conditions and provisions thereof shall be and remain in full force and effect for any and all purposes. From and after the date of this Second Amendment, any and all references to the Agreement shall refer to the Agreement as amended by the First and Second Amendments. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the date first above written. /s/ Murray R. McClean ------------------------------------ MURRAY R. McCLEAN COMMERCIAL METALS COMPANY BY: /s/ Stanley A. Rabin --------------------------------- STANLEY A. RABIN President and Chief Executive Officer E-17 EX-21 3 d82018ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY AS OF AUGUST 31, 2000
JURISDICTION OF PERCENTAGE NAME OF SUBSIDIARY INCORPORATION OWNED ------------------ ------------- ----- AHT, Inc. Pennsylvania 100 Centro Tecnico Joist, S.A. de C.V. Mexico 49 CMC (Australia) Pty., Limited Australia 100 CMC Comercio de Metias, Ltda. Brazil 100 CMC Concrete Accessories, Inc. Texas 100 CMC Fareast Limited Hong Kong 100 CMC International (S.E. Asia) Pte., Limited Singapore 100 CMC Oil Company Texas 100 CMC Steel Holding Company Delaware 100 CMC Steel Fabricators, Inc. Texas 100 CMC Steel IPH Company Delaware 100 CMC Trading A.G. Switzerland 100 CMC Trinec GmbH Germany 50 CMC (UK) Limited England 100 Cometals China, Inc. Texas 100 Cometals Far East, Inc. Texas 100 Commercial Metals - Austin Inc. Texas 100 Commercial Metals Deutschland GmbH Germany 100 Commercial Metals (International) AG Switzerland 100 Commercial Metals Overseas Export (FSC) Corp. US Virgin Islands 100 Commercial Metals Railroad Salvage Company Texas 100 Commercial Metals SF/JV Company Tennessee 100 Construction Materials, Inc. Louisiana 100 Daltrading Limited Switzerland 100 Howell Metal Company Virginia 100 Owen Electric Steel Company of South Carolina South Carolina 100 Owen Industrial Products, Inc. South Carolina 100 Owen Joist Corporation South Carolina 100 Owen Joist of Florida, Inc. Florida 100 Owen of Georgia, Inc. Georgia 100 Owen Steel Company of Florida Florida 100 Owen Steel Company of N.C., Inc. North Carolina 100 Owen Supply Company, Inc. South Carolina 100 Pyrosteel Limited, Sydney Australia 50 Regency Advertising Agency, Inc. Texas 100 SMI-Owen Steel Company, Inc. South Carolina 100 SMI Rebar Coating JV, Inc. North Carolina 100 SMI Steel Inc. Alabama 100 Structural Metals, Inc. Texas 100 Zenith Finance and Construction Company Texas 100
E-18 EX-23 4 d82018ex23.txt INDEPENDENT AUDITORS' CONSENT TO INCORPORATION 1 EXHIBIT 23 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in the Registration Statement Nos. 033-60809 and 333-61379 on Form S-3 and Registration Statement Nos. 033-61073, 033-61075, 333-27967 and 333-42648 on Form S-8 of Commercial Metals Company of our report dated October 13, 2000, appearing in the Annual Report on Form 10-K of Commercial Metals Company for the year ended August 31, 2000. Dallas, Texas November 20, 2000 E-19 EX-27 5 d82018ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-2000 SEP-01-1999 AUG-31-2000 20,067 0 365,587 7,868 277,455 715,018 856,128 448,616 1,172,862 439,190 261,884 0 0 80,663 339,953 1,172,862 2,661,420 2,661,420 2,333,930 2,333,930 0 948 27,319 73,225 27,000 46,255 0 0 0 46,255 3.30 3.25
-----END PRIVACY-ENHANCED MESSAGE-----