Commercial Metals Company (CMC) purchases and processes scrap metals for use as raw materials by manufacturers of new metal products. CMC produces finished long steel products, including rebar and merchant bar, as well as semi-finished billets and wire rod.
================================================================================ 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, 2001 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) <Table> <S> <C> 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) </Table> (Registrant's telephone number, including area code) (214) 689-4300 Securities registered pursuant to Section 12(b) of the Act: <Table> <Caption> NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- <S> <C> Common Stock, $5 par value New York Stock Exchange Rights to Purchase Series A Preferred Stock New York Stock Exchange </Table> 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 8, 2001, HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $31.00 PER SHARE ON NOVEMBER 8, 2001, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY $357,582,086. (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 8, 2001: COMMON STOCK, $5.00 PAR -- 13,109,683. 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 24, 2002 -- PART III. ================================================================================
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 13 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, five 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-four 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 $144 million, or 55% of our total capital expenditures, have been for minimill projects. Increased competition, steel imports and inventory reduction initiatives resulted in decreased minimill production in 2001, but the general increase in shipments continued. <Table> <Caption> 1999 2000 2001 ---------- ---------- ---------- <S> <C> <C> <C> Tons Melted 1,582,000 1,848,000 1,796,000 Tons Rolled 1,410,000 1,765,000 1,705,000 Tons Shipped 1,685,000 1,853,000 1,903,000 </Table> 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 Company, Inc. and affiliates. A fourth, much smaller mill, has been in operation since 1987 and is located near Magnolia, Arkansas. 1
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 a full line of bar size products including 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 729,000 tons during 2001, compared to 769,000 tons during the prior year, and rolled 641,000 tons, a decrease of 46,000 tons from 2000. The Alabama mill recorded 2001 melt shop production of 457,000 tons down 66,000 from the prior year with 366,000 tons rolled, a decrease of 49,000 tons from 2000. 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 a full line of bar size products, 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 2001, the South Carolina minimill melted 610,000 tons and rolled 581,000 tons compared to 556,000 and 532,000 tons, respectively, during 2000. 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 have been readily available although subject to fluctuating prices based on regional and, more recently, national energy supply and demand levels. 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 flats, angles and squares 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. 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 2
rebuilding. Steel fabrication capacity now exceeds 1.1 million tons, with a record 987,000 tons of fabricated steel shipped in 2001, an increase of 32,000 tons from 2000. Fabrication activities are 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; Naples, Starke and Whitehouse, Florida; Fallon, Nevada; Cayce, Columbia, and Taylors, South Carolina; Lawrenceville, Georgia; Gastonia, North Carolina; Fredericksburg, Virginia; and Rancho Cucamonga, San Marcos, Stockton and Fontana, California. 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, began joist fabrication in 2001. 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 which expanded during 2001 at two new facilities specifically dedicated to this product line, one located adjacent to the Hope joist facility and a second at Farmville, Virginia. 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 fifteen warehouse locations in Texas, six Louisiana locations, and one location each in Mississippi, Georgia and Florida. 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 year. During 2001, Howell completed construction of an enlarged facility as part of a two-year expansion project which, includes a three furnace melt shop, extrusion, drawing and finishing lines. When in full production the expansion should increase capacity by approximately fifty percent. 3
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 2001 year-end was approximately $340,684,000. Backlog at 2000 year-end was approximately $312,389,000. 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 four secondary metals processing divisions' recycling plants, which excludes eight such facilities operated by our steel group as a part of the manufacturing segment. 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 1,599,000 tons of scrap metal during 2001 and 1,670,000 tons during the prior year. Ferrous metals comprised the largest tonnage of metals recycled at approximately 1,363,000 tons, which was approximately 75,000 less than the prior year. Shipments of non-ferrous metals, primarily aluminum, copper and stainless steel, were approximately 237,000 tons, compared to 233,000 in 2000. We also purchased and sold an additional 46,000 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 635,000 tons of primarily ferrous scrap metal during 2001. 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
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 9% 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 Sandbach, United Kingdom and Bergisch Gladbach, Germany. We also maintain representative offices in Moscow, Seoul, and Beijing, as well as agents or joint venture offices at twenty three locations in 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. The segment has 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 built to process and pickle hot rolled steel coil. At year end the Belgium venture was nearing start-up operations. Both investments have related marketing activities. During the past year, our marketing and trading segment sold approximately 1.2 million tons of steel products. The Australian operations maintain three warehousing facilities for just in time delivery of steel and industrial products and operates a heat treating facility for steel products. During 2001 our Australian 5
operation contracted to acquire the remaining 78% interest we did not previously own in Coil Steels Group, the third largest distributor of steel sheet and coil products in Australia, with warehouse and processing facilities in Brisbane, Sydney, Melbourne and Perth. The acquisition was completed in early September, 2001. 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 2001 imports to the United States of certain steel products, including steel concrete reinforcing bars, continued at a high level, a trend that began in 2000. 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, 2000, the ITC determined that there was 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. In January, 2001, preliminary dumping margins of 17% to 277% were established with final duties on rebar from the eight countries of from 17% to 232% set in April and June, 2001. In June, 2001, President Bush instituted an investigation under Section 201 of the Trade Act of 1974 to determine if imports of certain steel products, including those products manufactured by the Company, are being imported into the United States in such increased quantities as to be a cause of serious injury to domestic manufacturers of steel products. Subsequent to fiscal 2001 year end, in October, 2001, the ITC determined that imports of 12 product categories caused serious injury to the U.S. industry, was evenly divided as to injury from 4 product categories and made negative findings with regard to 17 categories. President Bush may adopt either the affirmative or negative finding for the 4 product categories subject to the tie vote. The ITC has stated that the 16 product categories account for 27 million tons of steel (74 percent of the imports under investigation) valued at $10.7 billion during calendar year 2000. The categories encompass a majority of the steel products produced by our minimills including rebar, hot rolled bars and light shapes. As a result of this determination, the remedy phase of the investigation has begun which may ultimately result in quotas or tariffs on imports of a majority of steel products manufactured by the Company together with possible multi-lateral government agreements limiting steel imports and regulating production capacity. The timing, extent and nature of the ultimate relief, if any, is not certain but a favorable resolution would have a beneficial impact on the domestic steel industry, including the Company's steel manufacturing operations. Some members of the domestic steel industry, primarily integrated steel producers with significant legacy costs associated with retiree pension and medical plans have actively supported legislation that would subsidize their operations by relieving them of liability for most legacy costs and providing other government financial assistance. The Company would not benefit by such actions since we have no significant unfunded retirement or medical plan expenses and we are opposed to government subsidies benefiting only a few of the less financially viable and production cost competitive domestic steel producers. 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. 6
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 which have continued into 2001 resulted in an abrupt halt to acquisitions by these competitors, subsequent bankruptcy proceedings by three consolidators and efforts to sell operating or closed facilities continuing through 2001. 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 believed to be significant with several such sites closing during 2001. We continue to review opportunities for participation should ecommerce sites develop into significant and reliable competition. 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 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 7
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 2001, we incurred environmental costs including disposal, permit, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately $10.8 million. In addition, we estimate that approximately $502,000 of capital expenditures put in service during 2001 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 2002. EMPLOYEES As of October, 2001, we had approximately 7,998 employees. Approximately 6,564 were employed by the manufacturing segment, 964 by the recycling segment, 402 by the marketing and trading segment, 33 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. ITEM 2. PROPERTIES Our Texas steel minimill is located on approximately 600 acres of land we own. Facilities including buildings occupying approximately 767,000 square feet, are used for manufacturing, storage, office and related uses. Our Alabama steel mill is located on approximately 38 acres, with buildings occupying approximately 497,000 square feet used for manufacturing, storage, office and related use. Our South Carolina minimill is located on approximately 84 acres, with buildings occupying approximately 660,000 square feet. Our Magnolia, Arkansas facility is located on approximately 135 acres, with buildings occupying approximately 202,000 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 1,100 acres of land and lease approximately 23 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 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. 8
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, 2001, to be paid during fiscal 2002 is approximately $2,987,000. 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, 2001, to be paid during fiscal 2002, is approximately $5,798,000. 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 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 approximately $23 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 $144 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 intend to vigorously defend these claims. As of August 31, 2001, 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 9
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 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. 10
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. <Table> <Caption> Price Range 2000 of Common Stock Fiscal --------------- Cash Quarter High Low Dividends - --------------------------------------------- <S> <C> <C> <C> 1st $ 33.50 $ 26.56 13(cent) 2nd 33.94 27.13 13(cent) 3rd 31.13 22.13 13(cent) 4th 29.38 24.38 13(cent) </Table> <Table> <Caption> Price Range 2001 of Common Stock Fiscal --------------- Cash Quarter High Low Dividends - --------------------------------------------- <S> <C> <C> <C> 1st $ 28.19 $ 22.13 13(cent) 2nd 25.75 19.75 13(cent) 3rd 27.01 23.80 13(cent) 4th 32.73 25.25 13(cent) </Table> Since 1982, Commercial Metals' common stock has been listed and traded on the New York Stock Exchange. From 1959 until the NYSE listing in 1982, the common stock was traded on the American Stock Exchange. The number of shareholders of record of Commercial Metals' common stock at November 8, 2001, was approximately 2,490. 11
ITEM 6. SELECTED FINANCIAL DATA The table below sets forth a summary of selected consolidated financial information of Commercial Metals for the periods indicated: <Table> <Caption> FOR THE YEARS ENDED AUGUST 31, 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> Net Sales 2,441,216 2,661,420 2,251,442 2,367,569 2,258,388 Net Earnings 24,340 46,255 47,120 42,714 38,605 Diluted Earnings 1.85 3.25 3.22 2.82 2.54 Per Share Total Assets 1,084,800 1,172,862 1,079,337 1,002,617 839,061 Stockholders' Equity 435,473 420,616 418,458 381,389 354,872 Long-term Debt 251,638 261,884 265,590 173,789 185,211 Cash Dividends Per Share .52 .52 .52 .52 .52 </Table> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION CONSOLIDATED RESULTS <Table> <Caption> Year ended August 31, ---------------------------------------- (in millions except share data) 2001 2000 1999 - ------------------------------- --------- --------- --------- <S> <C> <C> <C> Net sales $ 2,441 $ 2,661 $ 2,251 Net earnings 24.3 46.3 47.1 Cash flows* 95.1 116.1 102.9 International sales 755 879 760 As % of total 31% 33% 34% LIFO effect on net earnings 1.1 (3.4) 12.6 Per diluted share 0.08 (0.24) 0.86 LIFO reserve 6.5 8.2 3.0 % of inventory on LIFO 70% 71% 72% </Table> *before changes in operating assets and liabilities The Company's long-time strategy of vertical integration, product diversification and geographic dispersion enabled it to outperform most of its competitors in various industry sectors in spite of difficult 2001 market conditions. Significant events affecting the Company this year: 1. Second best ever third and fourth quarter per share earnings. 2. Short-term debt was significantly reduced during the year through aggressive working capital management. 3. An unanticipated adverse court ruling resulted in an $8.3 million litigation accrual (which is under appeal). 4. Despite high imports and intense domestic competition, the increased steel group shipments, strong downstream operations, a turnaround in large structural steel jobs and lower scrap purchase costs largely offset joist and cellular beam start-up costs and higher utility expense. 5. Copper tube continued to produce historically good profits. 6. High imports, weak customers and abysmal prices resulted in a recycling segment loss for the year, but the last half was profitable. 7. The marketing and trading segment's volumes and prices declined due to the persistent global economic slowdown. SEGMENTS Financial results for the Company's reportable segments are consistent with the basis and manner in which management internally disaggregates financial information for making operating decisions. 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: <Table> <Caption> Year ended August 31, ----------------------------------- (in millions) 2001 2000 1999 - ------------- -------- -------- -------- <S> <C> <C> <C> Net sales: Manufacturing $ 1,321 $ 1,357 $ 1,206 Recycling 394 463 302 Marketing and trading 771 903 802 Operating profit (loss): Manufacturing 57.6 74.7 83.8 Recycling (2.3) 5.8 (5.0) Marketing and trading 7.8 19.2 22.6 </Table> 13
2001 COMPARED TO 2000 MANUFACTURING The manufacturing segment includes the CMC steel group and Howell Metal Company. Net sales for the fiscal year ended August 31, 2001 for the manufacturing segment decreased by 3% from the prior year due to lower selling prices, although both mill and fabrication shipments increased. Operating profit for the segment decreased $17.1 million (23%) from the prior year. Almost half of this decrease directly resulted from the adverse charge for litigation of $8.3 million. Also, copper tube profits declined from record prior year levels. Steel group profits (excluding the litigation accrual) were marginally lower as well. The Company, primarily in manufacturing, recorded pre-tax LIFO income of $1.7 million compared to $5.2 million LIFO expense reported in the prior year. <Table> <Caption> August 31, ------------- (dollars per ton) 2001 2000 - ----------------- ---- ---- <S> <C> <C> Average mill selling price-total sales $284 $306 Average mill selling price-finished goods only 290 314 Average fab selling price 646 647 Average ferrous scrap purchase price 74 91 </Table> The Company's steel minimills recovered in the second half of 2001 despite very weak markets throughout the year. Operating profit for the four steel mills was 27% below fiscal 2000 primarily because of an operating loss at the Alabama mill and lower profits in Texas and Arkansas, which were partially offset by significantly lower losses at South Carolina. Tons melted and rolled decreased 3% to 1.8 and 1.7 million tons, respectively, while shipments rose by 3% to 1.9 million tons. For the year ended August 31, 2001, the average mill selling price decreased $22 (7%), and the average selling price for finished goods decreased $24 per ton (8%). The average scrap purchase cost for the mills decreased $17 per ton (19%) in the current year, which offset the decreases in selling prices. However, utility costs rose $9.8 million (13%) compared with the previous year. Sales prices were impacted negatively by import levels and more aggressive competition. Excluding prior year graphite electrode settlements, fiscal 2001 operating profit at SMI-Texas decreased 16% and SMI-Arkansas declined 24% from the prior year. SMI-Alabama, which was profitable in fiscal 2000, reported an operating loss in 2001. This mill was especially hurt by the price drops. Record shipments at the SMI-South Carolina mill caused losses to decrease by $8.1 million to $1.6 million, and this mill was profitable in the second half of 2001. In the fourth quarter 2001, operating profit for the four mills combined was 21% higher than last year's fourth quarter due to a 10% increase in tonnage shipped. Although selling prices were still significantly lower, utility and scrap purchase costs were down as well. Fiscal 2001 was another solid year in the Company's downstream steel fabrication businesses. Excluding a net pre-tax gain of $5.5 million from the sale of land and improvements in the prior year, net sales were about the same in 2001, but operating profits decreased 12%. The 2001 decrease was due to the $8.3 million litigation accrual for an adverse court ruling. Fabricated steel shipments totaled 986,000 tons, 3% more than the previous record-setting year, although this included new capacity. Prices were mixed but the annual average fab selling price was substantially unchanged, although lower in the fourth quarter 2001, compared to the prior year periods. Steel joist and cellular beam manufacturing operations incurred $8.9 million in start-up costs for four projects. These costs were more than offset by a major turnaround in large structural steel jobs fabricated by SMI-Owen. Fiscal 2001 operating profit for Howell Metal Company, although still historically above average, decreased 29% from the prior year's record results. Shipments decreased less than 1% to 57.3 million pounds, but metal spreads declined 13%. Production at the plant decreased comparably to shipments. Although the housing sector of the U.S. economy remained relatively strong, demand for plumbing and refrigeration tube was softer than it had been in the prior year. In the second half of 2001, the division added line sets to its product mix, although shipments of this new product were not yet significant. The division continued to adapt to consolidation among its buyers in the marketplace. Capital improvements for the Company decreased significantly to $53 million from $70 million spent in 2000, primarily in the manufacturing segment. The prior year's amount included the expansion at the copper tube mill and the installation of a ladle metallurgical station at SMI-South Carolina. The copper tube mill expansion was almost complete at the end of fiscal 2001. 14
RECYCLING The recycling segment incurred an operating loss of $2.3 million for the year ended August 31, 2001, compared to a $5.8 million operating profit in the prior year. Tons processed and shipped decreased 4% from the record prior year level; however, net sales decreased 15%. Due to high scrap imports, weak domestic steel mills and the strong U.S. dollar, ferrous prices fell $21 per ton (22%) from fiscal 2000 to $75 per ton, and shipments fell 5%. Nonferrous margins were impacted as well by the sharp drop in terminal market values. The average nonferrous scrap price was 5% lower on volumes which were 2% higher. The effect of the very poor markets was mitigated by increased productivity, high asset turnover and reduced expenses. The total volume of scrap processed and shipped in 2001, including the CMC steel group operations, decreased slightly to 2.3 million tons from 2.4 million tons in fiscal 2000. MARKETING AND TRADING The marketing and trading segment's net sales declined in fiscal 2001 by 15% to $771 million, and operating profits were 59% lower than the prior year. Depressed global economies, oversupply in most markets and intense competition from domestic suppliers in the respective markets were the key contributing factors. During the fourth quarter of 2001, prices softened further, extending the squeeze on gross margins and resulting in an abnormal incidence of claims. Also, the strong U.S. dollar continued to hamper the segment's results in various parts of the world. Margins were compressed for most steel products, nonferrous metal products and industrial raw materials and products. The Company's strategy in recent years to enhance its regional business tempered the difficult market and currency conditions. Most importantly, the segment was able to attain profitability even as it continued a major commitment to develop quality people in sales and administration to provide for long-term growth. It continued to diversify and build business by adding product and geographic areas. Regional trade expanded as well, and the Company continued to increase its presence in the processing of the materials and products it buys and sells. OTHER The Company's employees' retirement plans' expense decreased in fiscal 2001 due to reductions in discretionary items consistent with year over year operating profitability. NEAR-TERM OUTLOOK The U.S. and other major economies have slowed considerably, especially in the aftermath of the terrorist attacks on September 11, 2001. An economic recovery appears to be delayed to the middle of calendar year 2002, with sectors such as durable goods, private non-residential construction and housing likely to weaken in the short term. Other construction markets should remain firm, particularly spending for highways and bridges, institutional buildings and power plants. The U.S. Department of Transportation budget for its fiscal 2002 (October 1, 2001-September 30, 2002) includes a record $42.8 billion for transportation infrastructure, i.e, roads, bridges, airports and transit projects. More severe production cutbacks are anticipated for global steel and nonferrous metals, and pricing and volume in the Company's segments should improve as supply and demand come into better balance. The Company anticipates improved fiscal 2002 results based mainly on internal improvements including the absence of a litigation accrual, lower start-up expenses and lower interest expense. Management expects lower, or at least stable utility costs and has reduced costs in other areas, which should benefit next year. Also, the U.S.'s monetary and fiscal stimulus measures should benefit the second half of the Company's fiscal 2002 after consumer and business confidence is restored. Overall, the Company anticipates higher net sales and net earnings from its steel mills in fiscal 2002. Management anticipates that the operating results at SMI-South Carolina will continue to improve. President Bush announced on June 5, 2001, that the U.S. International Trade Commission would conduct a Section 201 trade investigation into whether steel imports are causing serious injury to the U.S. steel industry. A favorable resolution would be beneficial for the Company's steel business. Meanwhile, a successful antidumping trade case on steel rebar imports has provided modest relief for rebar although shifting of origins has occurred. The CMC steel group plans to continue its 15
growth in rebar fabrication, niche applications of structural steel, fence posts, concrete-related products, heat treating of steel and other related fabricated steel products and components. The Company anticipates that progress in improving the operations at SMI-Owen will continue into the new fiscal year. Start up of the 50% addition to the Company's copper tube mill in Virginia has begun in stages, and production and shipments are expected to increase as the new year progresses. The planned product mix includes HVAC products and line sets. Both ferrous and nonferrous operations in the recycling segment should be profitable for fiscal 2002, although the first half of the year will be difficult because of prevailing market conditions. The Company is poised to capitalize on better markets and to continue its turnaround and rationalization at underperforming facilities. Additionally, the Company's national account program, which was created to enhance sourcing of industrial scrap, will continue its growth. The marketing and trading segment began the new year with continued penetration in marketing and distribution while maintaining a strong presence in the trading side of the business. During 2002, management will build further on strategic alliances with customers and suppliers. Also, the September 2001 acquisition of the remaining interest in Coil Steels Group, an Australian service center in which the Company already owned a 22% share, is expected to have a positive impact. During fiscal 2001, capital spending was reduced to $53 million from $70 million in 2000 as the Company focused on reducing short-term debt. As operating results improve, the Company plans to increase capital expenditures by 53% to $81 million for fiscal 2002, including the acquisition of Coil Steels Group. Over 30% of the fiscal 2002 capital expenditures will be for expansion in downstream fabrication operations in the steel group and the acquisition of the remaining shares of Coil Steels Group. The remaining increase is partially due to several projects that were deferred and carried over from the prior year. There are no major projects planned at the steel mills for fiscal 2002, rather smaller enhancements and maintenance expenditures. All segments will also focus on improving or disposing of underperforming operations, especially if they no longer fit the Company's strategic direction. LONG-TERM OUTLOOK The Company is poised to move to the next level in net sales and net earnings 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. Management anticipates relatively high public sector consumption of steel bar and structurals in the next several years. 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 growth and profitability. Management believes that the long-term demand for scrap will continue to grow and that the Company's regional volume will increase. The marketing and trading segment will further its efforts on value-added businesses to broaden its product range and provide more services to suppliers and customers. To achieve improved 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 inadequate return on capital for most companies in the industry, numerous bankruptcies, a highly fragmented industry, 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, selective acquisitions, a focus on cash flows, strong regional positions and outstanding people. The Company will participate in industry consolidation, form strategic alliances, grow value-added businesses, redeploy assets and increase its earnings and cash flows in order to create economic value and improve return on capital employed. 16
The sections regarding near- and long-term outlook contain forward-looking statements regarding the outlook for the Company's financial results including net earnings, product pricing and demand, production rates, energy costs, interest rates, inventory levels, results of litigation and general market conditions. These forward-looking statements can generally be identified by phrases such as the Company or its management "expects," "anticipates," "believe," "plans to," "should," "likely," "appears," "projected," or other words or phrases of similar impact. 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, court decisions, global factors including credit availability, currency fluctuations, energy prices, and decisions by governments impacting the level and pace of overall economic activity. 2000 COMPARED TO 1999 SEGMENTS MANUFACTURING Net sales for the fiscal year ended August 31, 2000, for the manufacturing segment increased by 13% from the prior year, primarily due to increased tons shipped. Operating profit for the segment decreased by 11% from the prior year because of 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 sustained at the South Carolina mill and on several large, complex structural steel fabrication jobs at SMI-Owen were partially offset by record earnings at the copper tube mill. The Company, primarily in manufacturing, incurred pre-tax $5.2 million LIFO expense versus $15.9 million LIFO income reported in the prior year. <Table> <Caption> August 31, ------------- (dollars per ton) 2000 1999 - ----------------- ---- ---- <S> <C> <C> 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 </Table> Operating profit for the four steel mills was 26% below fiscal 1999 primarily due to a $9.7 million operating loss at the South Carolina mill and difficult markets. Tons melted and rolled increased 17% and 25%, respectively. Shipments rose to 1.9 million tons (10%). 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 imports 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. Operating profit at SMI-Arkansas improved 32% from the prior year. Production at the SMI-South Carolina rolling mill was at record levels, but 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 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. 17
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 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 2000, the Company acquired substantially all of the assets of two rebar fabrication operations in California: Fontana Steel, Inc., with operations in Rancho Cucamonga, San Marcos and Stockton, and C&M Steel, Inc. in Fontana. Also, the Company purchased substantially all of the operating assets of Bell-Barcelona Concrete Accessories, further expanding its concrete-related products business in Texas. The purchase prices for these acquisitions were not significant to the Company. 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%, and metal spreads improved by 19%. Residential construction, the principal economic driver, remained strong during 2000. Capital improvements for the Company decreased significantly to $70 million from the record $142 million spent in 1999, primarily in the manufacturing segment. 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, net sales increased 53%. Ferrous prices, however, fell during the second half of fiscal 2000. 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 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 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, which it buys and sells. The Company acquired an 11% stake and executed a long-term marketing and trading agreement with a Czech steel mill, Trinecke Zelezarny, one of its key European suppliers. 18
2001 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations (before changes in operating assets and liabilities) for the year ended August 31, 2001, were $95 million compared to $116 million for fiscal year 2000. However, decreases in operating assets significantly increased the cash flows from operating activities. Accounts receivable, net of notes receivable from affiliate, significantly decreased in all segments partly due to the accounts receivable securitization program implemented in June 2001. The remaining decrease in accounts receivable was due to lower sales prices and faster collection. Due to weakness in the domestic and global economies, the Company recorded a $4.4 million provision for losses on receivables, up from $900 thousand in the prior year. Inventories decreased in all segments following management's emphasis on improving cash flows and consequently, reducing short-term debt. Other assets decreased mostly due to lower refundable federal income taxes and decreased funding for the Company's nonqualified employee benefits plan. Cash flows from operating activities in fiscal 2001 were invested in new plant and equipment, primarily in the manufacturing segment (including the expansion of the copper tube facility and new joist and cellular beam plants). During fiscal 2000, the steel group sold land and improvements grossing $8.4 million, which after costs related to the sale and escrows, resulted in a net gain of $5.5 million (pre-tax). Net working capital was $292 million as of August 31, 2001, compared to $272 million last year. The current ratio increased to 1.8 versus 1.6 at the prior year end. During fiscal 2001, the Company consummated several key financing arrangements. In June 2001, a new accounts receivable securitization program was implemented with an entity associated with Mellon Bank. This arrangement provides for funding up to $130 million. The proceeds from the sales of accounts receivable under this arrangement were used to reduce short-term notes payable and commercial paper and for other corporate uses. $40 million was utilized under this program at August 31, 2001, of which $23 million was temporarily invested. In August 2001, the Company renegotiated its unsecured revolving bank credit facilities. As a result, the Company reduced its commercial paper program to permit maximum borrowings of up to $135 million, down from the previous $200 million level. On a combined basis, these actions provided the Company increased short-term funding capacity and flexibility. 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. No commercial paper was outstanding at August 31, 2001. 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 and to take advantage of new opportunities requiring capital. Capital investments in property, plant and equipment were $53 million in 2001 compared to $70 million the prior year. Capital spending for fiscal 2002 is projected to be $81 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 $718 million at the end of fiscal 2001, slightly up from the prior year. The ratio of long-term debt to total capitalization was 35.1%, down from 36.7% last year, and the ratio of total debt to total capitalization plus short-term debt was 36.3% down from 44.6%. Stockholders' equity was $435 million or $33.30 per share. During the fiscal year, the Company repurchased 271,500 shares of Company stock at an average cost of $24.74 per share. At year end, the Company had remaining an additional 533,781 shares authorized for repurchase. On August 31, 2001, 19
3,053,989 treasury shares were held by the Company. There were 13,078,594 shares outstanding at year end. CONTINGENCIES CONSTRUCTION CONTRACT DISPUTES In December 2000, the Company received a Court's unanticipated adverse findings of fact and conclusions of law from a trial which concluded in October 1999, arising from a contractual dispute with a customer. Accordingly, the Company increased its reserve for litigation by $10.7 million. In July 2001, the Court entered judgment against the Company in an amount which was $2.5 million less than originally accrued. The Company is appealing the judgment. 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, 2001 and 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. Disputes between the Company and the D/B have been submitted to binding arbitration. The Company has filed a claim for approximately $23 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, 2001 and 2000, the Company maintained contract receivables of $7.2 million from the D/B. 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, totaling approximately $144 million which includes alleged delay damages in construction of a retail area adjacent to the Project. Management believes the claims are generally unsubstantiated, and the Company has valid legal defenses against such claims and intends to vigorously defend these claims. 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 amounts receivable and possible liability could occur in the near term. The Company is involved in various other claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse effect on the results of operations or the financial position of the Company. 20
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. 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 fifteen 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 2001, the Company incurred environmental expense of $10.8 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 $502 thousand of its capital expenditures for fiscal 2001 related to costs directly associated with environmental compliance. At August 31, 2001, $4.4 million remained accrued for environmental liabilities, of which $1.9 million was in other long-term liabilities. DIVIDENDS Quarterly cash dividends have been paid in each of the past 37 consecutive years. The annual dividend in 2001 was 52 cents a share paid at the rate of 13 cents each quarter. RECENTLY ISSUED ACCOUNTING STANDARDS Recently issued accounting standards are described in note 1 to the consolidated financial statements. 21
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 foreign 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 notes 1 and 5 to the annual financial statements. FOREIGN EXCHANGE The Company enters into foreign exchange forward contracts as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency to mitigate the effects of changes in currency rates. 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. 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, 2001, $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. The variable rate at year end was 4.9% and the fixed rate 5.5%. At August 31, 2001, the fair value of this derivative liability was minimal. 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. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to small gains and losses at settlement. Certain of the Company's derivative instruments which management believes are economic hedges and mitigate exposures to fluctuations in exchange rates and commodity prices, have not been designated as hedges for accounting purposes. The changes in fair value of these instruments resulted in a $452 thousand increase in cost of goods sold for the year ended August 31, 2001. The following table provides certain information regarding the financial instruments discussed above. 22
FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST 31, 2001: <Table> <Caption> Range of U.S. $ Amount Currency Hedge Rates Equivalent ------ -------- ----------- ---------- <S> <C> <C> <C> 1,344,000 German mark $.4735-.5137 $ 655,000 13,641,000 ECU .8577-.9164 12,292,000 1,174,150,000 Japanese yen .0085-.0090 10,227,000 10,710,000 British pound 1.390-1.452 15,361,000 54,776,000 Australian dollar .5022-.5520 28,779,000 850,000 Canadian dollar .6383-.6385 543,000 ------------ 67,857,000 Revaluation as of August 31, 2001, at quoted market 69,184,000 ------------ Settlement loss $ 1,327,000 o Substantially all foreign currency exchange contracts mature within one year. o Hedge rates reflect foreign currency conversion to U.S. dollar. AS OF AUGUST 31, 2000: Revaluation at quoted market $ 44,727,000 Settlement gain $ 1,419,000 </Table> METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUST 31, 2001: <Table> <Caption> Range of Total Contract Long/ # of Standard Total Hedge Rates Value at Terminal Exchange Metal Short Lots Lot Size Weight Per MT Inception - ----------------- ----- ----- ---- -------- ------ ----------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> London Metal Exchange (LME) Copper Long 500 25 MT 12,500 MT $ 1,565-2,003 $ 879,000 Copper Short 100 25 MT 2,500 MT 1,438-1,994 158,000 Zinc Long 100 25 MT 2,500 MT 1,030-1,192 109,000 Aluminum Long 875 25 MT 21,875 MT 1,360-1,521 1,246,000 Aluminum Short 1,725 25 MT 43,125 MT 1,424-1,463 2,503,000 New York Mercantile Per 100/wt. Exchange Copper Long 242 25,000 lbs. 6.1 MM lbs. 66.85-91.00 4,280,000 Commodities Division (Comex) Copper Short 99 25,000 lbs. 2.5 MM lbs. 67.15-70.40 1,716,000 ----------- 10,891,000 Revaluation as of August 31, 2001, at quoted market 10,733,000 ----------- Settlement loss $ 158,000 o Seven lots mature after one year o MT = Metric Tons o MM = Millions AS OF AUGUST 31, 2000: Revaluation at quoted market $15,491,000 Settlement gain $ 134,000 </Table> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS <Table> <Caption> Year ended August 31, ---------------------------------------- (in thousands, except share data) 2001 2000 1999 - --------------------------------- ---------- ---------- ---------- <S> <C> <C> <C> Net sales $2,441,216 $2,661,420 $2,251,442 Costs and expenses: Cost of goods sold 2,143,900 2,333,930 1,948,596 Selling, general and administrative expenses 211,539 208,808 192,233 Employees' retirement plans 10,611 18,108 15,933 Interest expense 27,608 27,319 19,650 Litigation accrual 8,258 -- -- ---------- ---------- ---------- 2,401,916 2,588,165 2,176,412 ---------- ---------- ---------- Earnings before income taxes 39,300 73,255 75,030 Income taxes 14,960 27,000 27,910 ---------- ---------- ---------- Net earnings $ 24,340 $ 46,255 $ 47,120 ========== ========== ========== Basic earnings per share $ 1.87 $ 3.30 $ 3.25 ========== ========== ========== Diluted earnings per share $ 1.85 $ 3.25 $ 3.22 ========== ========== ========== </Table> See notes to consolidated financial statements. 24
Commercial Metals Company and Subsidiaries CONSOLIDATED BALANCE SHEETS <Table> <Caption> August 31, ---------------------------- (in thousands, except share data) 2001 2000 - --------------------------------- ----------- ----------- <S> <C> <C> ASSETS Current assets: Cash $ 33,289 $ 20,067 Temporary investments 23,000 -- Accounts receivable (less allowance for collection losses of $5,192 and $7,868) 204,032 354,045 Notes receivable from affiliate 95,515 -- Inventories 236,679 277,455 Other 49,662 59,777 ----------- ----------- Total current assets 642,177 711,344 Property, plant and equipment: Land 29,315 27,984 Buildings 109,549 97,566 Equipment 704,469 676,369 Leasehold improvements 33,213 31,507 Construction in process 20,350 22,702 ----------- ----------- 896,896 856,128 Less accumulated depreciation and amortization (501,045) (448,616) ----------- ----------- 395,851 407,512 Other assets 46,772 54,006 ----------- ----------- $ 1,084,800 $ 1,172,862 =========== =========== </Table> See notes to consolidated financial statements. 25
<Table> <Caption> August 31, ---------------------------- (in thousands, except share data) 2001 2000 - --------------------------------- ----------- ----------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Commercial paper $ -- $ 79,000 Notes payable 3,793 13,466 Accounts payable 201,292 194,538 Accrued expenses and other payables 133,464 142,680 Income taxes payable 1,105 678 Current maturities of long-term debt 10,288 8,828 ----------- ----------- Total current liabilities 349,942 439,190 Deferred income taxes 30,405 31,131 Other long-term liabilities 17,342 20,041 Long-term debt 251,638 261,884 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 13,078,594 and 13,172,675 shares 80,663 80,663 Additional paid-in capital 13,930 14,231 Accumulated other comprehensive loss (1,961) (1,591) Retained earnings 424,688 407,128 ----------- ----------- 517,320 500,431 Less treasury stock 3,053,989 and 2,959,908 shares at cost (81,847) (79,815) ----------- ----------- 435,473 420,616 ----------- ----------- $ 1,084,800 $ 1,172,862 =========== =========== </Table> See notes to consolidated financial statements. 26
Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS <Table> <Caption> August 31, --------------------------------------- (in thousands) 2001 2000 1999 - -------------- --------- --------- --------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 24,340 $ 46,255 $ 47,120 Adjustments to earnings not requiring cash: Depreciation and amortization 67,272 66,583 52,054 Provision for losses on receivables 4,371 948 1,877 Deferred income taxes (726) 7,868 1,887 Gain on sale of property and other (148) (5,570) (68) --------- --------- --------- Cash Flows from Operations Before Changes in Operating Assets and Liabilities 95,109 116,084 102,870 Changes in Operating Assets and Liabilities: Decrease (increase) in accounts receivable 108,408 (57,144) 18,929 Proceeds from sales of accounts receivable, net change 40,000 -- -- Decrease (increase) in notes receivable from affiliate (98,281) -- -- Decrease (increase) in inventories 40,776 (27,767) 7,543 Decrease (increase) in other assets 11,837 (32,720) (5,809) Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes (2,200) 4,385 29,155 Increase (decrease) in other long-term liabilities (2,699) 5,780 5,606 --------- --------- --------- Net Cash Flows from Operating Activities 192,950 8,618 158,294 CASH FLOWS USED BY INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (53,022) (69,627) (141,752) Sales of property, plant and equipment 2,866 9,323 4,247 Temporary investments, net (23,000) -- -- Other investments -- (2,966) -- --------- --------- --------- Net Cash Used by Investing Activities (73,156) (63,270) (137,505) CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: Commercial paper-net change (79,000) 69,000 (30,000) Notes payable-net change (9,673) 9,084 (56,427) New long-term debt -- -- 100,000 Payments on long-term debt (8,786) (4,750) (9,809) Stock issued under incentive and purchase plans 4,383 5,958 3,679 Treasury stock acquired (6,716) (41,934) (7,012) Dividends paid (6,780) (7,304) (7,540) --------- --------- --------- Net Cash from (Used by) Financing Activities (106,572) 30,054 (7,109) --------- --------- --------- Increase (Decrease) in Cash 13,222 (24,598) 13,680 Cash at Beginning of Year 20,067 44,665 30,985 --------- --------- --------- Cash at End of Year $ 33,289 $ 20,067 $ 44,665 ========= ========= ========= </Table> See notes to consolidated financial statements. 27
Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <Table> <Caption> Common Stock Accumulated ------------------------- Additional Other Number of Paid-In Comprehensive (in thousands, except share data) Shares Amount Capital Loss - --------------------------------- ---------- ---------- ---------- ------------- <S> <C> <C> <C> <C> Balance, September 1, 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 incentive and purchase plans (154) ---------- ---------- ---------- ---------- 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 incentive and purchase plans 100 ---------- ---------- ---------- ---------- Balance, August 31, 2000 16,132,583 80,663 14,231 (1,591) ---------- ---------- ---------- ---------- Comprehensive income: Net earnings Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment, net of taxes of $192 (356) Comprehensive income Cash dividends-$.52 per share Treasury stock acquired Stock issued under incentive and purchase plans (301) ---------- ---------- ---------- ---------- Balance, August 31, 2001 16,132,583 $ 80,663 $ 13,930 $ (1,961) ========== ========== ========== ========== <Caption> Treasury Stock -------------------------- Retained Number of (in thousands, except share data) Earnings Shares Amount Total - --------------------------------- ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> Balance, September 1, 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 incentive and purchase plans 151,049 3,833 3,679 ---------- ---------- ---------- --------- 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 incentive and purchase plans 231,515 5,858 5,958 ---------- ---------- ---------- --------- Balance, August 31, 2000 407,128 (2,959,908) (79,815) 420,616 ---------- ---------- ---------- --------- Comprehensive income: Net earnings 24,340 24,340 Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment, net of taxes of $192 (356) --------- Comprehensive income 23,970 Cash dividends-$.52 per share (6,780) (6,780) Treasury stock acquired (271,500) (6,716) (6,716) Stock issued under incentive and purchase plans 177,419 4,684 4,383 ---------- ---------- ---------- --------- Balance, August 31, 2001 $ 424,688 (3,053,989) $ (81,847) $ 435,473 ========== ========== ========== ========= </Table> See notes to consolidated financial statements. 28
Commercial Metals Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 note 13, the manufacturing segment is the most dominant in terms of capital assets and operating profit. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries except CMC Receivables, Inc. (CMCR). See note 2. All material intercompany transactions and balances are eliminated in consolidation. REVENUE RECOGNITION Generally, sales are recognized when title passes to the customer. 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. 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 note 6. 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. 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. TEMPORARY INVESTMENTS The Company considers investments that are short-term (generally with original maturities of three months or less) and highly liquid to be temporary investments. DERIVATIVES The Company records derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses from the changes in the values of the derivatives are recorded in the statement of earnings, or are deferred if they are highly effective in achieving offsetting changes in fair values or cash flows of the hedged items during the term of the hedge. RECLASSIFICATIONS Certain reclassifications have been made in the 2000 and 1999 financial statements to conform to the classifications used in the current year. 29
ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivatives and Hedges (as amended) on September 1, 2000. Adoption of this new standard had no material impact on the financial position or results of operations of the Company (see note 5). On September 1, 2000, the Company adopted the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The Company's revenue recognition policies were in substantial conformity with the SAB. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaced SFAS No. 125. The Company's sales of accounts receivable in 2001 were accounted for as true sales (see note 2). SFAS No. 141, Business Combinations, prohibiting the pooling-of-interests method, was effective for all business combinations initiated after June 30, 2001. SFAS No. 142, Goodwill and Other Intangible Assets, must be adopted by the Company in the first quarter of its fiscal year 2003, and will be applied to all goodwill and other intangible assets recognized on the balance sheet, regardless of when those assets were initially recognized. Goodwill must be tested for impairment as of the beginning of the fiscal year of adoption and annually thereafter. Goodwill acquired in a business combination completed after June 30, 2001 cannot be amortized. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for the Company in fiscal 2003. This standard requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the assets. Management is still evaluating the impact of this Statement. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces SFAS No. 121 and certain provisions of Accounting Principles Board Opinion No. 30 relating to reporting of discontinued operations, effective for the Company's fiscal 2003. Management does not anticipate that the adoption of SFAS Nos. 141, 142 and 144 will significantly impact the results of operations or financial position of the Company. 2. SALE OF ACCOUNTS RECEIVABLE On June 20, 2001, the Company and several of its subsidiaries (the Originators) entered into three-year agreements to periodically sell certain trade accounts receivable through a special purpose subsidiary (CMCR), to a financial institution up to a maximum net proceeds of $130,000,000. Under the agreements among CMCR, the Originators and the financial institution, CMCR buys qualified receivables from the Originators and resells a portion of those receivables in an amount determined by the Company, subject to certain reserves, up to the $130 million maximum. The Company utilizes this arrangement as an alternative to borrowing under its commercial paper program and short-term notes. At August 31, 2001, the Originators sold accounts receivable of $138.2 million for $40 million cash and $98.2 million in notes receivable from CMCR. These notes receivable from affiliate were carried net of an allowance for collection losses of $2.7 million at August 31, 2001. Thus, the subordinated retained portion at year end was $95.5 million. When the accounts receivable are sold, the Company incurs discount expense. The discounts represent the financial institution's financing costs of issuing commercial paper backed by the receivables. These discounts (which aggregated $976 thousand in 2001) from the face amount are included in selling, general and administrative expenses in the Company's consolidated statement of earnings. The Originators retain collection and administrative responsibilities for the accounts receivable, and accordingly receive a market-based servicing fee. The financial institution has no recourse to the Company's other assets for failure of debtors to pay when due. 30
3. INVENTORIES Before deduction of LIFO reserves of $6,476,000 and $8,217,000 at August 31, 2001 and 2000, respectively, inventories valued under the first-in, first-out method approximated replacement cost. At August 31, 2001 and 2000, 70% and 71%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to international business. 4. CREDIT ARRANGEMENTS In August 2001, the Company reduced its commercial paper program to permit maximum borrowings of up to $135 million, down from the prior year $200 million level. 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, 2001, the Company arranged unsecured revolving credit agreements with a group of five banks consisting of a three-year, $45 million facility and a 364-day, $90 million facility. The agreements provide for borrowing in United States dollars indexed to LIBOR. Facility and other fees of 0.150% and 0.125% per annum, respectively, are payable "on the three-year and 364-day credit lines. No compensating balances are required. The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at bankers' acceptance rates or on a cost of funds basis. No compensating balances or commitment fees are required under these credit facilities. Long-term debt and amounts due within one year as of August 31, are as follows: <Table> <Caption> (in thousands) 2001 2000 - -------------- -------- -------- <C> <C> <C> 6.75% notes due February 2009 $100,000 $100,000 7.20% notes due July 2005 100,000 100,000 6.80% notes due August 2007 50,000 50,000 8.49% notes due December 2001 7,142 14,285 Other 4,784 6,427 -------- -------- 261,926 270,712 Less current maturities 10,288 8,828 -------- -------- $251,638 $261,884 ======== ======== </Table> Interest on these notes is payable semiannually. Certain of the note agreements include various covenants. The most restrictive of these requires maintenance of consolidated net worth of $150 million, an interest coverage ratio of greater than three times, and a debt/capitalization ratio of 55% (as defined). At August 31, 2001, under the most restrictive of these covenants, $230 million of retained earnings was free of restriction for dividends. The aggregate amounts of all long-term debt maturities for the five years following August 31, 2001 are (in thousands): 2002-$10,288; 2003-$521; 2004-$519; 2005-$100,510; 2006 and thereafter-$150,088. Interest expense is comprised of the following: <Table> <Caption> Year ended August 31, ------------------------------- (in thousands) 2001 2000 1999 - -------------- ------- ------- ------- <S> <C> <C> <C> Long-term debt $17,532 $18,419 $12,013 Commercial paper 7,076 4,816 2,257 Notes payable 3,000 4,084 5,380 ------- ------- ------- $27,608 $27,319 $19,650 ======= ======= ======= </Table> Interest of $1,111,000, $808,000, and $4,547,000 was capitalized in the cost of property, plant and equipment constructed in 2001, 2000, and 1999, respectively. Interest of $28,704,000, $27,536,000, and $24,334,000 was paid in 2001, 2000, and 1999, respectively. 31
5. 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 receivable/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. <Table> <Caption> (in thousands) 2001 2000 - -------------- -------- -------- <S> <C> <C> Long-Term Debt: Carrying amount $261,926 $270,712 Estimated fair value $252,531 $248,208 ======== ======== </Table> 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 by sound financial institutions are obtained to further ensure prompt payment in accordance with terms of sale; generally, collateral is not required. In the normal course of its marketing activities, the Company transacts business with substantially all sectors of the metals industry. Customers are internationally dispersed, cover the spectrum "of manufacturing and distribution, deal with various types and grades of metal and have a variety of end markets in which they sell. The Company's historical experience in collection of accounts receivable falls within the recorded allowances. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed inherent in the Company's accounts receivable. 32
The Company's product lines and its worldwide operations expose it to risks associated with fluctuations in foreign currency exchange, commodity prices, and interest rates. As part of the Company's risk management program, it uses or has used financial instruments, including commodity futures or forwards, foreign currency exchange forward contracts and interest rate swaps. The Company enters into the foreign currency exchange forwards as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency to mitigate the effects of changes in currency rates. Due to the close match for foreign currency hedges, there was substantially no ineffectiveness in cost of goods sold or net earnings for the year ended August 31, 2001. Pricing of certain sales and purchase commitments is fixed to forward metal commodity exchange quotes. The Company enters into metal commodity forward 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. Certain of the Company's derivative instruments, which management believes are economic hedges and mitigate exposure to fluctuations in exchange rates and commodity prices, have not been designated as hedges for accounting purposes. The changes in fair value of these instruments caused a $452 thousand increase in cost of goods sold for the year ended August 31, 2001. Substantially all of the Company's debt is denominated in U.S. dollars. However, at August 31, 2001, seven million Australian dollars notional amount of debt was covered by an interest rate swap. During 2001, the activities in other comprehensive loss related to the interest rate swap classified as a cash flow hedge at August 31, 2001. The $14 thousand in other comprehensive loss will be reclassified into earnings as the related debt matures. None of the instruments used are entered into for trading purposes or speculation, and management believes all are economically effective as hedges of underlying physical transactions. The adoption of SFAS No. 133 did not have a material impact on the Company's results of operations or financial position, but resulted in cumulative after tax decreases in net earnings of $294 thousand and other comprehensive loss of $14 thousand for the year ended August 31, 2001. The effect of the transition adjustment as of September 1, 2000, was an increase in net earnings of $315 thousand and other comprehensive income of $126 thousand. As of August 31, 2001, other current assets included $394 thousand representing the fair value of derivative instruments and $1.2 million of hedged firm commitments. Also, at August 31, 2001, $1.9 million and $175 thousand, respectively, were included in accrued expenses and other payables for derivative liabilities and hedged firm commitments. 33
6. INCOME TAXES The provisions for income taxes include the following: <Table> <Caption> Year ended August 31, ----------------------------------- (in thousands) 2001 2000 1999 - -------------- -------- -------- -------- <S> <C> <C> <C> Current: United States $ 13,815 $ 15,661 $ 22,443 Foreign 80 573 672 State and local 1,863 2,637 2,689 -------- -------- -------- 15,758 18,871 25,804 Deferred (798) 8,129 2,106 -------- -------- -------- $ 14,960 $ 27,000 $ 27,910 ======== ======== ======== </Table> Taxes of $8,691,000, $26,363,000 and $32,515,000 were paid in 2001, 2000 and 1999, respectively. Deferred taxes arise from temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. The sources and deferred long-term tax liabilities (assets) associated with these differences are: <Table> <Caption> August 31, ---------------------- (in thousands) 2001 2000 - -------------- -------- -------- <S> <C> <C> Tax on difference between tax and book depreciation $ 33,873 $ 30,665 U.S. taxes provided on foreign income and foreign taxes 11,586 11,542 Net operating losses (less allowances of $1,500 and $1,200) (1,090) (1,090) Alternative minimum tax credit (1,713) (1,713) Other accruals (6,330) (2,559) Other (5,921) (5,714) -------- -------- Total $ 30,405 $ 31,131 ======== ======== </Table> Current deferred tax assets of $11.0 and $16.1 million at August 31, 2001 and 2000, respectively, were included in other assets on the consolidated balance sheets. These deferred taxes were largely due to the different book and tax treatments of valuation allowances and accruals. 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 $73 million of state net operating losses that expire during the tax years ending from 2006 to 2021. 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 38.1% for 2001, 36.9% for 2000 and 37.2% for 1999. Reconciliations of the United States statutory rates to the effective rates are as follows: <Table> <Caption> Year ended August 31, ------------------------------- 2001 2000 1999 ------ ------ ------ <S> <C> <C> <C> Statutory rate 35.0% 35.0% 35.0% State and local taxes 3.1 2.3 2.3 Other -- (.4) (.1) ------ ------ ------ Effective tax rate 38.1% 36.9% 37.2% ====== ====== ====== </Table> 34
7. 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 market price. Annual activity of the stock purchase plan was as follows: <Table> <Caption> 2001 2000 1999 ------- ----------- ----------- <S> <C> <C> <C> Shares subscribed 173,820 165,000 187,460 Price per share $ 18.95 $ 23.49 $ 19.50 Shares purchased 37,240 136,990 39,810 Price per share $ 23.47 $ 19.50 $ 24.59 Shares available 287,701 </Table> The Company recognized compensation expense for this plan of $291,000, $890,000 and $326,000 in 2001, 2000 and 1999, 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, 26,063 in 2000, and 33,635 in 2001. 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
Combined share information for the three plans is as follows: <Table> <Caption> Weighted Average Price Exercise Range Number Price Per Share --------- ----------- ------------- <S> <C> <C> <C> September 1, 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 Increase 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 Increase 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 Granted 401,836 23.42 21.97-26.45 Exercised (160,211) 21.39 12.61-30.88 Forfeited (49,966) 27.64 21.97-31.94 Increase authorized 33,635 August 31, 2001 Outstanding 2,367,089 $ 26.71 $18.42-31.94 Exercisable 1,804,026 26.94 18.42-31.94 Authorized Shares remaining 298,831 </Table> Share information for options at August 31, 2001: <Table> <Caption> Outstanding Exercisable - ------------------------------------------------------- ------------------------ Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Yrs) Price Outstanding Price - ------------ ----------- ----------- -------- ----------- -------- <S> <C> <C> <C> <C> <C> $18.42-24.50 809,007 4.3 $22.60 442,307 $21.86 26.25-29.81 1,195,998 3.5 28.21 1,179,567 28.23 30.88-31.94 362,084 5.1 30.90 182,152 30.91 ============ ========= === ====== ========= ====== $18.42-31.94 2,367,089 4.0 $26.71 1,804,026 $26.94 </Table> 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
The Black-Scholes option pricing model used requires the following assumptions as of August 31: <Table> <Caption> 2001 2000 1999 ---------- ---------- ---------- <S> <C> <C> <C> Risk-free interest rate 4.84% 6.34% 4.80% Expected life 4.60 years 4.06 years 4.15 years Expected volatility .232 .248 .214 Expected dividend yield 1.7% 1.9% 1.7% </Table> 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 2001 pro forma information includes options granted in preceding years. <Table> <Caption> 2001 2000 1999 ---------- ---------- ---------- <S> <C> <C> <C> Net earnings (in thousands) As reported $ 24,340 $ 46,255 $ 47,120 Pro forma 23,145 44,762 45,598 Diluted earnings per share As reported $ 1.85 $ 3.25 $ 3.22 Pro forma 1.76 3.14 3.12 </Table> The weighted-average fair value of options granted in 2001, 2000 and 1999 was $5.54, $7.77 and $5.07, 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. 8. EMPLOYEES' RETIREMENT PLANS Substantially all employees of the Company and its subsidiaries are covered by defined contribution profit sharing and savings plans. Company contributions, which are discretionary, to all plans were $10,611,000, $18,108,000, and $15,933,000, for 2001, 2000 and 1999, respectively. 37
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT BENEFITS The Company has no significant postretirement obligations. The Company's historical costs for postemployment benefits have not been significant and are not expected to be in the future. 10. COMMITMENTS AND CONTINGENCIES Minimum lease commitments payable by the Company and its consolidated subsidiaries for noncancelable operating leases in effect at August 31, 2001, are as follows for the fiscal periods specified: <Table> <Caption> Real (in thousands) Equipment Estate - -------------- --------- ------- <S> <C> <C> 2002 $ 5,798 $ 2,987 2003 3,423 1,763 2004 1,695 873 2005 1,241 640 2006 and thereafter 1,828 942 ------- ------- $13,985 $ 7,205 ======= ======= </Table> Total rental expense was $11,483,000, $10,664,000 and $9,100,000 in 2001, 2000 and 1999, respectively. CONSTRUCTION CONTRACT DISPUTES In December 2000, the Company received a Court's unanticipated adverse findings of fact and conclusions of law from a trial which concluded in October 1999, arising from a contractual dispute with a customer. Accordingly, the Company increased its reserve for litigation (included in accrued expenses and other payables) by $10.7 million. In July 2001, the Court entered judgment against the Company relating to this case in an amount which was $2.5 million less than originally accrued. The litigation reserve was reduced to reflect this change in the fourth quarter of 2001. The Company is appealing the judgment. 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, 2001 and 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. Disputes between the Company and the D/B have been submitted to binding arbitration. The Company has filed a claim for approximately $23 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, 2001 and 2000, the Company maintained contract receivables of $7.2 million from the D/B. Such amounts are included within other assets on the accompanying balance sheets. The D/B has not disputed certain amounts owed under the contract, but contends that other deductive items, disputed by the Company, reduce the contract balance by approximately $6.3 million which together with other D/B claims (discussed below) exceed the unpaid contract balance. The Company disputes the deductive items in the D/B's claim and intends to vigorously pursue recovery of the contract balance in addition to all amounts, if any, not recovered under the Policy as a result of misrepresentations or omissions of the D/B. 38
The owner of the Project and the D/B have filed joint claims in the arbitration proceeding against the Company, primarily for alleged delay damages, totaling approximately $144 million which includes alleged delay damages in construction of a retail area adjacent to the Project. Management believes the claims are generally unsubstantiated, and the Company has valid legal defenses against such claims and intends to vigorously defend these claims. 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 amounts receivable and possible liability could occur in the near term. The Company is involved in various other claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse effect on the results of operations or the financial position of the Company. ENVIRONMENTAL AND OTHER MATTERS In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. Management believes that adequate provision has been made in the financial statements for the potential impact of these issues, and that the outcomes will not significantly impact the results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular quarter. The Company has received notices from the U.S. Environmental Protection Agency (EPA) or equivalent state agency that it is considered a potentially responsible party (PRP) at fifteen sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is "contesting, or at the appropriate time may contest, its liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with the above-referenced "matters, it makes accruals as warranted. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. It is the opinion of the Company's management that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the results of operations or the financial position of the Company. 39
11. EARNINGS PER SHARE In calculating earnings per share, there were no adjustments to net earnings to arrive at income for any years presented. The stock options granted October 22, 1999 and January 27, 2000, with total outstanding share commitments of 362,084 at year end, are antidilutive. <Table> <Caption> August 31, ---------------------------------------- 2001 2000 1999 ---------- ---------- ---------- <S> <C> <C> <C> Shares outstanding for basic earnings per share 13,029,561 14,018,026 14,510,882 Effect of dilutive securities: Stock options/ purchase plans 130,933 232,059 115,658 ---------- ---------- ---------- Shares outstanding for diluted earnings per share 13,160,494 14,250,085 14,626,540 ========== ========== ========== </Table> 12. OTHER PAYABLES AND ACCRUED EXPENSES <Table> <Caption> August 31, --------------------- (in thousands) 2001 2000 - -------------- -------- -------- <S> <C> <C> Salaries, wages and commissions $ 30,844 $ 42,281 Litigation accruals 16,048 7,650 Advance billings on contracts 15,621 4,548 Employees' retirement plans 11,749 18,741 Insurance 10,401 9,778 Taxes other than income taxes 10,110 9,413 Freight 4,467 10,726 Accrual for contract losses 3,278 5,327 Environmental 2,675 3,088 Interest 2,491 2,830 Other 23,637 28,298 -------- -------- $131,321 $142,680 ======== ======== </Table> 40
13. BUSINESS SEGMENTS The Company's reportable segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise. The Company has three reportable segments consisting of manufacturing, recycling, and marketing and 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: <Table> <Caption> External Net Sales for the Year ended August 31, ---------------------------------------- (in thousands) 2001 2000 1999 - -------------- ---------- ---------- ---------- <S> <C> <C> <C> United States $1,685,981 $1,782,189 $1,491,371 Non United States 755,235 879,231 760,071 ---------- ---------- ---------- Total $2,441,216 $2,661,420 $2,251,442 ========== ========== ========== </Table> <Table> <Caption> Long-Lived Assets as of August 31, ---------------------------------- (in thousands) 2001 2000 1999 - -------------- -------- -------- -------- <S> <C> <C> <C> United States $432,995 $451,254 $426,476 Non United States 9,628 10,264 6,765 -------- -------- -------- Total $442,623 $461,518 $433,241 ======== ======== ======== </Table> 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: <Table> <Caption> Year ended August 31, ---------------------------------- (in thousands) 2001 2000 1999 - -------------- -------- -------- -------- <S> <C> <C> <C> Net sales-unaffiliated customers $266,609 $343,805 $306,279 ======== ======== ======== Operating profit $ 1,936 $ 5,627 $ 5,521 ======== ======== ======== Total assets $ 83,365 $ 68,178 $101,434 ======== ======== ======== </Table> 41
The following is a summary of certain financial information by reportable segment: 13. BUSINESS SEGMENTS (Continued): <Table> <Caption> ADJUSTMENTS MARKETING AND 2001 (DOLLARS IN THOUSANDS) MANUFACTURING RECYCLING AND TRADING CORPORATE ELIMINATIONS CONSOLIDATED - --------------------------- ------------- ---------- ----------- ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Net sales-unaffiliated customers $1,315,700 $ 371,298 $ 752,723 $ 1,495 $ -- $2,441,216 Intersegment sales 5,375 22,539 18,433 -- (46,347) -- ---------- ---------- ---------- ---------- ---------- ---------- Net sales 1,321,075 393,837 771,156 1,495 (46,347) 2,441,216 ========== ========== ========== ========== ========== ========== Operating profit (loss) 57,585 (2,324) 7,833 4,790 -- 67,884 ========== ========== ========== ========== ========== ========== Profit (loss) before income taxes 56,861 (2,482) 5,751 (20,830) -- 39,300 ========== ========== ========== ========== ========== ========== Interest expense 10,585 2,165 1,332 14,637 (1,111) 27,608 ========== ========== ========== ========== ========== ========== Capital expenditures 45,979 5,587 1,208 248 -- 53,022 ========== ========== ========== ========== ========== ========== Depreciation and amortization 54,402 11,005 1,124 741 -- 67,272 ========== ========== ========== ========== ========== ========== Total assets $ 742,754 $ 93,268 $ 188,405 $ 60,373 $ -- $1,084,800 ========== ========== ========== ========== ========== ========== Operating profit return on net assets 9.7% -- 5.7% -- -- 8.1% ========== ========== ========== ========== ========== ========== 2000 (DOLLARS IN THOUSANDS) - --------------------------- Net sales-unaffiliated customers $1,348,994 $ 432,115 $ 881,238 $ (927) $ -- $2,661,420 Intersegment sales 7,732 30,496 22,055 -- (60,283) -- ---------- ---------- ---------- ---------- ---------- ---------- Net sales 1,356,726 462,611 903,293 (927) (60,283) 2,661,420 ========== ========== ========== ========== ========== ========== 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% ========== ========== ========== ========== ========== ========== </Table> 42
14. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 2001, 2000 and 1999 are as follows (in thousands except per share data): <Table> <Caption> Three Months Ended 2001 ---------------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $ 594,540 $ 578,330 $ 622,090 $ 646,256 Gross profit 70,844 58,253 82,893 85,326 Net earnings (loss) (2,233) 1,662 10,721 14,190 Basic EPS (loss) (0.17) 0.13 0.83 1.09 Diluted EPS (loss) (0.17) 0.13 0.82 1.07 </Table> <Table> <Caption> Three Months Ended 2000 ---------------------------------------------------- Nov. 30 Feb. 29 May 31 Aug. 31 --------- --------- --------- --------- <S> <C> <C> <C> <C> 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 0.71 0.72 0.93 0.95 Diluted EPS 0.70 0.70 0.92 0.94 </Table> <Table> <Caption> Three Months Ended 1999 ---------------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 --------- --------- --------- --------- <S> <C> <C> <C> <C> 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 0.76 0.57 0.76 1.16 Diluted EPS 0.75 0.57 0.76 1.15 </Table> The quantities and costs used in calculating cost of goods sold on a quarterly basis include estimates of the annual LIFO effect. The actual effect cannot be known until the year end physical inventory is completed and quantity and price indices are developed. The quarterly cost of goods sold above includes such estimates. The final determination of inventory quantities and prices did not significantly impact fourth quarter 2001 net earnings. Fourth quarter 2000 net earnings decreased $1.2 million, and 1999 increased $6.0 million after the final determination of quantities and prices was made. In recording accruals for workers' compensation expense, management relies on prior years' 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 2001 and 2000 indicated a decline in the number of claims from the prior year resulting in a $2.1 million and $2.6 million reduction, respectively, in the accrual during the fourth quarter. During the fourth quarter 2001, the Company increased its property tax accrual by $1.1 million based on revised estimates from a local taxing authority. Following a revised Court ruling, the Company reduced its litigation accrual by $2.5 million during the fourth quarter 2001 (see note 10). In the fourth quarter 1999, the Company received $3.0 million in settlement for antitrust litigation. 43
Commercial Metals Company and Subsidiaries 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, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended August 31, 2001. 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, 2001 and 2000, and the results of their operations and their cash "flows for each of "the three years in the period ended August 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Dallas, Texas October 12, 2001 44
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 24, 2002, 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, 2001, as defined under Rule 3b-7: <Table> <Caption> NAME CURRENT TITLE & POSITION AGE OFFICER SINCE - ---- ------------------------ --- ------------- <S> <C> <C> <C> Louis A. Federle Treasurer 52 1979 Hugh M. Ghormley Vice President and 72 1981 CMC Steel Group - President Fabrication Plants Harry J. Heinkele Vice President and Secondary Metals 69 1981 Processing Division - President A. Leo Howell Vice President and 80 1977 Howell Metal Company - President; Director and Chairman of the Executive Committee William B. Larson Vice President and 48 1995 Chief Financial Officer Murray R. McClean Vice President and Marketing and 53 1995 Trading Segment - President Malinda G. Passmore Controller 42 1999 Stanley A. Rabin Chairman of the Board, 63 1974 President and Chief Executive Officer; Director </Table> 45
<Table> <S> <C> <C> <C> Marvin Selig CMC Steel Group - Chairman 78 1968 and Chief Executive Officer; Director Clyde P. Selig Vice President and 69 1981 CMC Steel Group - President and Chief Operating Officer David M. Sudbury Vice President, Secretary and 56 1976 General Counsel </Table> 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 24, 2002, 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 24, 2002, 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 24, 2002, which will be filed no later than 120 days after the close of Commercial Metals' fiscal year. 46
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)(i)a - Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (Filed as Exhibit (10)(a) to the Company's Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). 47
(10)(i)b - Receivables Purchase Agreement dated June 20, 2001, among CMC Receivables, Inc., as Seller, Three Rivers Funding Corporation as Buyer and Commercial Metals Company as Servicer (Filed as Exhibit (10)(b) to the Company's Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). (10)(i)c - $45,000,000 3 Year Revolving Credit Agreement dated as of August 15, 2001.................................E1-63 (10)(i)d - $90,000,00 364-Day Revolving Credit Agreement dated as of August 15, 2001...............................E64-130 (10)(iii)a- Employment Agreement of Murray R. McClean as amended through October 2, 2000 (Filed as Exhibit (10)(iii) to the Company's Form 10-K for the fiscal year ended August 31, 2000, and Incorporated herein by reference). (10)(iii)b - Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001.............................E131-132 (10)(iii)c - Key Employee Long-Term Performance Plan description..............................................E133-134 (10)(iii)d - Key Employee Annual Incentive Plan description...E135-136 (21) Subsidiaries of Registrant...................................E137 (23) Independent Auditors' consent to incorporation by reference of report dated October 12, 2001, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2001, 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.......................E138 (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
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ Stanley A. Rabin ----------------------------------- By: Stanley A. Rabin Chairman of the Board, President and Chief Executive Officer Date: November 19, 2001 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: <Table> <S> <C> /s/ Moses Feldman /s/ Stanley A. Rabin - -------------------------------------- ------------------------------------- Moses Feldman, November 19, 2001 Stanley A. Rabin, November 19, 2001 Director Chairman of the Board, President, And Chief Executive Officer /s/ A. Leo Howell - -------------------------------------- /s/ Marvin Selig A. Leo Howell, November 19, 2001 ------------------------------------- Director Marvin Selig, November 19, 2001 Director /s/ Ralph E. Loewenberg - -------------------------------------- /s/ Robert R. Womack Ralph E. Loewenberg, November 19, 2001 ------------------------------------- Director Robert R. Womack, November 19, 2001 Director /s/ Anthony A. Massaro - -------------------------------------- /s/ William B. Larson Anthony A. Massaro, November 19, 2001 ------------------------------------- Director William B. Larson, November 19, 2001 Vice President and /s/ Robert D. Neary Chief Financial Officer - -------------------------------------- Robert D. Neary, November 19, 2001 /s/ Malinda G. Passmore Director ------------------------------------- Malinda G. Passmore, November 19, 200 /s/ Dorothy G. Owen Controller - -------------------------------------- Dorothy G. Owen, November 19, 2001 Director </Table> 49
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, 2001 and 2000, and for each of the three years in the period ended August 31, 2001, and have issued our report thereon dated October 12, 2001; 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 12, 2001 50
SCHEDULE VIII COMMERCIAL METALS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 ( In thousands ) Allowance for collection losses deducted from notes and accounts receivable: <Table> <Caption> 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 ------ --------- ---------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> 1998 8,120 1,877 332 2,615 7,714 1999 7,714 948 567 1,361 7,868 2000 7,868 4,371 264 4,545 7,958 </Table> ( A ) Recoveries of accounts written off. ( B ) Write-off of uncollectible accounts. 51
EXHIBIT INDEX <Table> <Caption> EXHIBIT NO. DESCRIPTION - ------- ----------- <S> <C> (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)(i)a - Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (Filed as Exhibit (10)(a) to the Company's Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). </Table>
<Table> <S> <C> (10)(i)b - Receivables Purchase Agreement dated June 20, 2001, among CMC Receivables, Inc., as Seller, Three Rivers Funding Corporation as Buyer and Commercial Metals Company as Servicer (Filed as Exhibit (10)(b) to the Company's Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). (10)(i)c - $45,000,000 3 Year Revolving Credit Agreement dated as of August 15, 2001.................................E1-63 (10)(i)d - $90,000,00 364-Day Revolving Credit Agreement dated as of August 15, 2001...............................E64-130 (10)(iii)a - Employment Agreement of Murray R. McClean as amended through October 2, 2000 (Filed as Exhibit (10)(iii) to the Company's Form 10-K for the fiscal year ended August 31, 2000, and Incorporated herein by reference). (10)(iii)b - Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001.............................E131-132 (10)(iii)c - Key Employee Long-Term Performance Plan description..............................................E133-134 (10)(iii)d - Key Employee Annual Incentive Plan description...........E135-136 (21) Subsidiaries of Registrant...................................E137 (23) Independent Auditors' consent to incorporation by reference of report dated October 12, 2001, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2001, 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.......................E138 </Table>