CHAPARRAL STEEL CO, 10-K, 1997-07-23

CHAPARRAL STEEL CO
10-K, 1997-07-23
STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS)

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<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MAY 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-9944

CHAPARRAL STEEL COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE 75-1424624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

300 WARD ROAD, MIDLOTHIAN, TEXAS 76065
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: A/C 972 775-8241
Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
<S> <C>
COMMON STOCK, PAR VALUE $.10 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 periods 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 (ss.229.405 of this chapter) 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. [ ].

Aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of July 14,
1997, computed by reference to the closing sale price of the registrant's
Common Stock on the New York Stock Exchange on such date: $66,531,072.

Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.

COMMON STOCK - $.10 PAR VALUE
28,453,963 SHARES AS OF JULY 14, 1997

DOCUMENTS INCORPORATED BY REFERENCE

NONE

(Page 1 of 39 pages including Exhibits)

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<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I

Item 1. Business........................................................ 1

Item 2. Properties...................................................... 4

Item 3. Legal Proceedings............................................... 5

Item 4. Submission of Matters to a Vote of
Security Holders.............................................. 5

PART II

Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................... 6

Item 6. Selected Financial Data......................................... 6

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 7

Item 8. Financial Statements and Supplementary Data..................... 10

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 22

PART III

Item 10. Directors and Executive Officers of the Registrant.............. 22

Item 11. Executive Compensation.......................................... 24

Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 28

Item 13. Certain Relationships and Related Transactions.................. 30

PART IV

Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 31
</TABLE>

<PAGE> 3
PART I

ITEM 1. BUSINESS

(a) General development of business

Chaparral Steel Company (the "Company") was organized as a Delaware
corporation in July 1973 by Texas Industries, Inc. ("TXI") and Co-Steel
Inc.("Co-Steel"), a Canadian corporation, which owns steel mills in New Jersey,
Canada and the United Kingdom. TXI is a New York Stock Exchange listed company
which produces cement and concrete. At the time of the Company's organization,
TXI and Co-Steel each owned a 50% interest in the Company. TXI owned 100% of
the Company from November 1985 when it acquired the remaining 50% of the
outstanding securities of the Company from Co-Steel, until July 1988 when
approximately 19.8% of the outstanding securities were sold in an initial
public offering of common stock by the Company. In April 1997, the Company
announced plans to construct a new structural steel mill in the eastern United
States. The new mill's annual capacity is planned to exceed one million tons
and incorporate various technologies developed at the Texas facility. The
consolidated financial statements include the operations of Chaparral Steel
Company, America Steel Transport, and Castelite Steel Products, Inc.

(b) Financial information about industry segments

The Company operates in the steel industry only; therefore, no
industry segment information is presented.

The Company's original steel mill facility was completed in 1975 and
consisted of an electric arc furnace and a rolling mill, which produced rebar
used in concrete construction, and small size angles, channels, rounds and
flats.

In 1982, a major expansion of the steel mill, at a cost of
approximately $180 million, added an additional electric arc furnace and
rolling mill to produce medium-sized structural products. The expansion enabled
the Company to produce beams up to 8" wide. Additional modifications to the
medium section mill now enable the Company to produce beams up to 14" wide, in
addition to large channels and angles.

During fiscal 1992, commissioning was completed on a large beam mill
which has expanded the existing product range up to include 24" wide flange
beams. The expansion was financed with long-term senior unsecured notes of $80
million.

PRODUCTS

The Company's products are sold generally to steel service centers and
steel fabricators for use in the construction industry, as well as to cold
finishers, forgers and original equipment manufacturers for use in the
railroad, defense, automotive, mobile home and energy industries.

The Company designed its bar and structural mills to efficiently
produce bar mill products (33% of 1997 sales on a tonnage basis), structural
mill products (42% of 1997 sales on a tonnage basis) and large beam mill
products (25% of 1997 sales on a tonnage basis). The bar and structural mills
can be modified, without substantial cost or delay, to change current product
mix in order to comply with customer needs or changes in market conditions.

After inspection, bundling and strapping, finished products are
delivered by common carrier, customer-owned truck, rail or barge. The Company
maintains an inventory of finished products based on anticipated short-term
usage to provide prompt shipments to customers when possible.

1
<PAGE> 4

STRUCTURAL PRODUCTS BUSINESS UNIT:

BEAMS

Beams are used for building construction and the non-building
fabrication industries. Sales of beams currently constitute approximately 67%
of the Company's sales on a tonnage basis. Beams produced by the Company's
medium section mill include wide-flange beams (ranging in size from 4" x 4" to
14" x 6-3/4"), certain sizes of standard "I" beams and Bantam(TM) beams. Those
beams are used in low-rise construction (up to five stories) and in various
fabrication operations for industrial machinery and mobile home frames. The
large beam mill has enabled the Company to produce wide-flange beams from 8" to
24" in diameter that are used in multi-story buildings, short-span bridges and
other heavy industrial applications.

BAR PRODUCTS BUSINESS UNIT:

REINFORCING BAR

The Company produces all commercial sizes of rebar from 3/8" diameter
to 1-3/8" diameter for use in construction applications ranging from highway
and public works projects to residential and high-rise construction.

SPECIAL BAR AND MERCHANT QUALITY ROUNDS

Special Bar Quality ("SBQ") rounds are produced in a large variety of
carbon and alloy grades primarily for use in the forging, machining and cold
drawing industries for production of automotive gears and hand tools. SBQ
rounds are also used as sucker rod material in the oil industry.

Merchant quality rounds are cylindrical steel bars used in
construction and fabrication operations. Common uses include roof joists,
anchor bolts and truss supports.

STRUCTURAL MERCHANT SHAPES AND OTHER PRODUCTS

These products consist of structural channels, flat bars and squares
used in the equipment manufacturing and construction industries, particularly
in low-rise structures.

The Company's products are predominately marketed in North America
exclusively by Company salespersons. Approximately 52% of the Company's
products are sold in Texas, Oklahoma, Louisiana and Arkansas. Other regional
sales of the Company's products are approximately 15% in the midwest United
States and approximately 12% in the southeastern United States. Rebar, merchant
shapes and other products are sold principally to customers located in the
southwestern United States. Rebar, merchant shapes and other products are sold
principally to customers located in the southwestern United States. The Free
Trade Agreements between the United States, Canada and Mexico may continue to
favorably affect the Company's position as a supplier of certain steel products
in the Canadian and Mexican markets. Export sales accounted for 3% of 1997
shipments.

EXPANDING CAPACITY

Historically, the Company's philosophy was to operate its mill at full
production capacity. Recently, the Company refocused on serving customer
requirements and specific markets while striving to achieve the lowest possible
unit cost of production. The Company's strategy is to continually increase its
melting capacity through productivity improvements, the utilization of new
technology and capital expenditures. Continuing increases in melting capacity
have dictated further capital spending for increases in rolling capacity to
allow maximum use of the Company's facilities to take advantage of marketplace
opportunities.

2
<PAGE> 5

RAW MATERIALS AND ENERGY

The Company's primary raw material is scrap steel, which includes
shredded steel. The Company produces a major portion of its shredded steel
requirements from its own shredder operation at the site of the steel mill.
Shredded material, which constitutes approximately 41% of the Company's raw
material mix, is produced by the Company at its facility and is primarily
composed of crushed auto bodies purchased on the open market. Another grade of
scrap steel is #1 Heavy, which constitutes approximately 28% of the Company's
scrap steel requirements and is also purchased on the open market.
Historically, the Company has had an adequate supply of scrap steel for its
operations, and the Company believes that the supply of scrap steel will be
adequate to meet future requirements. The purchase price of scrap steel is
subject to market forces largely beyond the control of the Company. The Company
has historically maintained a scrap inventory commensurate with market
conditions.

The Company's steel mill consumes large amounts of electricity and
natural gas. Electricity is obtained from a local electric utility under an
interruptible supply contract with price adjustments which reflect increases or
decreases in the utility's fuel costs. The Company believes that the savings in
the cost of electricity resulting from the interruption provisions of the
contract offsets any loss which might result from interruptions. Natural gas is
purchased in the open market generally under a one year supply contract. The
Company believes that adequate supplies of both electricity and natural gas are
readily available.

SEASONALITY

While there is generally no seasonality in demand for the Company's
products, production at the mill is normally shut down for up to two weeks each
summer and up to one week in December, in order to conduct comprehensive
maintenance (in addition to normal maintenance performed throughout the year)
and to install capital improvements. During these periods, much of the
equipment in the plant is dismantled, inspected and overhauled. The resulting
lower production during the three month periods ending August and February
affect the Company's financial results for those periods.

MARKETING AND BACKLOG

At present, the Company has approximately 762 customers. One customer
accounted for approximately 12% of the Company's sales in 1997. The commodity
nature of certain of the Company's products is generally not characteristic of
a long lead time order cycle. The Company does not believe that backlog is a
significant factor in its business. While the Company has a small number of
long-term customer contracts, most contracts are for quarterly customer
requirements or for immediate shipment. Orders are generally filled within 45
days and are cancelable.

COMPETITION AND OTHER MARKET FACTORS

The Company competes with steel producers, including foreign
producers, on the basis of price, quality and service. Intense sales
competition exists for substantially all of the Company's products. A
substantial portion of the Company's products is sold to the construction
industry.

Steel producers in the United States have faced strong competition
from producers around the world. The Company believes that its success in
increasing productivity, reducing production costs and shifting into higher
margin product lines should continue to enable it to compete effectively with
both foreign and domestic producers.

3
<PAGE> 6

ENVIRONMENTAL MATTERS

The operations of the Company and its subsidiaries are subject to
various federal and state environmental laws and regulations. Under these laws
the U.S. Environmental Protection Agency ("EPA") and agencies of state
government have the authority to promulgate regulations which could result in
substantial expenditures for pollution control and solid waste treatment. Three
major areas regulated by these authorities are air quality, water quality and
hazardous waste management. Pursuant to these laws and regulations emission
sources at the Company's facilities are regulated by a combination of permit
limitations and emission standards of statewide application, and the Company
believes that it is in substantial compliance with its permit limitations and
applicable laws and regulations.

The Company's steel mill generates, in the same manner as other
similar steel mills in the industry, electric arc furnace ("EAF") dust that
contains lead, chromium and cadmium. The EPA has listed this EAF dust, which is
collected in baghouses, as a hazardous waste. The Company has contracts with
reclamation facilities in the United States and Mexico pursuant to which such
facilities receive the EAF dust generated by the Company and recover the metals
from the dust for reuse, thus rendering the dust non-hazardous. In addition,
the Company is continually investigating alternative reclamation technologies
and has implemented processes for diminishing the amount of EAF dust generated.

In March 1991, the EPA issued an Administrative Order for Removal
Action requiring the Company, along with several other companies, to undertake
final removal activities (the "Final Activities") at a site to which it had
shipped EAF dust. The Company had participated earlier in preliminary remedial
activities at the site under an Administrative Order on Consent entered into in
January 1986 among the EPA, Chaparral and the other companies. Chaparral's
share of the costs associated with the Final Activities did not have a material
adverse effect on its competitive position, operations or financial condition.

The Company intends to comply with all legal requirements regarding
the environment, but since many of them are not fixed, presently determinable,
or are likely to be affected by future legislation or rule making by government
agencies, it is not possible to accurately predict the aggregate future costs
of compliance and their effect on the Company's operations, future net income
or financial condition.

EMPLOYEES

At May 31, 1997, the Company had 1,318 employees.

ITEM 2. PROPERTIES

The Company's original steel mill facility completed in 1975 in
Midlothian, Texas, consisted of an electric arc furnace and a rolling mill. In
1982, a major expansion of the steel mill added an additional electric arc
furnace and rolling mill that produced medium-sized structural products. In
1992, a large beam mill was commissioned that resulted in excess rolling
capacity over the production capacity of the melting operation. The Company's
real property, plant and equipment are subject to liens securing its long-term
debt.

Operating facilities are as follows:

<TABLE>
<CAPTION>
(000's)
(000's) Production Approximate
Capacity 1997 square footage
(Tons) (Tons) of facilities
-------- ---------- --------------
<S> <C> <C> <C>
Melting 1,800 1,683 265,000
Rolling 1,900 1,597 560,000
</TABLE>

4
<PAGE> 7

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to
claims arising in the ordinary course of business operations. No material
litigation is pending against or currently affects the Company.

The Company maintains insurance with financially sound insurance
companies against certain risks, which insurance the Company believes to be
adequate in relation to the Company's business. The Company also maintains a
hazardous waste liability policy against certain third party claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
POSITIONS WITH REGISTRANT, OTHER
NAME AGE EMPLOYMENT DURING LAST FIVE YEARS
---- --- ---------------------------------
<S> <C> <C>
Robert D. Rogers.............. 61 Chairman of the Board of the Company; President,
Chief Executive Officer and Director of TXI

Gordon E. Forward............. 61 President, Chief Executive Officer and Director;
Director of TXI

Kenneth R. Allen.............. 40 Director of Investor Relations of Chaparral Steel
and TXI; Treasurer of TXI

Dennis E. Beach............... 58 Vice President - Administration

Larry L. Clark*............... 53 Vice President - Controller and Assistant Treasurer

David A. Fournie*............. 49 Vice President - Structural Products Business Unit

Richard M. Fowler............. 54 Vice President - Finance and Treasurer; Vice
President - Finance of TXI

H. Duff Hunt, III*............ 51 Vice President - Recycled Products Business Unit

Richard T. Jaffre............. 54 Vice President - Raw Materials/Transportation

Robert C. Moore............... 63 Vice President - General Counsel and Secretary; Vice
President - General Counsel and Secretary of TXI

Libor F. Rostik............... 63 Vice President - Engineering

Peter H. Wright*.............. 55 Vice President - Bar Products Business Unit
</TABLE>

*Each of the executive officers named above has also served in other executive
or managerial roles for the Company during the last five years.

5
<PAGE> 8

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock is traded on the New York Stock Exchange.
At May 31, 1997, the number of common stockholders of record was 869.
Information on quarterly dividends and common stock prices dividends are
located on page 10 and are incorporated herein by reference.

The terms of the loan agreements impose certain restrictions on the
Company, the most significant of which require the Company to maintain minimum
amounts of working capital, limit the incidence of certain indebtedness and
restrict payments of cash dividends and purchases of treasury stock. The
amounts of earnings available for restricted payments were approximately $52
million and $41 million at May 31, 1997 and 1996, respectively.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Year ended May 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands except per share)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 616,676 $ 607,656 $ 531,811 $ 462,275 $ 420,210
Gross profit (exclusive of depreciation
and amortization) 132,309 130,050 94,761 81,777 58,624
Employee bonus programs 8,856 6,116 2,933 1,896 --
Interest expense 8,099 10,007 12,082 13,439 14,650
Net income (loss) 40,182 41,977 19,607 11,919 (2,051)
--------- --------- --------- --------- ---------

PER SHARE INFORMATION
Net income (loss) $ 1.41 $ 1.43 $ .67 $ .41 $ (.06)
Dividends .20 .20 .20 .20 .20
--------- --------- --------- --------- ---------

FOR THE YEAR
Net cash provided by
operating activities $ 47,536 $ 52,618 $ 72,723 $ 10,603 $ 25,087
Capital expenditures 33,776 20,630 16,234 7,805 7,424
--------- --------- --------- --------- ---------

YEAR END POSITION
Total assets $ 494,210 $ 475,337 $ 469,827 $ 488,307 $ 480,811
Net working capital 155,252 136,723 113,745 95,225 80,901
Long-term debt 52,554 66,697 81,065 96,219 113,997
Stockholders' equity 326,260 294,965 269,868 265,623 259,598
--------- --------- --------- --------- ---------
</TABLE>

6
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The Company's Texas steel plant is a market mill with the flexibility
to produce a wide range of steel products. The ability to produce a variety of
products at low cost has enabled the Company to penetrate markets throughout
the United States and overseas. The principal components of the Company's cost
of sales are raw material and conversion costs. Scrap steel, the cost of which
fluctuates with market conditions, is the Company's primary raw material.
Conversion costs are comprised principally of energy, maintenance and labor.

In April 1997, the Board of Directors approved the engineering and
site selection work in connection with a plan for the construction of a new
structural mill in the eastern United States with production scheduled to begin
in 1999. The new mills' annual capacity is expected to exceed one million tons
and is expected to produce a full range of structural beams up to 36" in depth
and sheet pile sections. The mill will be positioned to replace the decrease in
supply caused by the reduction in domestic suppliers that has taken place over
the last few years. Patented technologies and existing material recycling
expertise will be incorporated in the new location.

On May 22, 1997, the Board of Directors received an unsolicited offer
to merge with Texas Industries, Inc., owner of 85% of Chaparral Steel. Under
terms of the offer, owners of the publicly traded shares of Chaparral Steel
would receive consideration of $14.25 per share, pursuant to a cash merger. The
Board of Directors appointed a Special Committee to consider the offer and make
a recommendation to Chaparral's Board.

RESULTS OF OPERATIONS

NET SALES

Net sales increased $9 million to $616.7 million for 1997. Shipments
increased 30,000 tons to a record level of 1,620,000 tons as average selling
price declined slightly from the previous year. The demand for structural
products from domestic sources remained strong from the prior year as prices
for structural mill products were comparable to 1996. Bar product shipments
were 16% higher from the previous year on somewhat lower average selling
prices. Special Bar Quality shipments increased 6%. Export sales were level at
3% of total shipments because of the continued strong domestic market.
Chaparral uses its ability to adjust its product mix to maximize profit
margins.

In 1996, net sales increased $75.8 million from the previous year due
to a 9% increase in average selling price and a 79,000 ton increase in
shipments to a record level of 1,590,000 tons. Export sales decreased to 4% of
total shipments in 1996. The demand for structural products from service
centers, fabricators and the mobile home industry has increased substantially
from 1995. Prices for structural mill products increased 13% in 1996. Bar mill
shipments were 5% below 1995 levels on somewhat lower average selling prices.

7
<PAGE> 10

COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)

In 1997, cost of sales increased $6.8 million due primarily to the
30,000 ton increase in shipments as per ton cost amounts were slightly lower
than 1996. Scrap costs were comparable to those of a year ago and were offset
by decreases in combined rolling costs.

Cost of sales increased $40.6 million, in 1996 due to the 79,000 ton
increase in shipments and a 4% increase in average cost per ton. Higher scrap
and melt shop conversion costs in 1996 accounted for a significant portion of
the increase in average cost of sales. Combined rolling costs were slightly
higher than the prior year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses generally fluctuated with
the provisions for employee incentive programs that are based on profitability
which amounted to $8.9 million, $6.8 million and $2.8 million for 1997, 1996
and 1995, respectively.

INTEREST EXPENSE

Payment of scheduled maturities and optional prepayments without
penalty of long-term debt during the three years ended May 31, 1997 served to
reduce the amount of interest expense.

NET INCOME

Net income decreased $1.8 million in 1997 as gross profit per ton was
virtually unchanged from the prior year. Lower interest expense was offset by
higher employee incentives. Depreciation costs increased slightly due to the
rise in capital improvements. Amortization of commissioning costs were $2
million in the current year and were fully amortized at January 31, 1997.
Goodwill is amortized over 40 years using the straight-line method and totaled
$2 million in 1997.

In 1996, net income more than doubled to $42 million due primarily to
the 9% increase in average selling prices. Depreciation costs decreased
slightly as the Company did not incur any major capital improvements during
1996. Amortization of commissioning costs and goodwill totaled $3 million and
$2 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Working capital increased $18.6 million to an all-time high of $155.3
million at May 31, 1997. Cash provided by operating activities decreased by
$5.1 million from the prior year. Accounts receivable increased $16.7 million
from the prior year due to record shipments in the month of May 1997.
Inventories increased $9.2 million from the prior year-end due to record
production in 1997. Other accrued expenses increased $6.2 million as employee
incentives payable increased from May 1996 because of a change in the plan. As
a result, at May 31, 1997, cash and cash equivalents decreased $5.7 million to
$14.3 million after the Company acquired $33.8 million of capital equipment,
repaid $14.5 million of long-term debt, purchased $3.8 million of treasury
stock and paid cash dividends of $5.7 million.

Capital expenditures for fiscal 1998 are currently estimated to be
approximately $50 million at the Texas facility; which includes upgrades to the
material recycling and bar products production unit along with normal
replacement of existing equipment. In April 1997, the Board of Directors
approved the engineering and site selection work in connection with a plan for
the construction of a new structural mill in the eastern United States with
production scheduled to begin in 1999. Expenditures of $50 million are
anticipated in fiscal 1998 for the new facility with a total capital commitment
of $450 million over the next five years.

8
<PAGE> 11

The Company's capitalization of $378.8 million at May 31, 1997,
consisted of $52.5 million in long-term debt and $326.3 million of
stockholders' equity. The Company's stockholders' equity includes paid-in
capital which resulted from the excess of cost over fair value of net assets
acquired, net of amortization. During 1996, the Board of Directors approved the
repurchase of a portion of the Company's outstanding stock to satisfy
outstanding stock option grants. The long-term debt-to-capitalization ratio was
14% at May 31, 1997, versus 18% at May 31, 1996. The decrease was caused by the
repayment of $14.5 million of long-term debt and the increase in stockholders'
equity which was due to the net income of $40.2 million minus the payment of
cash dividends of $5.7 million.

The Company's earnings decreased slightly in 1997 as overall demand
for the Chaparral's products remained good. Based on the current outlook for
steel consumption levels in 1998 and its impact on prices, the Company
anticipates its average selling price to increase slightly. Management
anticipates higher shipment levels during fiscal 1998 resulting from both
increased raw steel production and the reduction in domestic suppliers that has
taken place over the last few years. Significant changes in average selling
price without a corresponding change in the scrap raw material costs could have
a substantial effect on the Company's operating results and liquidity.

The Company expects the current financial resources and anticipated
cash provided from operations will be sufficient to provide funds for capital
expenditures, meet scheduled debt payments and satisfy other known working
capital needs for fiscal 1998. The Company has a short-term credit facility
with a bank totaling $10 million which will expire in December 1997, if not
renewed by the bank or the Company. During fiscal 1997, the Company had no
borrowings at any time under the current arrangement. The Company believes that
it will be able to renew these credit facilities or negotiate similar
arrangements with other financial institutions if they are deemed necessary.

The Company is currently negotiating with various financial
institutions regarding funding for the new mill. Management is confident that
the Company will be successful in obtaining all necessary funds at competitive
rates to construct and provide other known working capital needs for the new
facility.

INFLATION

Energy, scrap and labor, which are the principal components of the
Company's manufacturing cost, are generally susceptible to inflationary
pressures, while finished product prices are more readily influenced by
competition within the steel industry. Since May 31, 1994, inflation has not
materially affected the Company's results of operations or financial condition.

9
<PAGE> 12

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table is a summary of quarterly financial information
for the two years ended May 31, 1997:

<TABLE>
<CAPTION>
Three months ended AUG.(2) NOV. FEB. MAY
-------- -------- -------- --------
(In thousands except per share)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales $149,527 $143,637 $147,715 $175,797
Gross profit(1) 30,662 30,140 32,738 38,769
Net income 8,314 8,048 9,706 14,114
-------- -------- -------- --------

Net income per common share .29 .28 .34 .50
Dividends .05 .05 .05 .05

Common stock price range:
High 14 1/2 14 1/2 13 15 1/4
Low 10 1/2 12 1/2 11 1/8 11 3/8

1996
Net sales $138,141 $154,990 $158,954 $155,571
Gross profit(1) 26,060 33,623 34,900 35,467
Net income 6,428 10,485 11,895 13,169
-------- -------- -------- --------

Net income per common share .22 .35 .41 .45
Dividends .05 .05 .05 .05

Common stock price range:
High 11 3/4 11 7/8 16 3/4 15 7/8
Low 9 1/8 9 1/8 10 1/2 13
</TABLE>

(1) Gross profit exclusive of depreciation and amortization.
(2) Results are effected by annual maintenance performed during the summer
months.

10
<PAGE> 13

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Chaparral Steel Company
Midlothian, Texas

We have audited the accompanying consolidated balance sheets of
Chaparral Steel Company and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated statements of income, cash flows and stockholders' equity
for each of the three years in the period ended May 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Chaparral Steel Company and subsidiaries at May 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended May 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP
Dallas, Texas
July 8, 1997

11
<PAGE> 14

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
May 31

<TABLE>
<CAPTION>
1997 1996
(In thousands)
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,291 $ 20,014
Trade accounts receivable, net of allowance of $2
million and $2.8 million, respectively 66,266 49,530
Inventories 131,034 121,791
Prepaid expenses 9,218 7,757
--------- ---------
TOTAL CURRENT ASSETS 220,809 199,092

PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 57,506 55,342
Machinery and equipment 464,485 436,886
Land 1,288 1,288
--------- ---------
523,279 493,516
Less allowance for depreciation 308,359 279,447
--------- ---------
214,920 214,069
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $31.3
million and $27.3 million, respectively 58,481 62,176
--------- ---------
$ 494,210 $ 475,337
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 31,466 $ 34,131
Accrued interest payable 965 1,402
Other accrued expenses 20,681 14,470
Current portion of long-term debt 12,445 12,366
--------- ---------
TOTAL CURRENT LIABILITIES 65,557 62,369

LONG-TERM DEBT 52,554 66,697

DEFERRED INCOME TAXES
AND OTHER CREDITS 49,839 51,306

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 authorized,
none outstanding -- --
Common stock, $.10 par value, 50,000,000 authorized,
28,403,700 and 28,707,400 outstanding, respectively 2,994 2,994
Paid-in capital 178,689 178,517
Retained earnings 161,392 126,885
Cost of common shares in treasury (16,815) (13,431)
--------- ---------
326,260 294,965
--------- ---------
$ 494,210 $ 475,337
========= =========
</TABLE>

See notes to consolidated financial statements.

12
<PAGE> 15

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Year Ended May 31

<TABLE>
<CAPTION>
1997 1996 1995
(In thousands except per share)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 616,676 $ 607,656 $ 531,811
Costs and expenses:
Cost of sales (exclusive of items stated
separately below) 484,367 477,606 437,050
Depreciation and amortization 33,153 32,493 33,887
Selling, general and administrative 29,197 26,099 20,362
Interest 8,099 10,007 12,082
Other income (1,528) (4,318) (3,116)
--------- --------- ---------
553,288 541,887 500,265
--------- --------- ---------

INCOME BEFORE INCOME TAXES 63,388 65,769 31,546

Provision for income taxes 23,206 23,792 11,939
--------- --------- ---------

NET INCOME $ 40,182 $ 41,977 $ 19,607
========= ========= =========

NET INCOME PER COMMON SHARE $ 1.41 $ 1.43 $ .67
========= ========= =========

CASH DIVIDENDS PER COMMON SHARE $ .20 $ .20 $ .20
========= ========= =========
</TABLE>

See notes to consolidated financial statements.

13
<PAGE> 16

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended May 31

<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 40,182 $ 41,977 $ 19,607
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 33,153 32,493 33,887
Provision for deferred income taxes (3,333) (1,894) 1,994
Other deferred credits 1,866 867 83

Changes in operating assets and liabilities:
Trade accounts receivable, net (16,736) 2,149 (9,548)
Inventories (9,243) (20,414) 16,206
Prepaid expenses (1,461) 353 804
Trade accounts payable (2,665) (3,687) 9,151
Accrued interest payable (437) (460) (573)
Other accrued expenses 6,210 1,234 1,112
-------- -------- --------
Net cash provided by operating activities 47,536 52,618 72,723

INVESTING ACTIVITIES
Capital expenditures (33,776) (20,630) (16,234)
Other 3,615 1,429 (124)
-------- -------- --------
Net cash used in investing activities (30,161) (19,201) (16,358)

FINANCING ACTIVITIES
Repayments on short-term debt -- -- (15,000)
Long-term borrowings 456 52 985
Repayments on long-term debt (14,520) (15,700) (20,477)
Dividends paid (5,675) (5,859) (5,936)
Proceeds from issuance of treasury stock 411 1,470 --
Purchase of treasury stock (3,770) (12,506) --
-------- -------- --------
Net cash used in financing activities (23,098) (32,543) (40,428)

Increase (decrease) in cash and cash equivalents (5,723) 874 15,937

Cash and cash equivalents at beginning of year 20,014 19,140 3,203
-------- -------- --------

Cash and cash equivalents at end of year $ 14,291 $ 20,014 $ 19,140
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

14
<PAGE> 17

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
PREFERRED ------------------ PAID-IN RETAINED -------------------
STOCK SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994 $ -- 29,940 $ 2,994 $ 188,037 $ 77,096 (260) $ (2,504)
Net income for the year
ended May 31, 1995 -- -- -- -- 19,607 -- --
Dividends paid to
stockholders ($.20 per share) -- -- -- -- (5,936) -- --
Adjustments to the excess of cost
over fair value of net assets acquired -- -- -- (9,426) -- -- --
---- ------ --------- --------- --------- ------ ---------

Balance at May 31, 1995 -- 29,940 2,994 178,611 90,767 (260) (2,504)
Net income for the year
ended May 31, 1996 -- -- -- -- 41,977 -- --
Dividends paid to
stockholders ($.20 per share) -- -- -- -- (5,859) -- --
Treasury stock purchased -- -- -- -- -- (1,107) (12,506)
Treasury stock issued for
options - 134,000 shares -- -- -- (94) -- 134 1,579
---- ------ --------- --------- --------- ------ ---------

Balance at May 31, 1996 -- 29,940 2,994 178,517 126,885 (1,233) (13,431)
Net income for the year
ended May 31, 1997 -- -- -- -- 40,182 -- --
Dividends paid to
stockholders ($.20 per share) -- -- -- -- (5,675) -- --
Treasury stock purchased -- -- -- -- -- (349) (3,770)
Treasury stock issued for options
and bonuses - 46,000 shares -- -- -- 172 -- 46 386
---- ------ --------- --------- --------- ------ ---------

BALANCE AT MAY 31, 1997 $ -- 29,940 $ 2,994 $ 178,689 $ 161,392 (1,536) $ (16,815)
==== ====== ========= ========= ========= ====== =========
</TABLE>

See notes to consolidated financial statements.

15
<PAGE> 18

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1997

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND RELATED MATTERS:

The consolidated financial statements include the operations of
Chaparral Steel Company (the "Company") and its majority owned subsidiaries.
The Company is 85% owned by Texas Industries, Inc. ("TXI").

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:

The Company operates in the steel industry only; therefore, no
industry segment information is presented.

CASH EQUIVALENTS:

Cash equivalents consist of highly liquid investments with original
maturities of three months or less.

CREDIT RISKS:

The Company extends credit to various companies in steel distribution,
fabrication and related industries. Such credit risk is considered by
management to be limited due to the Company's sizable customer base and the
geographical dispersion of the customer base. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.

INVENTORIES:

Inventories are stated at the lower of cost (last-in, first-out) or
market, except rolls which are stated at cost (specific identification) and
supplies which are stated at average cost.

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
property.

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED:

The amount of goodwill, net of amortization, arising from the purchase
of 50% of the outstanding securities of the Company by TXI, was recorded using
the purchase method of accounting and totaled $57.2 million and $59.2 million
at May 31, 1997 and 1996, respectively. Due to an adjustment of the original
amount, goodwill and paid-in capital were decreased $9.4 million in 1995. This
goodwill is being amortized over 40 years using the straight-line method and
reduced earnings by $2 million, $2 million and $2.3 million in 1997, 1996 and
1995 respectively.

COMMISSIONING COSTS:

The Company's policy for new facilities is to capitalize certain costs
until the facility is substantially complete and ready for its intended use.

16
<PAGE> 19

INCOME TAXES:

The Company and TXI have a tax sharing agreement (the "Agreement")
whereby the Company is included in the consolidated income tax return of TXI.
The agreement provides that the Company will account for income taxes on a
stand-alone basis. Accordingly, the Company makes payments to or receives
payments from TXI in amounts equal to the income taxes it would have otherwise
paid or received. Deferred income taxes are determined using the liability
method.

COMPUTATION OF NET INCOME PER COMMON SHARE:

Net income per common share is calculated based upon a weighted
average of 28,728,000, 29,543,000 and 29,722,000 shares outstanding (including
common stock equivalents) during 1997, 1996 and 1995, respectively. The
calculations of net income per common share for periods after August 31, 1990,
contain an adjustment for the previous amortization of an estimated amount of
goodwill. Amounts calculated using the Basic earnings per share method were not
materially different than Primary or Fully Dilutive method and therefore, are
not presented.

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS:

In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("Statement No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
To Be Disposed Of", that requires recognition of impairment losses on
long-lived assets. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of in future periods. The
Company's adoption of Statement No. 121 in the first quarter of 1997 had no
effect on the financial statements.

NOTE B - INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
May 31 1997 1996
(In thousands)
--------------------------------------------------------
<S> <C> <C>
Finished good $ 73,926 $ 64,962
Work in process 11,534 11,851
Raw materials 15,832 21,082
Rolls and Molds 22,989 20,693
Supplies 17,012 16,377
LIFO adjustment (10,259) (13,174)
-------- --------
$131,034 $121,791
======== ========
</TABLE>

NOTE C - COMMISSIONING COSTS

In fiscal 1990, the Company began construction of the large beam mill
and commissioning commenced in February 1991. The mill was substantially
complete and ready for its intended use in the third quarter of fiscal 1992
with a total of $15.1 million of costs deferred. The amounts of commissioning
costs (net of amortization) were $0 and $2 million at May 31, 1997 and 1996,
respectively. The amounts of amortization charged to income were $2 million, $3
million and $3 million in 1997, 1996 and 1995, based on a five year period.

17
<PAGE> 20

NOTE D - CONTINGENCIES

The Company and subsidiaries are defendants in lawsuits which arose in
the normal course of business. In management's judgment (based on the opinion
of counsel) the ultimate liability, if any, from such legal proceedings will
not have a material effect on the Company's financial position.

The Company is subject to federal, state and local environmental laws
and regulations concerning, among other matters, air emissions, furnace dust
disposal and wastewater discharge. The Company believes it is in substantial
compliance with applicable environmental laws and regulations. Notwithstanding
such compliance, if damage to persons or property or contamination of the
environment has been or is caused by the conduct of the Company's business or
by hazardous substances or wastes used in, generated or disposed of by the
Company, the Company could be held liable for such damages and be required to
pay the cost of investigation and remediation of such contamination. The amount
of such liability could be material. Changes in federal or state laws,
regulations or requirements or discovery of unknown conditions could require
additional expenditures by the Company. At May 31, 1997, the Company had $1.6
million accrued for closure and post closure costs as prescribed by the Texas
National Resource Conservation Commission.

NOTE E - LONG-TERM DEBT

Outstanding long-term debt is as follows:

<TABLE>
<CAPTION>
May 31 Interest Rate 1997 1996
(In thousands)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
$61.4 million first mortgage note, due in
annual installments through January 1999 14.2% $ 8,182 $ 14,320

$80 million senior unsecured notes due in
annual installments through April 2004 10.2% 56,000 64,000

Other notes payable, due through 2001 Various 817 743
------- --------
64,999 79,063
Less current portion 12,445 12,366
------- --------

$52,554 $ 66,697
======= ========
</TABLE>

Scheduled maturities of long-term debt at May 31, 1997 are $12.4
million, $12.4 million, $8.1 million, $8 million and $8 million in the fiscal
years 1998 through 2002, respectively.

Substantially all of the assets of the Company except accounts
receivable, inventories and certain equipment not forming an integral part of
the mill have been pledged as collateral on the first mortgage notes.

The terms of the loan agreements impose certain restrictions on the
Company, the most significant of which require the Company to maintain minimum
amounts of working capital, limit the incurrence of certain indebtedness and
restrict payments of cash dividends and purchases of treasury stock. The
amounts of earnings available for restricted payments were approximately $52
million and $41 million at May 31, 1997 and 1996, respectively. Interest
payments were $8.7 million, $10.5 million and $12.7 million in 1997, 1996 and
1995, respectively.

18
<PAGE> 21

NOTE F - INCOME TAXES

The provisions for income taxes are comprised of:

<TABLE>
<CAPTION>
Year ended May 31 1997 1996 1995
(In thousands)
----------------------------------------------------------------------
<S> <C> <C> <C>
Current $22,567 $ 26,176 $ 9,451
Deferred 639 (2,384) 2,488
------- -------- -------

$23,206 $ 23,792 $11,939
======= ======== =======
</TABLE>

The reasons for the differences between the provisions for income taxes and the
amounts computed by applying the statutory federal income tax rates to income
before income taxes are:

<TABLE>
<CAPTION>
Year ended May 31 1997 1996 1995
(In thousands)
----------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income
before income taxes $22,186 $ 23,019 $11,041
Increase in taxes resulting from:
Goodwill amortization 702 702 811
Other - net 318 71 87
------- -------- -------

$23,206 $ 23,792 $11,939
======= ======== =======
</TABLE>

The components of the net deferred tax liability as of May 31, 1997 and 1996
are summarized below:

<TABLE>
<CAPTION>
Year ended May 31 1997 1996
(In thousands)
----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 961 $ 458
Accounts receivable 715 997
Inventory - 1,165
Expenses not currently
tax deductible 1,515 1,872
Total deferred tax assets 3,191 4,492

Deferred tax liabilities:
Accelerated tax depreciation (47,103) (49,229)
Inventory (2,168) -
Commissioning costs - (704)
-------- --------
Total deferred tax liabilities (49,271) (49,933)
Net deferred tax liability (46,080) (45,441)
Current portion 62 4,034
-------- --------
Non-current portion of deferred
tax liability $(46,142) $(49,475)
======== ========
</TABLE>

The Company made income tax payments of $21.1 million, $25.6 million
and $9.6 million in 1997, 1996 and 1995, respectively.

19
<PAGE> 22

NOTE G - RETIREMENT PLAN

A non-contributory defined contribution plan provides retirement
benefits for substantially all employees. The Company makes a regular
contribution of 1% of annual compensation for each participant and a variable
contribution equal to 1/2 of 1% of pre-tax income, as defined, to this plan.
The amounts of expense charged to income for this plan were $.8 million, $.8
million and $.6 million in 1997, 1996 and 1995, respectively. The plan is
funded to the extent of charges to income.

NOTE H - INCENTIVE PLANS

All personnel employed as of May 31 share currently in the pre-tax
income, as defined, of the Company for the year then ended based on a
predetermined formula. The duration of most of the plans is one year; certain
executives are additionally covered under a three-year plan. All plans are
subject to annual renewal by the Company's Board of Directors. The provisions
for this plan were $8.9 million, $6.1 million, $2.9 million for 1997, 1996 and
1995, respectively. The amount of employee incentives currently payable was
$7.8 million and $2.8 million at May 31, 1997 and 1996, respectively.

In 1987, the Board of Directors approved a deferred compensation plan
for certain executives of the Company. The plan is based on a five-year average
of earnings. Amounts recorded as expense (income) under this plan were $1.9
million, $.7 million, and ($.1) million for 1997, 1996 and 1995, respectively.
The amount of deferred compensation currently payable was $.5 million and $.1
million at May 31, 1997 and 1996, respectively.

NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts of financial instruments at May 31,
1997 and 1996 have been determined using available market information and the
following methodologies:

o Cash and cash equivalents, accounts receivable, accounts payable: The
carrying amounts of these items are a reasonable estimate of their
fair values at May 31, 1997 and 1996.

o Long-term debt: Interest rates that are currently available to the
Company for issuance of the debt with similar terms and remaining
maturities are used to estimate fair value for debt issues using a
discounted cash flow analysis.

<TABLE>
<CAPTION>
May 31 1997 1996
(In millions)
------------------------------------------------------------
<S> <C> <C>
Long-term debt:
Carrying amount $ 65.0 $ 79.1
Estimated fair value 73.7 86.0
</TABLE>

NOTE J - MERGER PROPOSAL

20
<PAGE> 23

NOTE K - STOCK OPTION PLAN

In 1989, the stockholders approved a stock option plan whereby options
to purchase Common Stock may be granted to officers and key employees at prices
not less than the market value at the date of grant. Generally, options become
exercisable beginning two years after date of grant and expire ten years after
the date of grant. In accordance with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company applies APB Opinion 25
and related interpretations in accounting for its stock option plan, and
accordingly, does not recognize compensation cost.

A summary of option transactions for the three years ended May 31,
1997, follows:

<TABLE>
<CAPTION>
SHARES UNDER WTD. AVG. OPTION AGGREGATE
OPTION EXER. PRICE PRICE OPTION PRICE
(In thousands except option price)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at May 31, 1994 1,110 $10.85 $8.88 - 12.13 $ 12,046
Granted 395 8.37 8.34 - 8.88 3,307
Terminated (10) 11.40 10.63 - 12.13 (114)
----- ------ ------------- --------
Outstanding at May 31, 1995 1,495 10.19 8.34 - 12.13 15,239
Terminated (66) 9.80 8.34 - 12.13 (647)
Exercised (134) 10.97 8.88 - 12.13 (1,470)
----- ------ ------------- --------
Outstanding at May 31, 1996 1,295 10.13 8.34 - 12.13 13,122
Terminated (18) 10.17 8.34 - 12.13 (183)
Exercised (43) 9.56 8.34 - 12.13 (411)
----- ------ ------------- --------

Outstanding at May 31, 1997 1,234 $10.15 $8.34 - 12.13 $ 12,528
===== ====== ============= ========
</TABLE>

<TABLE>
<CAPTION>
May 31 1997 1996
(In thousands except price)
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares at end of year:
Exercisable 982 787
Average exercise price $10.52 $10.86
Available for future grants 84 66
</TABLE>

The options outstanding at May 31, 1997, expire on various dates to
January 18, 2005.

21
<PAGE> 24
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
CORPORATE PROFILE

Chaparral Steel Company, located in Midlothian, Texas, owns and operates a
technologically advanced steel mill which produces bar and structural steel
products by recycling scrap steel. The plant commenced operations in 1975 and
more than doubled in capacity in 1982. In 1992, a large beam mill was completed
which further expanded Chaparral's capacity and product range. The Company now
has two electric arc furnaces with continuous casters, a bar mill, a structural
mill and a large beam mill which enable it to produce a broader array of steel
products than traditional mini mills. Chaparral follows a market mill concept
which entails the production of a wide variety of products ranging from
reinforcing bar and specialty products to large-sized structural beams at low
cost and is able to change its product mix to recognize changing market
conditions or customer requirements. The Company's steel products include
beams, reinforcing bars, special bar quality rounds, channels and merchant
quality rounds. These products are sold principally to the construction
industry and to the railroad, defense, automotive, mobile home and energy
industries. Chaparral's principal customers are steel service centers, steel
fabricators, cold finishers, forgers and original equipment manufacturers. The
Company distributes its products primarily to markets in North America, and
under certain market conditions, to Europe and Asia. Chaparral is listed on the
New York Stock Exchange under the ticker symbol CSM, and is 85% owned by Texas
Industries, Inc.

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands except per share)
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Tons shipped:
Bar products 525 453 475
Structural products 1,095 1,137 1,036
-------- -------- --------
Total 1,620 1,590 1,511

Net sales:
Bar products $178,227 $157,130 $167,962
Structural products 435,242 447,115 359,845
Transportation service 3,207 3,411 4,004
-------- -------- --------
Total 616,676 607,656 531,811

Net income 40,182 41,977 19,607
-------- -------- --------

PER SHARE INFORMATION
Net income 1.41 1.43 .67
Dividends .20 .20 .20
-------- -------- --------

FOR THE YEAR
Net cash provided by operating
activities 47,536 52,618 72,723
Capital expenditures 33,776 20,630 16,234
-------- -------- --------

YEAR END POSITION
Total assets 494,210 475,337 469,827
Net working capital 155,252 136,723 113,745
Stockholders' equity $326,260 $294,965 $269,868
</TABLE>

<PAGE> 25

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ELECTION OF DIRECTORS

The bylaws of the Company provide for a board of not fewer than three nor
more than twenty-one directors with the actual number to serve at any time to
be determined by resolution of the Board. The Board has fixed as six the number
of directors which will constitute the Board of Directors for the ensuing year.
Directors hold office until the next Annual Meeting of Stockholders or until
their successors are elected and qualified. Directors are elected by plurality
vote.

<TABLE>
<CAPTION>
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE DURING PAST FIVE YEARS* SINCE
---- ---- ----------------------- -------
<S> <C> <C> <C>
Robert D. Rogers.............. 61 Chairman of the Board of the Company, President and 1973
Chief Executive Officer of Texas Industries,
Inc.(a)(b)
Gordon E. Forward............. 61 President and Chief Executive Officer of the 1982
Company(a)(c)
Robert Alpert................. 65 Chairman of the Board of Alpert Companies 1989
(investments), Dallas, Texas(a)(b)
John M. Belk.................. 77 Chairman of the Board of Belk Stores Services, Inc.(d) 1987
Gerald R. Heffernan........... 77 President of G.R. Heffernan & Associates, Ltd., 1973
Toronto, Ontario, Canada(a)
Eugenio Clariond Reyes........ 54 Director General and Chief Executive Officer of Grupo 1993
IMSA, S.A.; President, Mexico-- U.S. Chamber of
Commerce; Director, Instituto Tecnologico y de
Estudias Superiores de Monterrey, A.C.
</TABLE>

- ----------

* Based upon information provided by the Directors to the Company as of
June 30, 1997.

(a) Messrs. Rogers, Forward, Alpert and Heffernan are members of the Board of
Directors of Texas Industries, Inc.

(b) Messrs. Rogers and Alpert are members of the Board of Directors of CNF
Transportation, Inc.

(d) Mr. Belk is a member of the Board of Directors of Lowe's Companies, Inc.
and Coca-Cola Bottling Co. Consolidated.

22
<PAGE> 26

BOARD COMMITTEES, MEETINGS, ATTENDANCE AND FEES

The Board of Directors of the Company has established Audit and
Compensation Committees which perform the functions described below. The Board
of Directors held four regular meetings during the fiscal year. All Directors
attended at least 75% of all Board meetings.

The Audit Committee, composed during the last fiscal year of Directors
Heffernan, Alpert and Clariond Reyes, reviews the scope, plan and results of
the annual audit with the independent auditors; approves and ratifies each
professional service provided by the independent auditors; considers the
independence of the auditors; and reviews and approves all non-audit fees paid
to the independent auditors. The Audit Committee met two times during the year,
and except for Mr. Alpert, who missed one meeting, all members attended both
meetings.

The Company's Compensation Committee, composed during the last fiscal year
of Directors Rogers, Alpert and Belk, recommends and approves the salaries of
the top management of the Company and all awards to employees of the Company
under the Company's compensation plans. Its actions are subject to the review
and approval of the Board of Directors. The Compensation Committee met one time
during the year, and all members attended such meeting.

The Board of Directors, acting in lieu of a Nominating Committee, will
consider nominees for directors recommended by Stockholders. Communications to
the Board may be addressed in care of the Company's Secretary at 1341 W.
Mockingbird Lane, Dallas, Texas 75247.

OTHER TRANSACTIONS

No reportable transaction occurred between the Company and any director,
nominee for director, officer or any affiliate of, or a person related to, any
of the foregoing since the beginning of the Company's last fiscal year (June 1,
1996).

COMPENSATION OF DIRECTORS

Directors who are not employees of the Company or its affiliates currently
receive $10,000 per year plus $1,000 for each day that a Board and/or a
Committee meeting is attended. In addition, on January 1 of each year, each
non-employee director receives an award of 500 restricted shares of the common
stock of TXI under TXI's directors restricted award plan. The restrictions on
the shares are removed at the time the director ceases holding such position.
Until such time, the Director is entitled to vote the shares and to receive all
cash dividends. Under a deferred compensation arrangement, such amount may be
deferred in whole or in part at the election of the director. Compensation so
deferred is denominated in shares of the Company's Common Stock determined by
reference to the average market price during the thirty (30) trading days prior
to the date of the arrangement. Dividends are credited to the account in the
form of Common Stock at a value equal to the fair market value of the stock on
the date of payment of such dividend. Each non-employee director is
automatically granted an option to purchase 10,000 shares of Common Stock when
first elected either by the Board, or by the Stockholders at an annual meeting,
and every third year thereafter that such director is reelected at an annual
meeting. The Company also reimburses directors for travel, lodging and related
expenses they may incur in attending Board and/or Committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is comprised exclusively of Directors who are
not officers or employees of the Company. No executive officer of the Company
serves or has served during the year on the Compensation Committee or as a
director of another company, one of whose executive officers serves as a member
of the Compensation Committee or as a Director of the Company.

23
<PAGE> 27

SECTION 16 COMPLIANCE

Section 16(a) of the Securities and Exchange Act of 1934 generally requires
the Company's Directors and executive officers who own more than 10% of a
registered class of the Company's equity securities ("10% owners") to file with
the Securities and Exchange Commission and the New York Stock Exchange initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Directors, executive officers and 10%
owners are required by the Securities and Exchange Commission regulations to
furnish the Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, based solely on review of copies of such forms furnished
to the Company and written transaction reports of its Directors and executive
officers that no other reports were required to be filed during the 1997 fiscal
year, all Section 16(a) filing requirements applicable to its Directors,
executive officers and 10% owners were complied with, except (i) Peter H.
Wright was one day late filing a report reflecting receipt of a stock
distribution from the Company's stock purchase plan, and (ii) Libor F. Rostik
filed, one day late and one (1) month late, respectively, two Form 4 reports
covering two (2) sales transactions.

ITEM 11. EXECUTIVE COMPENSATION

There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal years
ended May 31, 1997, 1996 and 1995, of those persons who were, at May 31, 1997,
(i) the Chief Executive Officer and (ii) the other four highly compensated
executive officers of the Company.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
AWARDS PAYOUTS
------ -------
SECURITIES UNDERLYING
ANNUAL OPTIONS(#)
COMPENSATION ISSUER LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPANY TXI PAYOUTS ($) COMPENSATION($)
- --------------------------- ----- --------- -------- ------- --- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon E. Forward........... 1997 300,000 385,000 -- 60,000 278,499 19,630(1)
President and 1996 300,000 88,389 -- -- 15,356 4,963
Chief Executive Officer 1995 300,000 43,628 60,000 -- 7,580 3,945

David A. Fournie............ 1997 180,000 171,000 -- 24,000 5,415 3,385(1)
Vice President Structural 1996 180,000 53,033 -- -- 5,386 2,809
Products Business Unit 1995 175,000 25,450 19,000 -- 2,659 2,376

Peter H. Wright............. 1997 170,000 161,188 -- 24,000 5,298 3,395(1)
Vice President Bar 1996 155,000 45,668 -- -- 5,270 2,592
Products Business Unit 1995 151,250 21,996 19,000 -- 2,602 2,259

Libor F. Rostik............. 1997 160,000 152,000 -- 20,000 1,518 3,279(1)
Vice President 1996 160,000 47,141 -- -- 1,510 2,601
Engineering 1995 156,250 22,723 19,000 -- 746 2,261

H. Duff Hunt................ 1997 160,000 151,271 -- 24,000 4,236 3,092(1)
Vice President Recycled 1996 125,000 36,829 -- -- 35,749 1,980
Products Business Unit 1995 125,000 18,179 7,000 -- 3,105 1,766
</TABLE>

- ----------

(1) Includes (i) vested and non-vested portions of employer contributions and
allocations to Retirement Savings Plan account, (ii) Company matching
portion of Stock Purchase Plan purchases and (iii) payment of imputed
dividends on deferred profit sharing, respectively, for the named
executive officers as follows: Gordon E. Forward, $4,489, $48 and $15,093;
David A. Fournie, $3,289, $96 and none; Peter H. Wright, $3,177, $10 and
$208; Libor F. Rostik, $3,089, $48 and $142; and H. Duff Hunt, $2,996, $96
and none.

24
<PAGE> 28

None of the Company's executive officers are employed under contract. They
participate on the same basis as other employees in the Company's broad-based
employee benefits program which includes a retirement savings plan, group
medical coverage and life insurance. The Company's executive officers (except
the President) are also covered by a financial security plan that includes
disability benefits under certain circumstances and death benefits payable to
beneficiaries for a period of ten years or until the executive will have
reached the age of 65, whichever last occurs. In the event of termination of
employment under certain circumstances following a change of control (as
defined in the plan), the executive officer will be deemed to be fully vested
in any supplemental retirement benefit, without reduction, provided by the
plan. The President of the Company is covered by a separate financial security
plan which is substantially similar to the executive officers' financial
security plan.

1997 STOCK OPTION GRANTS

The following table sets forth certain information concerning options
granted during the fiscal year ended May 31, 1997, to each executive officer
named in the Summary Compensation Table under Texas Industries, Inc.'s stock
option plans.

<TABLE>
<CAPTION>
% OF POTENTIAL REALIZABLE
NO. OF TOTAL VALUE OF ASSUMED
SECURITIES OPTIONS EXERCISE ANNUAL RATE OF STOCK
UNDERLYING GRANTED TO OR BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE PER EXPIRATION OPTION TERM(2)
NAME GRANTED(1) IN 1997 SHARES($) DATE 0% 5% 10%
---- ---------- ---------- --------- ---------------- --- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon E. Forward........ 60,000 7.4% 24.90625 January 15, 2007 -0- 939,225 2,381,625
David A. Fournie......... 24,000 3.0% 24.90625 January 15, 2007 -0- 375,690 952,650
Peter H. Wright.......... 24,000 3.0% 24.90625 January 15, 2007 -0- 375,690 952,650
Libor F. Rostik.......... 20,000 2.5% 24.90625 January 15, 2007 -0- 313,075 793,875
H. Duff Hunt............. 24,000 3.0% 24.90625 January 15, 2007 -0- 375,690 952,650
</TABLE>

- ----------

(1) The options to purchase Texas Industries, Inc. common stock become
exercisable in annual installments beginning one year from the date of
grant.

(2) The dollar amounts under these columns are the result of calculation at 0%
and at the 5% and 10% rates set by the Securities and Exchange Commission
and are not intended to forecast possible future appreciation, if any, of
the price of TXI's stock. TXI did not use an alternative formula for a
grant date value as it is not aware of any formula which will determine
with reasonable accuracy a present value based on future unknown or
volatile factors.

OPTION EXERCISES AND YEAR-END VALUES

The following table provides information concerning each option exercised
during the 1997 fiscal year ended May 31, 1997, by each of the named executive
officers and the value of unexercised options held by such executive officer at
May 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE YEAR END FISCAL YEAR END($)(1)
NAME ISSUER EXERCISE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------ ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Gordon E. Forward........ Company -0- -- 134,000/36,000 595,250/238,500
TXI -0- -- -0-/60,000 --/--
David A. Fournie......... Company -0- -- 50,100/11,400 246,875/ 75,525
TXI -0- -- -0-/24,000 --/--
Peter H. Wright.......... Company -0- -- 47,600/11,400 205,350/ 75,525
TXI -0- -- -0-/24,000 --/--
Libor F. Rostik.......... Company 12,700 37,463 39,900/11,400 154,513/ 75,525
TXI -0- -- -0-/20,000 --/--
H. Duff Hunt............. Company -0- -- 32,800 / 4,200 151,025/ 27,825
TXI -0- -- -0-/24,000 --/--
</TABLE>

(1) Computed based upon the difference between aggregate fair market value and
aggregate purchase price.

25
<PAGE> 29

PERFORMANCE GRAPH

The following chart compares the Company's cumulative total stockholder
return for the five-year period ended May 31, 1997, with the cumulative total
return of the Standard & Poor's 500 Composite Stock Index (the "S&P 500") and
the Standard & Poor's Steel Index (the "Peer Group"). These comparisons assume
the investment of $100 on May 31, 1992 and the reinvestment of dividends.

<TABLE>
<CAPTION>
MEASUREMENT PERIOD CHAPARRAL
(FISCAL YEAR COVERED) STEEL S&P 500 PEER GROUP
--------------------- --------- ------- ----------
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 87.65 111.61 148.60
1994 81.58 116.36 165.60
1995 88.13 139.86 135.08
1996 137.81 179.63 132.36
1997 143.70 232.25 135.72
</TABLE>

REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors is composed of three
non-employee Directors. It is the goal of the Committee to insure that policies
and processes exist so that all of the Company's employees will be fairly and
competitively compensated. The Committee evaluates the performance of the
senior executive group against predetermined goals with the guidance of the
President and evaluates the performance of the President. The Committee also
evaluates human resource development, and succession planning within the
Company.

General. The role of the Company's compensation program is to aid the
Company in the attraction and retention of the most productive employees in the
marketplace. The compensation program's guidelines are such that if individuals
are performing in the top 10% of effectiveness compared to others that might be
available in the marketplace to fill similar positions, their total
compensation should be in the upper 25% of those with whom the Company competes
for equivalent talent. The makeup of an executive's total compensation should
provide adequate direct compensation, high incentive compensation and modest
indirect or fringe compensation. A significant portion of the executive
officer's compensation is linked to the financial performance of the Company.

While the criteria for the compensation program for executive officers are
subjective in nature, to insure that the compensation program is competitive,
the Committee takes into account factors relevant to the specific compensation
component being considered, such as comparisons to industry and geographic
salary surveys.

Compensation Elements. The executive officers' total compensation
objectives, which are established over a five-year span of time, consist of
three basic elements -- salaries, annual incentives and long-term incentives.
Annual and long-term incentives are a significant portion of the total
compensation and are strongly linked to financial performance and thereby align
the interests of the Company's executives and its stockholders to build
long-term value and improve the return to the Company's stockholders.

26
<PAGE> 30

Salaries. Approximately 45% of the total compensation objective of an
executive officer, other than the Chief Executive Officer, is composed of
salary. Salaries are reviewed periodically and compared to industry and
geographic salary surveys to assure that the salary levels remain competitive.
The impact that the executive has on the Company, the skills and experience
required by the position and the performance of the executive are also
considerations in determining salary level. During the last fiscal year, H.
Duff Hunt was elected to the position of Vice President of the Company's
Recycled Products Business Unit and his annual compensation was adjusted to
reflect his increased responsibilities.

Annual Incentives. Approximately 10% of the total compensation objective of
an executive officer is based on an annual incentive. The Board of Directors
annually considers adoption, for the ensuing fiscal year, of a cash incentive
plan for employees, including executives, of the Company. Under this annual
incentive plan, a cash bonus equal to a designated percentage of an eligible
executive's annual salary is earned if a consolidated tangible return on assets
(as defined in the plan, "ROA") objective established by the Compensation
Committee is achieved. If the threshold level below which no incentive would be
paid is exceeded, the cash incentive award increases based on specified ROA
levels established by the Committee. Target ROA objectives and the designated
percentage of an executive's salary are not established for executives
individually; rather, they are the same for all executives in order to foster a
team-based approach.

Long-Term Incentives. Approximately 45% of the executive officer's total
compensation objective consists of long-term incentives, which is provided
primarily through the Company's stock option plan, a performance share plan and
a continuous rolling three-year cash incentive plan.

When granted, options under the stock option plan have exercise prices of
not less than 100% of the then fair market value of the Company's Common Stock
and become exercisable 40% after two years, 60% after three years, 80% after
four years and 100% five years after grant, and all expire not more than ten
years after grant. The value of the option ultimately realized will depend on
the continued success of the Company; thus, the option not only provides the
executive an incentive for years after it has been awarded but ties this
incentive directly into increasing stockholder value. Long-term stock options
also strengthen the ability of the Company to attract, motivate and retain
executives of superior capability required to achieve the Company's business
objectives in an intensely competitive environment. An executive is targeted to
have between one and five times annual salary in accumulated options as priced
at the time of the grant.

The Company has maintained since 1976 a performance share plan under which
performance shares have been granted from time to time by the Board of
Directors acting in its discretion and upon recommendation of the Compensation
Committee. The value of a performance share is based upon the Company's annual
financial results averaged over the preceding five years and a cash dividend is
paid on a performance share at the end of each fiscal year equal to 10% of the
Company's earnings per share for such fiscal year, based on an assumed 4.5
million shares. Performance shares are 40% vested after three years, 60% vested
after four years and 100% vested after five years. At five-year intervals, the
plan requires, subject to several restrictions and conditions, that a
percentage of the vested portion be redeemed based on the age of the executive
such that 100% of vested shares are redeemed by the time the executive reaches
65 years of age. No performance shares have been granted under the plan since
1986 and it is not contemplated that there will be future grants under the
plan.

27
<PAGE> 31

Beginning in fiscal year 1997, a continuous rolling three-year cash
incentive plan was established for certain executives of the Company, including
the named executives. Under this plan, an average consolidated tangible return
on equity threshold (as defined in the plan, "ROE") is established annually by
the Compensation Committee for the next succeeding three-year period. For an
executive to earn an annual incentive under the plan, the Company must reach or
surpass the ROE threshold for the period ending in the year in respect of which
the incentive is earned. If the threshold level below which no incentive would
be paid is exceeded, the incentive increases based on specified ROE levels
established by the Committee. If the average ROE threshold is reached or
surpassed, an executive can earn a cash incentive award ranging from 35% to
120% or more of the executive's annual salary, depending on the average ROE
achieved and the recommendation of the Chief Executive Officer of the Company
based upon his subjective evaluation of the executive's individual performance.
At the discretion of the Board of Directors, payment of an incentive award may
be deferred and may be in the form of cash and common stock. In fiscal year
1997, the initial year of the plan, an incentive was paid based on the ROE
achieved for that fiscal year. In fiscal year 1998, the threshold will be the
average ROE threshold established for the two-year period ending with the 1998
fiscal year and in fiscal year 1999, the threshold will be the average ROE
threshold established for the three-year period ending with the 1999 fiscal
year. The Committee believes that this plan focuses the participating
executives on growth and profitability for the Company further aligning their
interests to those of the Company's Stockholders.

Chief Executive Officer Compensation. The Chief Executive Officer's salary
is established in the same manner as other executive officers and he
participates on the same basis as such executive officers in the Company's
incentive programs. However, approximately 50% of the Chief Executive Officer's
total compensation objective is based on incentives linked to the financial
performance of the Company.

Tax Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code generally limits the corporate deduction to $1 million for
compensation paid to a person who on the last day of fiscal years beginning on
or after January 1, 1994 is either the chief executive officer or among the
four most highly compensated officers other than the chief executive officer,
except for qualified performance-based compensation. At this time, it is not
anticipated that any Company executive will receive any compensation in fiscal
year 1998 in excess of the limit. Therefore, during fiscal year 1997, the
Company did not take action to comply with such limit. The Company generally
intends to structure the compensation with its executives to achieve maximum
deductibility under Section 162(m) with minimum sacrifices in flexibility and
corporate objectives.

JOHN M. BELK, Chairman
ROBERT D. ROGERS, ROBERT ALPERT

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth, as of June 30, 1997, information with
respect to Texas Industries, Inc. ("TXI"), the only stockholder who is known to
the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock of the Company.

<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
------------------- ------------------ ----------
<S> <C> <C>
Texas Industries, Inc. 24,000,000 84.4%
1341 W. Mockingbird Lane
Dallas, Texas 75247
</TABLE>

28
<PAGE> 32

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth as of June 30, 1997, the approximate number
of shares of Common Stock of the Company and common stock of TXI beneficially
owned by each Director, by each executive officer named in the Summary
Compensation Table and by all Directors and executive officers of the Company
as a group.

<TABLE>
<CAPTION>
COMPANY TXI
COMMON SHARES(1) COMMON SHARES(1)
---------------------- -----------------------
BENEFICIALLY BENEFICIALLY
OWNED** %(2) OWNED** %(3)
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Robert Alpert................................... 5,000(4) * 12,110(5) *
John M. Belk.................................... 12,000(4) * 10,500(5) *
Eugenio Clariond Reyes.......................... 4,000(4) * 500 *
Gordon E. Forward............................... 149,100(4) * 41,140 *
David A. Fournie................................ 50,100(4) * 220 *
Gerald R. Heffernan(6).......................... 4,000(4) * 255,000(5) 1.2%
H. Duff Hunt.................................... 32,877(4) * None *
Robert D. Rogers(7)............................. 146,800(4) * 382,906(5) 1.8%
Libor F. Rostik................................. 39,900(4) * 28 *
Peter H. Wright................................. 47,600(4) * None *
All Directors and Executive Officers
as a Group (15 Persons)....................... 671,515(4) 2.3% 881,096(5) 4.2%
</TABLE>

- ----------

* Represents less than one percent (1%) of the total number of shares
outstanding.

** Except as indicated in the notes below, each person has the sole voting
and investment authority with respect to the shares set forth in the above
table.

(1) The Company and TXI common stock are listed for trading on the New York
Stock Exchange.

(2) Based on the sum of (i) 28,446,963 shares of Common Stock, which on June
30, 1997, was the approximate number of shares outstanding, and (ii) the
number of shares subject to options exercisable by such person(s) within
60 days of such date.

(3) Based on the sum of (i) 20,900,375 shares of TXI common stock, which on
June 30, 1997, was the approximate number of shares outstanding, and (ii)
the number of shares subject to options exercisable by such person(s)
within 60 days of such date.

(4) Includes, with respect to such person(s) shares of Common Stock subject to
options exercisable within 60 days of June 30, 1997, as follows: Robert
Alpert, 4,000 shares; John M. Belk, 4,000 shares; Eugenio Clariond Reyes,
4,000 shares; Gordon E. Forward, 134,000 shares; David A. Fournie, 50,100
shares; Gerald R. Heffernan, 4,000 shares; H. Duff Hunt, 32,800 shares;
Robert D. Rogers, 106,000 shares; Libor F. Rostik, 39,900 shares; Peter H.
Wright, 47,600 shares; and all Directors and Executive Officers as a
Group, 602,000 shares.

(5) Includes, with respect to such person(s) shares of TXI common stock
subject to options exercisable within 60 days of June 30, 1997, as
follows: Robert Alpert, 6,000 shares; John M. Belk, 10,000 shares; Gerald
R. Heffernan, 14,000 shares; Robert D. Rogers, 82,000 shares; and all
Directors and Executive Officers as a Group, 187,200 shares.

(6) The wife of Mr. Heffernan owns 8,000 shares of TXI common stock as to
which he disclaims beneficial ownership.

(7) The wife of Mr. Rogers owns 4,000 shares of Common Stock as to which he
disclaims beneficial ownership.

29
<PAGE> 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No reportable transactions occurred between the Company and any
director, nominee for director, officer or any affiliate of, or person related
to, any of the foregoing since the beginning of the Company's last fiscal year
(June 1, 1996).

30
<PAGE> 34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this report.

(1) Financial Statements Page

Report of Independent Auditors.................................. 11
Consolidated Balance Sheets - May 31, 1997 and 1996............. 12
Consolidated Statements of Income - Years ended
May 31, 1997, 1996 and 1995................................. 13
Consolidated Statements of Cash Flows - Years ended
May 31, 1997, 1996 and 1995................................. 14
Consolidated Statements of Stockholders' Equity - Years
ended May 31, 1997, 1996 and 1995........................... 15
Notes to Consolidated Financial Statements - Year ended
May 31, 1997................................................ 16

(2) Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts................. 32

All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions, or are
inapplicable and therefore, have been omitted.

(3) Exhibits: References made to the list on page 33 of the exhibits
filed with this report.

(b) Reports on Form 8-K

On May 5, 1997, Chaparral Steel Company filed a report on Form 8-K
relative to the Board of Directors' approval the engineering and site selection
in connection with a plan for the construction of a new structural steel mill
to be located in the Eastern United States.

On June 2, 1997, Chaparral Steel Company filed a report on Form 8-K
relative to the offer to merge with Texas Industries, Inc., owner of 85% of
Chaparral Steel. Under terms of the offer, owners of the publicly traded shares
of Chaparral Steel would receive consideration of $14.25 per share, pursuant to
a cash merger. The Board of Directors appointed a Special Committee to consider
the offer and make a recommendation to Chaparral's Board.

31
<PAGE> 35

CHAPARRAL STEEL COMPANY AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended May 31, 1997, 1996 and 1995

(In thousands)

<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts.......... $2,848 $ 300 $1,104(1) $2,044

1996:
Allowance for doubtful accounts.......... $2,468 $ 635 $ 255(1) $2,848

1995:
Allowance for doubtful accounts.......... $3,848 $1,440 $2,820(1) $2,468
</TABLE>

(1) Uncollectible receivables written off.

32
<PAGE> 36

Listing of Exhibits

3. Articles of Incorporation. (incorporated by reference from Chaparral
Steel Company's Form S-1 Registration No. 33-22103 as filed June 29,
1988)

4. Instruments defining rights of security holders. (incorporated by
reference from Chaparral Steel Company's Form S-1 Registration No.
33-22103 as filed June 29, 1988)

10. Material contracts. (incorporated by reference from Chaparral Steel
Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988)

11. Statement re: computation of per share earnings.

21. Subsidiaries of the Registrant.

23. Consents of experts and counsel.

24. Power of Attorney for certain members of the Board of Directors.

27. Financial Data Schedule (electronically filed only).

33
<PAGE> 37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on the 23rd day of July, 1997.

CHAPARRAL STEEL COMPANY

By: /s/ GORDON E. FORWARD
----------------------------------
(Gordon E. Forward)
President, Chief Executive
Officer and Director

Pursuant to the requirements of the Securities Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ROBERT D. ROGERS Chairman of the Board July 23, 1997
- -----------------------------------
(Robert D. Rogers)

/s/ GORDON E. FORWARD President, July 23, 1997
- ----------------------------------- Chief Executive Officer
(Gordon E. Forward) and Director

/s/RICHARD M. FOWLER Vice President - Finance July 23, 1997
- ----------------------------------- and Treasurer Chief Financial
(Richard M. Fowler) and Accounting Officer

/s/ROBERT ALPERT Director July 23, 1997
- -----------------------------------
(Robert Alpert)

/s/JOHN M. BELK Director July 23, 1997
- -----------------------------------
(John M. Belk)

/s/GERALD R. HEFFERNAN Director July 23, 1997
- -----------------------------------
(Gerald R. Heffernan)

/s/EUGENIO CLARIOND REYES Director July 23, 1997
- -----------------------------------
(Eugenio Clariond Reyes)
</TABLE>

*By /s/ RICHARD M. FOWLER
---------------------------
(Richard M. Fowler)
Attorney-in-Fact

34
<PAGE> 38
<TABLE>
<S> <C> <C>
DIRECTORS BOARD COMMITTEES CORPORATE OFFICERS
Robert D. Rogers EXECUTIVE COMMITTEE Gordon E. Forward
Chairman of the Board President and
Gordon E. Forward - Chairman Chief Executive Officer
Gordon E. Forward Gerald R. Heffernan
President and Robert D. Rogers Kenneth R. Allen
Chief Executive Officer Director-Investor Relations
AUDIT COMMITTEE
Robert Alpert Dennis E. Beach
Chairman of the Board Gerald R. Heffernan -Chairman Vice President-Administration
Alpert Companies Robert Alpert
Dallas, Texas Lic. Eugenio Clariond Reyes Larry L. Clark
Vice President-Controller and
John M. Belk COMPENSATION COMMITTEE Assistant Treasurer
Chairman of the Board
Belk Stores Services, Inc. John M. Belk - Chairman David A. Fournie
Charlotte, North Carolina Robert Alpert Vice President-Structural
Robert D. Rogers Products Business Unit
Lic. Eugenio Clariond Reyes
Director General and SPECIAL COMMITTEE - MERGER Richard M. Fowler
Chief Executive Officer Vice President-Finance and
Grupo IMSA, S.A. John M. Belk Treasurer
Monterrey Lic. Eugenio Clariond Reyes
H. Duff Hunt
Gerald R. Heffernan Vice President-Recycled
President Products Business Unit
G.R. Heffernan & Associates, Ltd.
Toronto, Ontario Richard T. Jaffre
Vice President-Raw Materials/
Transportation

Robert C. Moore
Vice President-General
Counsel and Secretary

Libor F. Rostik
Vice President-Engineering

Peter H. Wright
Vice President-Bar Products
Business Unit
</TABLE>

With the exception of historical information, the matters discussed in this
annual report to stockholders are forward-looking statements that involve risks
and uncertainties.

STOCKHOLDER INFORMATION

TRANSFER AGENT AND REGISTRAR OF STOCK STOCK EXCHANGE LISTING

Chase Mellon Shareholder Services New York Stock Exchange
Stockholder Inquiries 1-800-635-9270

FORM 10-K AND 10-Q REQUESTS

Stockholders may obtain, without charge, a copy of the Company's Form 10-K for
the year ended May 31, 1997, and Form 10-Q for the quarters ended August 31,
1996, November 30, 1996 and February 28, 1997, as filed with the Securities and
Exchange Commission. Written requests should be addressed to the
Director-Investor Relations. The information contained herein is not given in
connection with any sale or offer of, or solicitation of any offer to buy, any
security.

35
<PAGE> 39
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3. Articles of Incorporation. (incorporated by reference from Chaparral
Steel Company's Form S-1 Registration No. 33-22103 as filed June 29,
1988)

4. Instruments defining rights of security holders. (incorporated by
reference from Chaparral Steel Company's Form S-1 Registration No.
33-22103 as filed June 29, 1988)

10. Material contracts. (incorporated by reference from Chaparral Steel
Company's Form S-1 Registration No. 33-22103 as filed June 29, 1988)

11. Statement re: computation of per share earnings.

21. Subsidiaries of the Registrant.

23. Consents of experts and counsel.

24. Power of Attorney for certain members of the Board of Directors.

27. Financial Data Schedule (electronically filed only).
</TABLE>

<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CHAPARRAL STEEL COMPANY

<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1997 1996 1995
------ ------ ------
(In thousands except per share)

<S> <C> <C> <C>
AVERAGE SHARES OUTSTANDING:
For 1997, 1996 and 1995, weighted average shares
outstanding............................................. 28,423 29,278 29,680
====== ====== ======

Primary:
Average shares outstanding................................. 28,423 29,278 29,680
Stock options and other equivalents
treasury stock method................................... 305 265 42
------- ------ -------
TOTALS 28,728 29,543 29,722
====== ====== ======

Fully diluted:
Average shares outstanding................................. 28,423 29,278 29,680
Stock options and other equivalents
treasury stock method................................... 347 287 42
------- ------ -------
TOTALS 28,770 29,565 29,722
====== ====== ======

INCOME APPLICABLE TO COMMON STOCK:
Primary and fully diluted:
NET INCOME.............................................. $ 40,182 $41,977 $ 19,607
Add:
Pre-September 1990 contingent
amortization................................... 233 233 233
-------- ------- ---------

NET INCOME APPLICABLE TO COMMON STOCK......................... $ 40,415 $ 42,210 $ 19,840
======== ======== =========

PRIMARY AND FULLY DILUTED:

NET INCOME PER COMMON SHARE................................... $ 1.41 $ 1.43 $ .67
======== ========= =========
</TABLE>

<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
CHAPARRAL STEEL COMPANY

<TABLE>
<CAPTION>
JURISDICTION
SUBSIDIARY OF INCORPORATION
---------- ----------------

<S> <C>
Wholly-Owned:

Chaparral Steel Texas, Inc...................... Delaware
Chaparral Steel Holdings, Inc................... Delaware
Chaparral Steel Trust........................... Delaware
Chaparral Steel Midlothian, LP.................. Delaware
Star 2000 LP.................................... Delaware

Castelite Steel Products, Inc................... Texas

80% Owned:

America Steel Transport, Inc.................... Texas
</TABLE>

<PAGE> 1
EXHIBIT 23
CHAPARRAL STEEL COMPANY
CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-39626) pertaining to the Chaparral Steel Company Stock Option
Plan and in the related Prospectus of our report dated July 8, 1997, with
respect to the consolidated financial statements and schedule included in the
Annual Report (Form 10-K) of Chaparral Steel Company for the year ended May 31,
1997.

/s/ERNST & YOUNG LLP
Dallas, Texas
July 8, 1997

<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY

Each of the undersigned hereby constitutes and appoints GORDON E.
FORWARD, RICHARD M. FOWLER and LARRY L. CLARK, and each of them, with full
power of substitution as the undersigned's attorney or attorney-in-fact, to
sign for each of them and in each of their names, as members of the Board of
Directors, an Annual Report on Form 10-K for the year ended May 31, 1997, and
any and all amendments, filed by CHAPARRAL STEEL COMPANY, a Delaware
corporation, with the Securities and Exchange Commission under the provisions
of the Securities Act of 1934, as amended, with full power and authority to do
and perform any and all acts and things necessary or appropriate to be done in
the premises.

DATED: July 16, 1997

/s/ ROBERT ALPERT
--------------------------------
(Robert Alpert)
(Director)

/s/ JOHN M. BELK
--------------------------------
(John M. Belk)
(Director)

/s/ GERARD R. HEFFERNAN
--------------------------------
(Gerald R. Heffernan)
(Director)

/s/ EUGENIO CLARIOND REYES
--------------------------------
(Eugenio Clariond Reyes)
(Director)

/s/ ROBERT D. ROGERS
--------------------------------
(Robert D. Rogers)
(Director)

STATE OF TEXAS )
)
COUNTY OF DALLAS )

On this 16th day of July, 1997, before me personally came ROBERT
ALPERT, JOHN M. BELK, GERALD R. HEFFERNAN, EUGENIO CLARIOND REYES AND ROBERT D.
ROGERS, known to me to be the same persons described in and who executed the
foregoing Power of Attorney and each of them duly acknowledged to me that they
each executed the same for the purposes therein stated.

/s/ GWYNN E. HERRICK
--------------------------------
(Gwynn E. Herrick)
Notary Public in and for the
State of Texas

<ARTICLE> 5
<CIK> 0000833226
<NAME> CHAPARRAL STEEL COMPANY
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 14,291
<SECURITIES> 0
<RECEIVABLES> 68,310
<ALLOWANCES> 2,044
<INVENTORY> 131,034
<CURRENT-ASSETS> 220,809
<PP&E> 523,279
<DEPRECIATION> 308,359
<TOTAL-ASSETS> 494,210
<CURRENT-LIABILITIES> 65,557
<BONDS> 52,554
0
0
<COMMON> 2,994
<OTHER-SE> 323,266
<TOTAL-LIABILITY-AND-EQUITY> 494,210
<SALES> 616,676
<TOTAL-REVENUES> 616,676
<CGS> 484,367
<TOTAL-COSTS> 484,367
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 8,099
<INCOME-PRETAX> 63,388
<INCOME-TAX> 23,206
<INCOME-CONTINUING> 40,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,182
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41

</TABLE>